The Motor Finance scandal revolves around allegations that certain car finance companies mis-sold complex loans to consumers, often failing to clearly explain the terms and true costs of their products. At the heart of the issue are “discretionary commission arrangements,” (DCA’s), where brokers could adjust interest rates on car loans, sometimes prioritising their own profits over the best interests of their customers. The Financial Conduct Authority (FCA) said this created an incentive for customers to be charged more interest than necessary, leading to higher overall costs. It banned this practice in 2021 and in January 2024 launched an investigation into potential overcharging of motor finance customers between April 2007 and January 2021, through the use of DCA’s.
In a test case (comprising three separate cases that were joined together) heard by the Court of Appeal in October 2024, the judge ruled against the lenders, stating that it was unlawful for them to pay commissions to car dealers without the borrowers’ knowledge. The ruling stated that the car dealers needed “fully informed customer consent” for commissions. This decision could have meant that almost all car finance customers were eligible to claim compensation, with the cost widely estimated to be in the region of £44bn. There was also speculation that there may be “contagion” risk for other sectors with a business model involving commission payments to third-party brokers. The lenders appealed to the Supreme Court.
On 1 August, the Supreme Court largely sided with finance companies by overturning the earlier ruling that the commissions were illegal. Judges upheld a single case (Mr Johnson) under s.140A of the Consumer Credit Act 1974 (“CCA”) that was deemed “unfair,” due in part to the size of the commission paid to the car dealer and how it was disclosed. The lender was ordered to pay the amount of the commission plus commercially appropriate interest to the borrower. Cases brought by the two others – alleging that commissions paid to car dealers were bribes and that dealers owed a fiduciary duty to the customer – were rejected.
As a result, motor finance commission claims will generally be limited to statutory claims under s.140A CCA.
The Supreme Court noted that the test of unfairness under section 140A CCA permits courts to take account of a very broad range of factors and is highly fact sensitive. It agreed with the FCA that the following (non-exhaustive) factors point toward unfairness: the size of the commission relative to the charge for credit; the nature of the commission (because, for example, a discretionary commission may create incentives to charge a higher interest rate); the characteristics of the consumer; the extent and manner of the disclosure, and compliance with the regulatory rules.
The Supreme Court highlighted the following factors as relevant on the facts of Mr Johnson's case:
Following the Supreme Court decision, the FCA announced plans for a much smaller redress scheme. The regulator will start consulting on the scheme by October and plans to include motorists who were harmed by discretionary commission arrangements. It will also consult on which non-discretionary commission arrangements should be included. These arrangements are ones where the buyer's interest rate didn't impact the dealer's commission. In most cases, the scheme would be likely to pay out less than £950 in compensation for each claim. This redress scheme is expected to cost lenders between £9bn and £18bn and draw a line under this car finance scandal. Shares in U.K. lenders surged on Monday after this ruling significantly slashed the anticipated bill.
While the exposure to claims may now be more limited, lenders may still face liability to customers, whether under the s140A CCA, or if the FCA takes further steps following consultation. The extent of insurance cover for such liabilities will need to be assessed in accordance with the lenders Professional Indemnity policy terms and conditions. As with other historical mis-selling events, the usual issues around aggregation, disgorgement and policy retentions will likely arise. If your company has any potentially responsive policies in relation to this or similar liabilities, consideration should be given to whether any steps are required now, in view of the Supreme Court's judgment, for example, to make a notification of claims or circumstances to insurers (or update a notification) in relation to actual or potential claims.
Please reach out to your WTW team for guidance.
