The Supreme Court’s forthcoming hearing on car finance mis-selling is set to produce one of the most significant legal decisions in recent financial history. With the hearing scheduled for early April, attention is now escalating rapidly as parties with vested interests lobby their cases.
The car finance sector is critical to the functioning of the broader car industry. Simply put, without car finance there is no car industry. So this case, and the ongoing investigation into the car finance sector, are hugely important in balancing fairness for consumers who may have been mis-sold in the past with ensuring competitive and affordable finance for consumers in the future.
For consumers, it’s not the most exciting topic to read about, but the decision of the Supreme Court is likely to reshape the future of car finance – and potentially other sectors of the finance industry as well. And whoever wins, it’s likely that we will all lose anyway. So let’s back up a little bit and explain how we got here.
This whole saga began in January 2024 when the Financial Conduct Authority (FCA) announced it was starting an investigation into Discretionary Commission Arrangements (DCAs), a practice that allowed car dealers to manipulate interest rates on loans to increase their commission. While that investigation has been underway, a court decision ruled in favour of consumer complainants and against their lenders, which was then escalated to the Court of Appeal.
The Court of Appeal, however, issued a judgment that went beyond DCAs and ruled that any broker-arranged finance must be completely disclosed up front and gain the customer’s approval (which essentially means that it has to be clearly disclosed in the contract that the customer signs so there can be no confusion). That broadened the scope of the case enormously; not only does it potentially bring in millions of car finance contracts that do not have a DCA, but also extends to other finance sectors.
If the Supreme Court upholds this interpretation, the impact could extend far beyond car finance, potentially affecting millions of other point-of-sale financing purchases every year – everything from mobile phones to furniture to fashion.
The Supreme Court has approved applications from the FCA and the National Franchised Dealers Association (NFDA) to join the case, which makes sense. The FCA, as the financial regulator, has a central role in this matter, while the NFDA represents the dealerships that sold these finance products. Both have key questions to answer.
Other applications to join the case were rejected. The most notable of these was from the chancellor, Rachel Reeves, who wanted to put the government’s case across that penalising the banks could hurt the UK economy. Other applicants who were rejected included the Finance and Leasing Association (FLA), which represents the lenders, and a consumer group.
Interestingly, the lenders seem to have shifted their position in recent months. For most of last year, the FLA defended the use of DCAs, claiming that they were often used to help customers by allowing dealers to lower interest rates rather than raise them. It now concedes that DCAs did cause consumer harm, a notable reversal from its earlier stance.
If the Supreme Court rules in favour of consumers
Given that the lower courts and the Court of Appeal have ruled quite unambiguously in favour of consumers and against the lenders, it would be a surprise if the Supreme Court deviates from those previous decisions. However, this story has taken several twists and turns over the last year so no-one’s quite sure how everything is going to pan out.
Even if we just focus on the DCA question, the implications will be enormous. If the Supreme Court upholds the Court of Appeal’s ruling that millions of car finance contracts over a 14-year period were illegal and unfair to consumers, it will open the floodgates for compensation claims – unless the court imposes an alternative penalty on the lenders.
If the Supreme Court does rule that the consumers in this case are eligible for compensation, the FCA will almost certainly create an industry-wide redress scheme. The FCA has said for some time that it is leaning towards a mass redress scheme anyway, and this week issued an update on its progress. It says that it will issue its proposals within six weeks of the Supreme Court’s ruling. There may be separate proposals and consultations for DCA redress and non-DCA (all other broker-arranged) cases.
Lenders could face compensation costs reaching tens of billions of pounds based on millions of car loans over 14 years. This would inevitably be clawed back by increasing interest rates and fees on new loans, meaning consumers might win compensation for their last car loan now but end up paying significantly more for their next car loan.
If the Supreme Court ruling follows the Court of Appeal in ruling that all broker-arranged finance must have clearly disclosed commission payments, then we’re potentially far beyond car finance. That means not just opening the floodgates, but creating an earthquake that would trigger a tsunami of compensation claims in multiple lending sectors.
It’s also likely that the FCA itself will face considerable scrutiny for issuing guidance that failed to comply with the law: it would be a major regulatory embarrassment for the courts to rule that the government regulator doesn’t understand finance laws. Regardless of which way the court rules, it’s fair to say that the FCA has failed the UK in this matter and needs to be reformed.
It’s possible that the government might attempt to retroactively alter disclosure laws to limit compensation – although this would be highly controversial, especially since the Supreme Court has already blocked the chancellor from intervening in the case.
For car dealers, who play the role of brokers in finance law, the way they handle car finance could change entirely. We may see a shift away from dealership-arranged finance toward direct lender-consumer arrangements, with lenders cutting dealers out of the loop to ensure they are fully compliant with relevant laws – and to potentially try to keep more of the profits for themselves. This would be a seismic shift in how cars are sold, but online lending dominates other sectors of banking and finance, so there’s no reason it can’t work for car finance as well. However, the net effect of such a move would be that cars would inevitably get more expensive if dealers lose a key source of their income.
It’s also worth noting that if the court sides with consumers, some lenders may attempt to sue the FCA or the government for providing flawed guidance, potentially transferring costs to taxpayers. It would certainly be an unpopular move but, given the amounts of money at stake, banks are unlikely to take such penalties without examining every option.
If the Supreme Court rules in favour of the lenders
If the Supreme Court overturns part or all of the Court of Appeal’s ruling, it makes an industry-wide mass redress event less likely. That sounds good in theory, but it certainly wouldn’t be the end of the story.
Without a centralised mass redress action, individual lawsuits and class actions would certainly explode, much like the PPI and Dieselgate scandals in recent years. Like those infamous class actions, these large-scale legal battles take a long time, and prolonged litigation would create uncertainty for both lenders and consumers for years to come. With multiple cases and class actions, and no clearly defined resolution process, that could potentially drive up costs even further in the long run.
There would inevitably be a loss of consumer trust, which is a big word and sentiment around car finance. Questions would remain about lender and dealer conduct, potentially damaging consumer behaviour and sentiment. If customers are reluctant to take car finance and look for alternative finance options to pay for their cars, it will have a major impact on the industry.
It’s also highly likely that some law firms may look for alternative legal angles to pursue, possibly targeting large dealership groups for mis-selling finance, rather than the finance providers.
How would car finance compensation work?
If compensation becomes the chosen path, the FCA would likely build a simple online claims portal (with alternative phone or written channels for customers who don’t like to manage their finances online). Consumers wouldn’t need their contract paperwork, just basic personal details and the car’s registration number. Compensation would be calculated automatically, with payments transferred directly into consumers’ bank accounts.
The service would be free for all users, regardless of whether you are awarded compensation. This would mean that the FCA will basically block out the aggressive claims firms from having an avenue to launch enormous and expensive class actions.
The financial burden on lenders would be immense – likely in the tens of billions of pounds. However, a defined claims period, perhaps 18 months, would provide some certainty for lenders, allowing them to manage those costs within a fixed timeframe. Without a centralised mass redress process, we would see endless individual cases and class actions being launched against every single car finance lender. That could end up being even more expensive in the long term, which means even more costs being transferred onto future customers.
This Supreme Court ruling is poised to reshape the car finance landscape, with repercussions that will extend far beyond the car industry. Whichever side wins, the likely outcome is that we’ll all lose.