Millions of drivers hoping for compensation in the car finance mis-selling scandal have been dealt a significant blow after the Supreme Court ruled in favour of lenders in two of three test cases heard today.
Supreme Court President Lord Reed announced this afternoon that the court would allow appeals brought by finance companies FirstRand Bank and Close Brothers, rejecting compensation claims from drivers Andrew Wrench and Amy Hopcraft.
However, the court upheld one claim from Marcus Johnson, who successfully argued that “the relationship between him and the finance company was unfair” under consumer credit law. Lord Reed said Johnson would be awarded the amount of the commission plus interest.
The landmark ruling at 4:35pm today has major implications for what has been dubbed Britain’s latest financial mis-selling scandal, with potential costs previously estimated at up to £50 billion – comparable to the Payment Protection Insurance (PPI) scandal.
The cases centred on whether “secret” commission payments to car dealers for arranging finance constituted unlawful practices. Between 2007 and 2021, almost 99 per cent of the roughly 32 million car finance agreements involved commission payments to brokers, according to the Financial Conduct Authority (FCA).
Lord Reed and fellow justices Lords Hodge, Lloyd-Jones, Briggs and Hamblen delivered their verdict after hearing appeals in April against an October 2024 Court of Appeal ruling that had found all commission arrangements unlawful without full customer disclosure.
The three test cases involved drivers who purchased second-hand cars worth less than £10,000 through dealer-arranged finance. In each case, dealers received commissions that increased with higher interest rates – a practice known as discretionary commission arrangements (DCAs), banned by the FCA in 2021.
Financial markets reacted immediately to the ruling, with bank shares falling despite the partially favourable outcome. Lloyds Bank, the most exposed through its Black Horse subsidiary, dropped 2.7 per cent, whilst Barclays fell 3.6 per cent.
Major lenders had set aside over £1 billion in provisions for potential compensation claims, including Lloyds (£1.2 billion), Santander UK (£295 million), Close Brothers Motor Finance (£165 million), Barclays (£90 million) and Investec (£30 million).
The FCA had warned of potential “market disorder” if the verdict were announced during trading hours, prompting the late afternoon timing. The regulator has said it will confirm within six weeks whether it plans to launch an industry-wide redress scheme.
Consumer finance expert Martin Lewis had previously urged motorists not to sign up with claims firms, advising: “Do not sign up to a claims firms. Don’t do anything now. This will all play out tonight then likely over the next six weeks or so and then we’ll have a good idea.
The ruling distinguishes between different levels of disclosure in the three cases. Amy Hopcraft received no disclosure about commissions, whilst Andrew Wrench and Marcus Johnson had varying degrees of partial disclosure through terms and conditions or separate documents.
Brian Nimmo, head of redress at financial services consultancy Broadstone, had warned the judgment could trigger “one of the country’s largest-ever mass redress schemes” if fully upheld. Today’s split decision creates a more complex landscape for potential claims.
The controversy erupted after the Court of Appeal’s October 2024 ruling that dealers owed fiduciary duties to customers and that undisclosed commissions amounted to “bribes” or breaches of trust. Finance companies argued this interpretation went too far and would create chaos in the motor finance market.
Rating agency Fitch had identified Bank of Ireland UK, Barclays, Investec, Lloyds and Santander UK as lenders “significantly involved” in motor finance lending, alongside Close Brothers, all potentially facing compensation claims.
The Supreme Court’s nuanced ruling – upholding Johnson’s claim whilst rejecting Wrench and Hopcraft – suggests compensation may be limited to cases where unfair relationships can be proven under the Consumer Credit Act, rather than applying automatically to all undisclosed commissions.
Consumer groups had hoped for a ruling that would entitle millions who took out car loans before 2021 to automatic compensation. Today’s decision significantly narrows that scope, though the FCA may still proceed with a limited redress scheme for specific types of arrangements.
The motor finance sector, worth billions annually, had warned that a full upheaval could restrict credit availability and increase costs for future car buyers. Today’s partial victory for lenders may ease those concerns whilst still leaving the door open for some compensation claims.
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