Potential automobile loan compensation: High Court confrontation could pave the path for a reparation system
Revamped Article:
The auto finance industry and Financial Conduct Authority (FCA) are keeping their fingers crossed for a Supreme Court decision that could initiate a massive compensation movement for car owners, not unlike the Payment Protection Insurance (PPI) fiasco.
The FCA has been digging into the car finance market since last year. The drama revolves around "secretive, exploitative" commissions taken by lenders and car dealers from customers before 2021.
The FCA outlawed discretionary commissions on car loans, like Hire Purchase (HP) and Personal Contract Purchase (PCP), back in January 2021. However, the FCA interceded last year as they received a high number of customer complaints about car loan sales made prior to the ban.
The FCA instructed lenders to press pause on investigating complaints until December 2025 while they examine the sector in depth.
A pivotal Court of Appeal ruling last October has expanded the issue to other types of "hidden" commission payments and raised the possibility of millions of car owners receiving payouts.
A Court of Appeal ruling involving lenders Close Brothers and FirstRand Bank supported consumers, declaring that car dealers should not earn a commission without informing the customer and obtaining their consent. The ruling covered both fixed commissions and discretionary commission agreements (DCAs). Both lenders plan to appeal, and the Supreme Court has been contemplating this week whether it will allow a case to go ahead.
The lenders argue that a car finance broker cannot lawfully receive a lender's commission without securing the customer's consent.
It's undecided if a decision will be announced once the hearing concludes today (3 April).
The FCA announced on 11 March that considering the Supreme Court's decision, if they establish that motor finance customers have suffered losses due to widespread failures by firms, a consultation on an industry-wide redress scheme will likely follow.
Brian Nimmo, head of redress at financial services consultancy Broadstone, stated, "The Supreme Court's decision will have massive implications for the financial services market and could ignite one of the largest and costliest redress schemes since PPI. Even though the final verdict is not anticipated until the summer, banks have already set aside billions of pounds for potential compensation payments."
Major UK bank Lloyds has already set aside more than £1 billion in potential redress. Given its significance as a car finance provider through its Black Horse brand, Lloyds plays a substantial role in this sector.
Even the Treasury has expressed concerns that firms might legally reduce their corporation tax bills by offsetting compensation payments to customers who were misled about car loans between 2007 and 2021. Other banks have also made provisions, with Barclays setting aside £90 million and Santander £295 million.
What is the FCA Motor Finance Market Review?
The FCA banned discretionary commissions for personal contract or hire purchase car finance agreements on 28 January 2021, as they deemed it created an incentive for brokers to hike up car loan charges.
However, the FCA expressed concern over the high number of complaints that firms reject but are subsequently overturned when challenged. Firms reject most complaints because they claim they have not acted unjustly or caused their customers financial loss based on the applicable legal and regulatory requirements.
However, the Financial Ombudsman Service (FOS) has overturned issues that have been rejected by firms in recent cases, and the FCA expects this to cause a significant surge in complaints. Claims have also been brought to the county courts, some of which have been upheld.
The regulator noted that this suggests a considerable dispute between some firms and consumers on whether firms have broken legal and regulatory requirements.
It launched the motor finance market review in January 2024.
The FCA has used its authority to halt all complaints about DCAs until 4 December 2025 as they examine the sector and DCAs more thoroughly.
How Would a Car Finance Redress Scheme Function?
A possible car finance redress scheme may operate similarly to the PPI scandal, where customer complaints must be considered and compensation rules will be established.
Under a redress scheme, lenders would be responsible for determining whether customers have suffered losses due to the firm's failures. If they have, the lender would need to provide appropriate compensation. The FCA would establish rules for firms to follow, and implement safeguards to ensure they comply.
The regulator states a redress scheme would be more straightforward for consumers compared to lodging a complaint, and they would retain all compensation received. It would also be more organized and efficient for firms compared to a complaint-driven approach, contributing to a well-functioning market in the future.
- The Supreme Court's decision regarding the ongoing dispute over hidden commissions in the car finance market could result in a redress scheme similar to the PPI fiasco, potentially impacting the finance and business sectors significantly.
- If the Supreme Court determines that motor finance customers have suffered losses due to widespread failures by firms, a car finance redress scheme might be established, following the model of the PPI scandal, with lenders responsible for providing compensation to affected customers.
