UK Supreme Court Ruling Favors Lenders in Car Finance Case
The United Kingdom’s Supreme Court delivered a ruling on Friday that largely overturns a previous court’s decision regarding the legality of certain car finance agreements. This outcome is expected to ease concerns among lenders and potentially reduce the scale of compensation payouts.
A panel of five judges in the Supreme Court concluded in favor of lenders on two out of three key issues. They determined that lenders are not responsible for undisclosed commission payments to dealers, ruling out the presence of bribery in these financial arrangements. Additionally, the court stated that dealers were not legally obliged to prioritize the customer’s interest over their own commercial objectives.
“No reasonable onlooker would think that, by offering to find a suitable finance package to enable the customer to obtain the car, the dealer was thereby giving up, rather than continuing to pursue, its own commercial objective of securing a profitable sale of the car,” the judges noted.
This decision is anticipated to spare lenders from paying compensation to millions of car finance customers—a potential financial burden initially estimated at tens of billions of pounds. Lloyds Banking Group, a major player in the UK car finance market through its Black Horse division, had already allocated over 1 billion pounds ($1.3 billion) in anticipation of such payouts.
The ruling was strategically released after stock markets closed to prevent any potential market volatility concerning firms associated with the car finance sector.
The financial services industry, which has been under scrutiny due to several scandals over the past decade, including the mis-selling of payment protection insurance (PPI), is likely to welcome this decision. Concerns about further claims linked to other financial products, such as household appliances, have also been alleviated.
According to Andrew Barber, Financial Regulatory Partner at Dentons, “The risk of claims in other finance arrangements where commission payments are made will also have significantly reduced as a result.”
The Supreme Court’s decision follows an earlier ruling by the Court of Appeal. Last October, the Court of Appeal found that three motorists, who purchased cars before 2021, were not adequately informed about commissions received by car dealers from lenders, thus entitling them to compensation.
FirstRand Bank and Close Brothers, two lenders involved in the case, challenged the Court of Appeal’s decision, describing it as an “egregious error” during a three-day Supreme Court hearing in April. The Financial Conduct Authority (FCA) also expressed that the prior ruling overextended its reach.
Post-ruling, the FCA expressed its approval of the clarification and committed to evaluating the judgment over the weekend to establish subsequent actions. The agency aims to discuss a potential compensation scheme with relevant parties before the markets reopen on Monday.
The FCA stated, “Our aims remain to ensure that consumers are fairly compensated and that the motor finance market works well, given around 2 million people rely on it every year to buy a car.”
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Note: This article has been updated to correctly reflect the number of judges on the Supreme Court panel as five.
