Supreme Court Ruling on Motor Finance Mis-Selling
A recent ruling by the UK Supreme Court has significantly impacted drivers who were hoping to claim compensation for mis-sold motor finance. This decision has left many motorists feeling disheartened, as it limits their ability to seek redress for hidden commission payments that were part of their car financing agreements.
The controversy began when it was revealed that some car dealers had been paying hidden commissions as part of finance arrangements without informing their customers. This loophole meant that buyers of second-hand vehicles were unknowingly paying an extra 25% commission as part of their repayments. The issue came to light before the practice was outlawed in 2021.
Three drivers who purchased used cars before this ban took their case to the Court of Appeal, where they initially won their claims. However, the Supreme Court has now overturned this decision, ruling in favor of lenders and stating that they are not liable for these hidden commission payments.
The case involved British lender Close Brothers and South African FirstRand, who challenged the previous outcome. Lord Reed, speaking on behalf of the Supreme Court, explained that while the appeals brought by the finance companies were allowed, the court upheld Mr. Johnson’s claim regarding an unfair relationship with his lender. He emphasized that the Court of Appeal had made several mistakes in its original decision, leading to a reevaluation of Mr. Johnson’s case.
Marcus Johnson, Andrew Wrench, and Amy Hopcraft were among those who complained about being given only one finance option while car dealers profited from the sale and received a commission from the lender. A victory for these three could have opened the floodgates to thousands of similar claims, potentially totaling up to £30 billion.
Each of the drivers had bought a second-hand car for less than £10,000. Marcus Johnson, from Cwmbran, Wales, was awarded £1,650 after the court ruled that his relationship with the lender was unfair. Despite this, he expressed disappointment, calling the Supreme Court decision a “really big bag of salt” that would prevent others from lodging similar claims.
Other claimants, such as Andrew Wrench and Jemma Caffrey, remained more optimistic. Wrench believed there was still potential for further action, while Caffrey continued to pursue her claim, acknowledging the challenges faced by others who might not be able to seek compensation.
The Court of Appeal had previously stated that burying information about the commission in small print made it unlikely that borrowers would read it, thus failing to inform them properly. Almost 99% of around 32 million car finance agreements since 2007 involved a commission payment to a broker.
The Supreme Court’s decision is expected to limit compensation payments to affected motorists. Financial institutions had reportedly set aside billions for potential compensation, with HSBC analysts estimating the total cost at £44 billion.
Despite the ruling, disappointed motorists may still have options. The UK finance watchdog, the Financial Conduct Authority (FCA), is considering launching its own redress scheme independent of the court ruling. The FCA found widespread evidence of mis-selling of car finance agreements, known as discretionary commission arrangements (DCAs).
Courmacs Legal, a law firm representing 1.5 million consumers, is dealing with over 4 million claims related to motor finance mis-selling. Managing director Darren Smith emphasized the importance of lenders clearly communicating the nature of their agreements, particularly if they were discretionary.
The Treasury stated it will work with the industry and regulators to address the impact of the ruling. They acknowledged the issues highlighted by the court case and are taking steps to reform the Financial Ombudsman Service and the Consumer Credit Act to ensure fair and clear product sales.
While the Supreme Court’s decision may seem like a setback, it leaves room for further legal actions and potential redress through the FCA’s proposed schemes. The next chapter in this ongoing story will unfold in September when the Court of Appeal hears a case related to the way the Financial Services Ombudsman has dealt with discretionary commission arrangements.
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