Close Brothers and MotoNovo scored a partial victory Friday when the Supreme Court scaled back their liability in a case that threatened to trigger £44 billion in compensation payments to UK motorists.
The ruling overturned key elements of a Court of Appeal decision that had sparked fears of a PPI-style crisis across the motor finance industry.
Millions of consumers had hoped to receive payouts over secret commissions – payments car finance providers made to dealerships without customer knowledge or consent.
The October 2023 Court of Appeal ruling found that all undisclosed commissions were unlawful if borrowers weren’t informed. The court also concluded that car dealers owed customers a fiduciary duty to act in their best interests.
The Supreme Court rejected the fiduciary duty requirement, narrowing the grounds for compensation claims.
But the door isn’t completely closed on consumer payouts.
FCA Review Continues
The Financial Conduct Authority is conducting its own investigation into motor finance practices. The regulator expects to announce next steps within six weeks.
The FCA had paused its review to await the Supreme Court’s decision. Officials have already indicated they’re considering a formal redress scheme that could still cost billions if widespread misconduct is confirmed.
The investigation covers 14.6 million car finance deals involving discretionary commissions – part of 25.9 million agreements signed between 2007 and 2020.
These arrangements allowed car dealers to set interest rates on finance agreements themselves. Higher rates meant bigger commissions, creating incentives that often left customers overpaying.
The FCA banned discretionary commissions in January 2021 after finding they created conflicts of interest.
Regulator data shows these commissions totaled £8.1 billion during the review period.
Since the ban, motor finance companies have faced thousands of complaints from consumers who say they weren’t aware of the commission structure.
Industry Relief
The financial services sector welcomed Friday’s ruling as protection against wider economic fallout.
Lenders had warned that mass compensation claims could destabilize the motor finance market. Analysts had estimated redress costs could exceed £40 billion – rivaling the PPI scandal that cost UK banks more than £50 billion.
The UK government had unsuccessfully tried to intervene in the case. Ministers expressed concern about setting legal precedent that could spread to other commission-driven industries like energy and telecoms.
Claims management companies and law firms had been preparing mass compensation cases before the Supreme Court decision.
The ruling limits immediate exposure for car finance providers, but the FCA’s review remains the deciding factor for whether widespread compensation materializes.
Lenders, lawyers and consumers now wait for the regulator’s announcement – expected by mid-September.
The investigation could still result in billions in payouts if the FCA confirms systematic misconduct in how dealers handled commissions between 2007 and 2020.
