Supreme Court judgment in car finance cases and the wider implications for lenders

The parties in the claim were consumers alleging that they were mis-sold car finance agreements and car finance providers including banks and dealerships. The Supreme Court ultimately allowed an appeal of the Court of Appeal ruling, that had found the consumers had been subject to ‘unfair relationships’ under the meaning with the Consumer Credit Act 1974 and that that car finance providers had a ‘disinterested duty’ to provide consumers with information on an impartial basis. If this duty was breached, then the consumers were due compensation for this failure to notify them of commission payments being made.

If the Supreme Court had sided with the Court of Appeal, it would have significantly broadened the scope of compensation cases and many car finance providers had anticipated it would open the floodgates of litigation. Lloyds Bank had reportedly put aside funds of £1.2 billion.

The Supreme Court, instead, allowed the car finance provider’s appeal. The judgment narrows the scope for compensation in three main ways:

1. Overturning two of the three consumer test cases, the Supreme Court decided that the car dealers did not owe any common law duty or even necessarily should disclose that they were receiving commission.
2. An ‘unfair relationship’ was established in one of the test cases, meaning the commission should be repaid to the consumer, along with a commercial rate of interest from the date of the agreement, with material factors found to be:

   i. commission that made up a high proportion (25%) of the total sum advanced and was not disclosed;

   ii. documentation misrepresented the number of potential lenders available, when the dealer had a preferential working relationship with only one; and

   iii. a lack of clarity in the documentation that would make it difficult to expect a consumer to understand.

3. Discretionary Commission Arrangements (DCAs) were confirmed as being inherently unfair. This affirms the outright ban of DCAs in 2021. A DCA is a scheme where car finance providers receive more commission if they charge a higher interest rate to consumers.

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What it means for lenders

While the dust continues to settle from the Supreme Court’s decision, the general view is one of broadly good news for lenders. Compensatory awards were expected to sky rocket following the Court of Appeal verdict. The position at present requires evidence of unfair dealing that goes beyond a typical car finance relationship.

The Financial Conduct Authority (FCA) confirmed on 3 August that they are consulting on a compensation scheme to consider cases as far back as 2007, with an anticipated launch date in 2026. The redress scheme will review cases where commission was excessive or tied to DCA’s, with the average, potential payout expected to be less than £950 per agreement.

While clarity will only be revealed as we start to see outcomes from the redress scheme, consumer lenders concerned about their arrangements with brokers and other agents would be minded to:

• assess historic agreements, back to 2007, to estimate potential liability in compensation plus interest;
• update current protocol and consumer communications to avoid an unfair relationship scenario; and
• train staff and update policies to ensure transparency moving forward.

Compensation on a huge scale has been narrowly avoided for lenders, and the decision offers an opportunity to evaluate the position in relation to anticipated claims, particularly where rates of commission paid are disproportionately high, the lender has ties with specific agents and the extent to which high rates of commission are brought to the consumers attention.

If you need advice, contact Daniel Adcock-Kirsh or a member of our commercial litigation team.