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The UK’s highest court has blunted the impact of a landmark motor finance judgment that has threatened to leave banks on the hook for tens of billions of pounds in compensation for allegedly deceiving consumers with hidden commissions on car loans.
The Supreme Court on Friday ruled that car dealers do not owe a “fiduciary duty” to their customers, reversing a central part of a bombshell Court of Appeal judgment last year that sent shockwaves through the UK banking sector.
“The Court of Appeal failed to understand that the dealer has a commercial interest in the financial relationship between the customer and the financing company,” said Lord Reed, president of the Supreme Court.
He added that nobody “could reasonably expect” that car dealerships were doing anything other than “acting in their own commercial interests”.
But while the court upheld the banks’ appeals on two of the three cases at issue, it sided with a factory supervisor in Wales in part of his case against MotoNovo Finance, which is part of South Africa’s FirstRand Bank.
The decision has been keenly awaited by investors as well as millions of consumers who were poised to claim redress from the banks. The government had even been considering legislation to limit the fallout.
The controversy over car finance shot to prominence after the Court of Appeal judgment in October that awarded compensation to three people who claimed they were misled by banks concealing the payment of commissions to dealerships.
The original cases were brought by — factory supervisor Marcus Johnson, a trainee nurse in Hull and a postman in Stoke-on-Trent — over second-hand cars they bought from dealerships with financing from Close Brothers and MotoNovo.
Reed explained that Johnson’s case differed from the other two in part because of the size of the commission, which amounted to 55 per cent of the total interest costs on the loan. The £1,650 commission was also a quarter of the vehicle’s entire £6,499 purchase price.
“The fact that the undisclosed commission was so high is a powerful indication that the relationship . . . was unfair,” said Reed.
The court also found that in Johnson’s case, the nature of the relationship between the dealer and the lender had not been properly disclosed. And while Johnson signed documents that mentioned payment of commission, the Supreme Court said the disclosure was not prominent enough.
The scandal has threatened to overturn the £40bn market for financing the 2mn cars that are bought with loans in Britain each year, and to disrupt other areas such as insurance and the provision of consumer loans for white goods purchases.
But lawyers said the Supreme Court’s decision would contain the issue. Kate Scott, a partner at law firm Clifford Chance, said: “The judgment removes much of the uncertainty for financiers of auto lending and indirectly other consumer financial products.”
In an unusual move, the court announced its decision after the UK stock market closed on Friday, a break with the normal practice of releasing judgments mid-morning, to avoid “a risk of market disorder”.
There was palpable relief in the Treasury over the ruling, with chancellor Rachel Reeves fearing chaos in the consumer credit market if it had gone the other way.
“The chancellor was worried about consumer credit drying up and some companies being in big financial trouble,” said one Treasury official.
Reeves had ordered contingency plans to be drawn up in case the Supreme Court upheld the shock Court of Appeal ruling, including possible retrospective legislation to limit the scale of claims.
The Treasury said: “We respect this judgment from the Supreme Court and we will now work with regulators and industry to understand the impact for both firms and consumers.”
Even before the Court of Appeal judgment last year, lenders were already exposed to claims on discretionary commissions, which paid more to dealerships that put customers on loans with higher interest rates and which have been banned since 2021. The latest case has threatened to expand banks’ liability to many fixed commissions too.
The Financial Conduct Authority has previously said it is likely to impose an industry-wide redress scheme to compensate car finance customers, and the watchdog has been waiting for the outcome of the Supreme Court case before deciding how this will work.
Lenders have been putting aside money to cover the cost of redress, which some analysts had estimated before Friday’s ruling could result in a compensation bill approaching that of the £50bn payment protection insurance scandal.
Lloyds Banking Group, the UK’s biggest car finance provider through its Black Horse arm, has set aside the most at £1.2bn, while Santander UK took a £295mn charge and Close Brothers has booked a £165mn provision.
Other lenders have also taken hits, including a R3bn ($166mn) charge at FirstRand and a €173mn provision at Bank of Ireland.
Additional reporting by George Parker in Edinburgh