There may well be a few sighs of relief from senior finance company and banking executives following the Supreme Court’s ruling, but it is unlikely you will hear the champagne corks popping.
The verdict does almost certainly reduce the potential compensation bill significantly.
Lenders no longer face the prospect of having to pay £30bn to £40bn to aggrieved car buyers. The likelihood of the government stepping in also appears to have receded dramatically.
Nevertheless, the industry is not off the hook. The Financial Conduct Authority may still open a redress scheme for cases where dealers had a financial incentive from lenders to ramp up interest rates on loans as much as possible.
The Supreme Court’s ruling also upheld one consumer claim, in which the commission payments were deemed unfair – and that could provide a template for others to follow. All of this means the compensation bill could still be in the billions.
The Supreme Court’s intervention has been eagerly awaited since October, when the Appeal Court issued a verdict in three test cases which could have triggered an avalanche of compensation claims.
In each case, people who had bought cars on finance claimed they were partially or wholly unaware that the deal had involved a commission payment being made by the lender to the car dealer. They claimed that in law the commissions amounted to bribes, or secret payments.
The Appeal Court judges agreed, essentially saying that commission payments made by a finance company to a dealer for arranging a car loan were illegal if the car buyer had not given his or her “informed consent”.
They also concluded that a car dealer had a “fiduciary duty” towards the car buyer when it came to arranging a car loan. In other words, the dealer should set his or her own interests aside, and act purely on the customer’s behalf.
This meant that millions of car buyers could potentially claim compensation – if they could show that the dealer had not specified what commission payments they were receiving for lining up a finance deal. It was not enough for the details to be buried in small print.
Lenders had feared that this would lead to an avalanche of claims against them – and that the same arguments could be used to challenge other kinds of consumer finance agreements as well, potentially increasing the compensation bill still further.
But the Supreme Court threw very cold water over those arguments. The President of the Court, Lord Reed, dismissed the idea that car dealers had a “single minded duty of loyalty” to their customers, and insisted they “plainly and properly” had personal interests in the finance agreements they were involved in.
The ruling clearly blocks off what could have been a very wide avenue for compensation claims.
However, the court did side with one of the claimants. In the case of Marcus Johnson, a factory worker, it decided that the finance agreement was “unfair” under the terms of the Consumer Credit Act.
This was because the size of the commission payment was very large, and because Mr Johnson had been misled about the relationship between the dealer and the lender. He was, they said, entitled to compensation.
Analysts say this could open the doors for other cases in which the commission payments are seen to be egregious.
There is also a key question the Supreme Court ruling does not answer. This is what should happen in cases involving so-called Discretionary Commission Agreements (DCAs). These were finance deals in which the car dealer could set the interest rate of a loan, within a set scale. The higher the rate, the more commission they would be paid – and the customer would be unaware of the fact.
The Financial Conduct Authority banned such deals in 2021. It is now considering whether to launch a redress scheme for consumers who were affected by them. If it goes ahead, millions of car buyers could still have a claim, though it is not clear how much compensation they would get.
According to Richard Barnwell, a financial services advisory partner at accountancy firm BDO, the bill could still be substantial.
“We believe there is still a potential for redress, for example, if discretionary commission arrangements are deemed to be an unfair relationship, redress could still be from £5bn to £13bn or more,” he said.
Other analysts agree. According to Martin Lewis, who runs the MoneySavingExpert website, “the Supreme Court has certainly narrowed the number of people who will be able to reclaim car finance. I think you’re probably talking the lower end of £10bn, as opposed to £40bn.”
That £10bn would still be a significant figure. But the finance industry appears to have avoided the potential free-for-all rush to claim compensation the earlier verdict had threatened to spark off.
And while the Treasury says it will “work with regulators and industry to understand the impact for both firms and consumers”, the BBC understands that the likelihood of the government intervening with retrospective legislation to protect financial firms has now diminished significantly.