A landmark decision by the Court of Appeal has sparked an ongoing dispute over car finance agreements, potentially leading to billions of pounds in compensation for mis-sold car loans. Buyers, who were unaware of hidden commission payments between car dealerships and lenders, may now face long waits for a resolution on their claims.
The ruling has cast a spotlight on the issue of undisclosed commissions and prompted calls for justice for those who were unaware of the financial arrangements that inflated their car loan costs. However, the Supreme Court has agreed to hear an appeal against the decision, which could delay any payouts.
The Financial Conduct Authority (FCA) has also granted motor finance providers extra time to address complaints, a move that has raised concerns among legal representatives for affected consumers about further delays in compensation.
Who Is Affected?
Car finance is common in the UK, with approximately two million vehicles being purchased through finance deals each year. Most customers pay an initial deposit followed by monthly payments, often with added interest. A series of investigations has revealed that many of these finance agreements were tainted by hidden commissions, which were charged to the buyer without their knowledge or consent.
In 2021, the FCA took decisive action, banning deals in which dealerships received commissions based on the interest rates charged to customers. This practice incentivized dealerships to push higher interest rates onto buyers, often without their awareness. Since January 2024, the FCA has been considering whether compensation should be extended to those who entered into these finance agreements prior to the 2021 ban.
This could lead to payouts in the millions, with the potential for the overall compensation bill to climb into the billions. Following last month’s Court of Appeal ruling, which expanded the scope of potential compensation, the total payout estimate has been revised to over £25 billion.
Why Is the Court’s Decision Significant?
The Court of Appeal’s ruling was pivotal in broadening the scope of compensation. While previous investigations had focused on discretionary commission arrangements, which were banned in 2021, the court extended its findings to cover all car finance commissions. Judges unanimously concluded that it is illegal for lenders to pay commissions to dealers without the buyer’s informed consent. This means that any undisclosed commission, buried in the fine print of loan agreements, could now be grounds for compensation.
A key test case involved Marcus Johnson, a 34-year-old from Cwmbran, Torfaen, who bought a Suzuki Swift in 2017. He was not informed that the dealership received a 25% commission, which was added to the total amount he repaid. Johnson described the situation as “heartbreaking,” as he felt he had no option but to finance the car, given his financial constraints at the time.
Following the Court of Appeal’s decision in Johnson’s favor, banks have begun setting aside large sums for potential payouts. Lloyds Banking Group, for example, has earmarked £1.2 billion to cover claims. However, experts predict that the total compensation costs could reach £25 billion or more.
Regulator’s Response
In response to the court’s decision, the FCA has expressed concern that the ruling could lead to a surge in complaints from car buyers. The regulator is encouraging consumers who feel they were victims of mis-selling to come forward and file claims, particularly those previously told they had no grounds for compensation.
To manage the anticipated influx of complaints, the FCA has extended the deadline for motor finance providers to resolve cases until December 2025. This extension includes claims related to both discretionary and non-discretionary commission arrangements, covering a range of finance options including Personal Contract Purchase (PCP) deals and leasing agreements.
The FCA is also urging the Supreme Court to quickly review the Court of Appeal’s ruling to ensure a fair and orderly compensation process.
While the Finance and Leasing Association, which represents motor finance providers, welcomed the extension, others argue that it could lead to further delays for consumers already waiting for compensation.
The government has also expressed concern about the scale of potential payouts, with fears that large-scale compensation could disrupt the car market. In February, the Supreme Court rejected a request from the government to intervene, reinforcing the need for a clear resolution to the ongoing dispute.
As the case continues to unfold, affected consumers are left in limbo, waiting for clarity on when they may receive the compensation they are owed.
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