UK Supreme Court’s Landmark Ruling on Motor Finance Commission Payments

The UK Supreme Court has granted permission to appeal a significant ruling regarding motor finance commission payments, which could reshape the regulatory landscape for the motor finance industry. This decision follows a Court of Appeal ruling that challenged traditional commission arrangements, potentially leading to stricter regulations and increased consumer compensation claims.

Key Takeaways

• The Supreme Court will hear the appeal before the end of March 2025.
• The Court of Appeal’s decision may lead to a more aggressive regulatory approach by the FCA.
• The ruling has drawn comparisons to the PPI scandal, with potential liabilities estimated in the billions.

Background of the Case

The case stems from three appeals heard by the Court of Appeal concerning commission payments made to car dealers acting as brokers for financing arrangements. The claimants, all financially unsophisticated consumers, argued that they were not adequately informed about the commissions paid to brokers, which they believed constituted a breach of fiduciary duty.

The Court of Appeal’s decision highlighted several key points:

1. Car dealers owe their customers a disinterested duty and fiduciary duty.
2. Lenders can be held liable for secret commission payments.
3. Disclosure must be sufficient to ensure fully informed consent from consumers.

Regulatory Context

In January 2021, the Financial Conduct Authority (FCA) banned discretionary commission arrangements to eliminate incentives for brokers to inflate interest rates. Since then, motor finance firms have faced numerous complaints regarding commission payments made before the ban. The FCA has largely rejected these claims, asserting that firms acted within legal boundaries at the time.

However, the Financial Ombudsman Service (FOS) has upheld some complaints, indicating a shift in how these cases may be viewed moving forward. The FCA has also reminded firms to maintain adequate financial resources in light of these developments.

Implications of the Ruling

The Court of Appeal’s ruling has significant implications for the motor finance industry:

• Increased Complaints: The decision may lead to a surge in complaints from consumers seeking compensation for undisclosed commission payments.
• Potential Financial Liabilities: Estimates suggest that the financial impact on lenders could range from £23 billion to £42 billion, reminiscent of the PPI scandal.
• Regulatory Scrutiny: The FCA is expected to reassess its approach to historical commission arrangements, potentially leading to stricter regulations.

Next Steps

With the Supreme Court set to hear the appeal, the outcome will be crucial for the future of commission payments in the motor finance sector. The FCA has paused the usual response timeline for claims until December 2025, allowing firms to prepare for the potential fallout from the Supreme Court’s decision.

In the meantime, lenders are advised to review their contractua terms and sales documentation to ensure compliance with the evolving legal landscape. The ruling underscores the importance of transparency and consumer rights in financial transactions, setting a precedent that could influence various retail sectors beyond motor finance.

As the industry awaits the Supreme Court’s ruling, stakeholders are urged to stay informed and proactive in addressing the implications of this landmark case.

Sources

• UK Supreme Court grants permission to appeal landmark case on motor finance commission payments and disclosure thresholds | Insights | Mayer Brown, Mayer Brown.