The UK’s Supreme Court is about to rule on a major £44 billion car finance scandal that could allow millions of drivers to claim compensation for being mis-sold loans. The decision, due after markets close at 4:35pm on Friday, will determine whether hidden commissions paid by lenders to car dealers were illegal – a finding previously made by the Court of Appeal last October.
The earlier ruling, based on test cases, stated that lenders broke the law by paying secret commissions to brokers who arranged car loans without telling borrowers about these payments. Two lenders involved – FirstRand Bank and Close Brothers – appealed this decision to the Supreme Court.
About 90% of new cars and many used cars are bought using finance deals. If the Supreme Court fully upholds the earlier ruling, customers could be owed billions in compensation, creating massive costs for lenders. Lloyds Banking Group, heavily involved through its Black Horse division, has already set aside £1.2 billion for potential claims.
The car finance industry, represented by the Financing & Leasing Association, maintains it did nothing wrong. Thousands of buyers who purchased cars before 2021 using now-banned “discretionary commission arrangements” (DCAs) – where dealers earned more by charging higher interest rates – were already in line for payouts.
The Financial Conduct Authority (FCA) will likely create a central compensation scheme for DCA-related mis-selling and will confirm its plans within six weeks of the Supreme Court’s decision. If the court fully backs the earlier ruling, many more people could become eligible to claim. However, if the court sides with lenders, compensation would be much more limited.
In February, the Supreme Court rejected an unusual government attempt to intervene, despite concerns that massive compensation payouts could disrupt the car market. The Treasury has called for a “balanced judgment” that compensates mis-sold customers while still allowing the finance industry to support car buyers who need loans.
