Car Finance Lawsuit Could Lead to Billions in Driver Compensation

This week, the UK’s highest judges will hear a case that could allow millions of drivers to seek compensation.

Last year’s Court of Appeal ruling shocked the car finance industry by declaring that undisclosed commission payments to dealers were illegal.

Companies maintain they acted lawfully and await essential clarification from the Supreme Court judges.

Major banks have set aside significant funds as countless individuals who financed new and used car purchases could make compensation claims worth hundreds of pounds.

When Marcus Johnson financed his car, a dealership earned £1,650, which was a quarter of the total amount borrowed by the 34-year-old from Cwmbran, Torfaen.

Mr. Johnson stated that at the time of purchasing a blue Suzuki Swift in 2017, he was unaware of the commission payment, despite the lender claiming he had signed an agreement.

“I acquired it as a convenient vehicle for commuting and taking my family out on weekends,” he recounted.

“I didn’t realize that commission was even part of the industry.”

His case, along with two others, was pivotal in the Court of Appeal ruling where three judges unanimously determined that it is illegal for lenders to provide commission to dealers without the buyer’s informed consent.

This means customers must be clearly informed about the commission amount and must agree to it, rather than having this information hidden within loan terms and conditions.

Car finance represents the second largest source of consumer borrowing in the UK, after mortgages.

Most new cars and many used ones are acquired through financing agreements.

Drivers typically make a down payment, borrow the remainder as a loan, and then drive away in their new vehicle.

Dealers enlisted customers in these financing options, while secretly receiving commissions from lenders.

These payments were at the heart of the Court of Appeal’s decision. The Financial Conduct Authority (FCA), the regulatory body for the City, reported a surge in complaints faced by dealers and motor finance providers.

The FCA is urging individuals to submit claims if they believe they were mis-sold.

In accordance with FCA’s guidelines, service providers have until December to address and respond to complaints; however, these cases are heavily reliant on the Supreme Court’s forthcoming ruling.

The concluding decision is anticipated in the summer, following three days of hearings starting Tuesday.

Back in February, the Supreme Court denied an unusual request from the government, which expressed concerns that substantial restitution payments could disrupt the car market and diminish its competitiveness while making the UK less appealing to investors.

The car finance industry asserts that it has adhered to the law as it was understood and as regulations stipulated.

Adrian Dally from the Finance and Leasing Association, the sector’s trade body, remarked: “We hope the Supreme Court will resolve the matter conclusively, affirming that the industry has historically acted lawfully while providing lasting clarity on the regulations moving forward.”

Dame Meg Hillier, chair of the Treasury Committee of MPs, described the situation as “a significant issue,” attributing the lack of transparency to both dealers and lenders toward their customers.

Even if the judges side with the appeal from car finance providers, lenders face considerable compensation liabilities.

This is due to the FCA having already prohibited discretionary commission arrangements (DCAs), whereby dealers received greater commissions as the interest rates on loans increased.

This arrangement incentivized the charging of inflated interest rates to the buyer.

A compensation scheme for drivers affected by these agreements prior to the 2021 ban is currently under consideration, though many individuals are pursuing legal action for compensation.

Alex Neill, co-founder of Consumer Voice, which assists individuals with compensation matters, indicated that the Supreme Court may side with the Court of Appeal by deeming all “secret” commission payments illegal.

“Such a ruling would be monumental and comparable in scale to PPI, demanding compensation amounts in the tens of billions,” she stated.

If not, compensation could still be applicable for 40% of car loan agreements involving discretionary arrangements.

“This would still amount to billions in compensation, averaging over £1,000 for each affected individual,” she added.