Motor finance compensation ruling ‘goes too far’, watchdog tells Supreme Court

A court ruling which could leave motorists being owed compensation over their car finance arrangements “goes too far”, the UK’s financial watchdog has told the Supreme Court.

Two lenders have taken a row over whether millions of drivers could be entitled to receive money back on their hire-purchase agreements to the UK’s highest court, with a three-day hearing starting on Tuesday.

The lenders, FirstRand Bank and Close Brothers, are challenging a Court of Appeal ruling from October last year, which found that “secret” commission payments to car dealers as part of finance arrangements made before 2021 without the motorist’s fully informed consent, were unlawful.

The court found that three motorists, who all bought their cars before 2021, had not been told either clearly enough or at all that the car dealers, acting as credit brokers, would receive a commission from the lenders for introducing business to them, and should receive compensation.

The lenders are challenging the ruling at the Supreme Court, with lawyers for FirstRand telling justices that the decision was an “egregious error”.

The three drivers, Marcus Johnson, Andrew Wrench and Amy Hopcraft, oppose the challenge, with the Financial Conduct Authority (FCA) also intervening in the case.

In written submissions for the hearing in London, Jemima Stratford KC, for the FCA, said: “The sweeping approach of the Court of Appeal in, effectively, treating motor dealer brokers as owing fiduciary duties to consumers in the generality of cases, goes too far.”

She continued: “The FCA submits that motor dealer brokers do not typically owe fiduciary duties. Treating all motor dealer brokers as fiduciaries would be too sweeping an approach.”

In a letter to the Supreme Court in December last year, the FCA said that almost 99% of the roughly 32 million car finance agreements entered into since 2007 involved a commission payment to a broker.

Mr Johnson, Mr Wrench and Ms Hopcraft all used car dealers as brokers for car finance arrangements for second-hand cars, all worth less than £10,000, before January 2021.

Only one finance option was presented to the motorists in each case, with the car dealers making a profit from the sale of the car and receiving commission from the lender.

The commission paid to dealers was affected by the interest rate on the loan.

The schemes were banned by the FCA in 2021, with the three drivers taking legal action individually between 2022 and 2023.

Ms Hopcraft, then a student nurse, bought her replacement car in 2014 through an agreement with Close, which paid the car dealership £183.26 in commission.

Mr Wrench, described by the Court of Appeal as a “postman with a penchant for fast cars”, entered into two hire-purchase agreements for an Audi TT coupe and a BMW 3 Series, with FirstRand, in 2015 and 2017 respectively, paying hundreds in commission in total.

Mr Johnson, then a factory supervisor, was buying his first car in 2017 and paid £1,650.95 in commission as part of his finance agreement with FirstRand for the Suzuki he purchased.

After the claims reached the Court of Appeal, three senior judges ruled that the lenders were liable to repay the motorists the commission, as there was “no disclosure” of the commission payments in Ms Hopcraft’s case, and “insufficient disclosure” in the case of Mr Wrench.

In Mr Johnson’s case, the judges found that he had received “insufficient disclosure” about the commission to give “fully informed consent” to the payment.

Lady Justice Andrews, Lord Justice Birss and Lord Justice Edis said that while each case was different, “burying such a statement in the small print which the lender knows the borrower is highly unlikely to read will not suffice” as enough to properly inform a motorist about the commission.

But in written submissions for the hearing on Tuesday, Mark Howard KC, for FirstRand, said the Court of Appeal’s ruling was “novel” and “came as a very considerable surprise to the industry”, adding: “Something has gone wrong.”

He said FirstRand did not owe a duty to Mr Johnson or Mr Wrench as they “never undertook to act loyally on their behalf”, and that it was “highly improbable” that they would do so.

In written submissions for Close, Laurence Rabinowitz KC said: “The Court of Appeal’s judgment accordingly enables customers to avoid their contracts with, and obtain money judgments against, lenders, without the need to show that these contracts were unfair, were induced by dishonesty or negligence, or resulted in any loss to the customer or unjust enrichment to the lender.”

The hearing before Lord Reed, Lord Hodge, Lord Lloyd-Jones, Lord Briggs and Lord Hamblen is due to conclude on Thursday, with a judgment expected in writing at a later date.