Supreme Court Ruling on Car Finance Scandal

The Supreme Court has lifted a decision that could have meant millions of drivers receiving compensation for incorrectly sold cars. British banks and lenders have been spared a large legislative template. However, the court agreed with one of the applicants, Marcus Johnson, and gave him individual compensation due to the circumstances in his case.

Background of the Case

The judgment is likely to significantly restrict the scope of the potential payments to drivers after the Court of Appeal decided as part of the financial agreements as a "secret" commission payments to car dealers last year without the full consent of the buyer being unlawful. The court found that three drivers, including Mr. Johnson, had not been clearly or not at all said that the car dealers who act as loan brokers would receive a commission from the lenders to present shops.

Details of the Judgment

The drivers had bought all their cars before 2021 and the court said they should receive compensation. Two lenders, Firstrand Bank and Close Brothers, went to the Supreme Court and said at a three-day hearing in April that the decision was an "enormous mistake". The Financial Conduct Authority (FCA) also intervened and informed the UK’s highest court that the judgment of the Court of Appeal "goes too far".

Reaction to the Judgment

Lord Reed gave a summary of the judgment and said: "For the details in a judgment published today, the Supreme Court allows the financial companies to be appointed." He continued: "However, we believe in Mr. Johnson that the relationship between him and the financial company was unfair, and we only allow the appeal in his case because the Court of Appeal made a number of mistakes in achieving its decision. We give him the amount of a commission plus interest. The claims of other customers are rejected."

Impact on Car Buyers

The drivers all used car dealers as a broker for financial agreements for vehicles from used hand worth less than 10,000 GBP. Each of them was only presented to a financing option, whereby the car dealers benefited from the sale of the car and received commission from the lender. Mr. Johnson bought his first car in 2017 and paid 1,650.95 GBP to the commission as part of his financial contract.

Victory for the Banks

This is largely a victory for the banks. Lord Reed has effectively found that the judgment of the Court of Appeal was wrong for many reasons. The judges of the Supreme Court examined some important details, including whether there was bribery or whether the dealers owed the loyalty of car buyers. One question was whether the car dealers acted in the interest of the customers. Lord Reed spoke about the relationship that the dealers had to the banks and with customers, and said effectively: No.

Separate Case for Car Financing

Some drivers could continue to receive compensation because a separate case for car financing takes place at the FCA. The second case focuses on Discretionary Commission Arrangements (DCAS) – a practice banned by the FCA in 2021. As part of these agreements, brokers and retailers increased the amount of the interest they deserve without sharing the buyers and received more commission for this. This should then incorporate sellers to maximize interest rates. In January 2024, the FCA announced a review of whether motorinance customers had been overloaded due to the earlier use of DCAS.