UK Supreme Court overturns ruling on motor finance commissions in win for banks

The United Kingdom’s top court on Friday overturned a landmark ruling on car finance commissions in a decision that is likely to ease fears among banks about a redress scheme some analysts had warned could run into the tens of billions of pounds.

Car dealers who sold vehicles and arranged the finance do not owe fiduciary duties to customers and lenders are therefore not liable for the commission, the Supreme Court said in a ruling which pushed up US-listed shares of UK banks.

The Supreme Court reversed a 2024 decision that sent shockwaves through the motor finance industry and weighed heavily on the stocks of the most exposed players such as Close Brothers and Lloyds.

Banks had feared that the total bill for compensation could lead to the industry’s costliest scandal since payment protection insurance cost lenders over 40 billion pounds to redress between 2011 and 2019.

Lenders will still likely face claims for overcharging in some cases under a compensation scheme, though the extent of the total bill is likely to be significantly reduced.

After Friday’s ruling, the Financial Conduct Authority (FCA) said it would confirm whether it will consult on a redress scheme before markets open on Monday.

Supreme Court president Robert Reed said the Court of Appeal had “failed to understand that the dealer has a commercial interest in the arrangement between a customer and a finance company”.

Close Brothers, which mounted the appeals alongside South Africa’s FirstRand, said it was considering the judgment and would make further announcements as appropriate.

Britain’s finance ministry – which unsuccessfully sought to intervene in the appeal – said it would work with regulators and industry to understand the impact for both firms and consumers.

The Treasury feared the Court of Appeal ruling, if left unchanged, would make it hard for consumers to get car loans and possibly hurt investment in Britain’s financial services, adding to the challenge of speeding up the slow-moving economy.

FEARS EASED

The Finance and Leasing Association, which represents car lenders, welcomed the judgment, adding it meant the sector remained a “solid investable option”.

“Impacted lenders should continue preparing for what is still likely to be a significant customer redress exercise early next year,” Peter Rothwell, Head of Banking at KPMG UK, said.

“But they can do so with greater confidence that it will focus on discretionary commission arrangements and cases where there is a breach of the Consumer Credit Act as a result of an unfair relationship, rather than all historic commissions.”

While the Supreme Court overturned the Court of Appeal’s findings that the commissions in three linked cases amounted to a bribe, one claimant was awarded just over £1,650 ($2,187.74) on the grounds that his relationship with the lender was unfair.

Reed, however, said that non-disclosure or a partial disclosure by dealers of the existence of a commission did not necessarily make the relationship between a customer and a lender unfair.

He said the Supreme Court had unusually given its judgment on a Friday afternoon after markets closed on the advice of the FCA “in order to avoid causing unnecessary disruption” for investors.

The judgment on unfair commissions could lead to further debate about the extent of lenders’ liabilities, said Caroline Edwards, a partner at law firm Travers Smith.

“This may only be the end of the beginning as far as motor finance claims are concerned,” she said.