Relief for banks as Supreme Court curbs £44 billion motor finance case

LONDON ― The Supreme Court has quashed hopes for a mass redress compensation scheme for British consumers hoping to appeal legacy car financing — handing a win to banks and the U.K. government.

Judges on the landmark case entirely sided with banks in two of three appeals, stating that consumers’ arguments that lenders paying hidden commissions to car dealers did not amount to a bribe and customers were not entitled to a duty of care, known as a “fiduciary duty.”

Speaking at 4.35 p.m. Friday afternoon, five minutes after markets closed, judge Robert Reed threw out the consumers’ main arguments which focused on the car dealer and banks owing a fiduciary duty to act in the best interest of borrowers.

Each party acted in its own interest and were not expected to show loyalty to the customer, the ruling said.

But in one of the three cases, judges said the consumer should be compensated as he was treated unfairly as per the Consumer Credit Act.

In that case, the consumer, Marcus Gervase Johnson, had his claim upheld for specific circumstances including the large size of the commission paid by the bank to the car dealer, and that the documents he was provided with upon sale of the vehicle were designed to create a false impression of terms offered by lenders.

“Mr. Johnson was commercially unsophisticated, and the court questions the extent to which a finance company could reasonably expect a customer to have read and understood the detail of such documents, particularly when no prominence was given to the relevant statements. For these reasons, the court holds that [the] relationship between Mr. Johnson and the finance company was unfair, and that the finance company should pay the amount of the commission to Mr. Johnson with interest at a commercial rate from the date of the agreement,” said Reed.

“Other customers’ claims are rejected.”

Some commission and compensation may still be payable to consumers, after this one case was broadly successful, but champagne is likely to be popping in the City of London considering some analysts put potential payouts for lenders as high as £44 billion.

“This judgment is an excellent outcome,” said Stephen Haddrill, director general of the Finance and Leasing Association, which lobbies on behalf of motor finance lenders.

“It properly reflects the role and responsibilities of dealers, lenders and customers, and it has restored certainty and clarity to the largest point-of-sale consumer credit market in the UK,” Haddrill added. “In addition, it has also restored confidence to the sector, confirming that it remains a solid investable option – which in turn means the supply of affordable motor finance will continue for customers.”

Richard Coates, partner and head of automotive at leading law firm Freeths, said: “The judgment opens the gateway for consumers to bring claims under the Consumer Credit Act, where particularly large commissions have been paid and the relationship is therefore unfair.”

The Financial Conduct Authority said it would confirm whether to consult on a consumer redress facility before markets open on Monday morning.

The ruling came after lenders FirstRand Bank and Close Brothers appealed the Court of Appeal’s October judgment which found it was unlawful for banks to have paid commission to car dealers without borrowers’ knowledge and consent.

The commission meant consumers paid more for car finance.

Banks argue they were following regulation as it stood at the time and said the earlier ruling would deter investment in the U.K., if businesses believe they are complying with the law but are later found to be guilty of not doing so.

The outcome will also likely provide some calm within Westminster, after reports suggested Chancellor Rachel Reeves was willing to enact a law to undo the Supreme Court ruling if it found banks should be on the hook for substantial redress.

In a statement following today’s ruling, a U.K. Treasury spokesperson 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.”

Reeves, desperate to show she is growing Britain’s economy, attempted to intervene in the case before it was heard in April over fears it could hurt the U.K. as a place to do business, but the Treasury’s application was rejected.

Reed noted that attempt to intervene, adding: “The Treasury also sought to intervene but their application was refused, as their arguments concerned the economic consequences of the Court of Appeal’s decision. The Supreme Court is only concerned with the legal issues in the case.”