Summary

  • The UK Supreme Court rules that lenders won't have to pay compensation to millions of motorists over car finance loans

  • The court sided with finance companies in two out of three test cases focusing on commission payments made by banks and other credit providers to car dealers - here's a quick explainer

  • These cases focused on whether or not the dealers had a duty to act in the interests of the car buyers when selling a car on finance

  • The ruling is likely to reduce the scope for very large scale claims for compensation from millions of motorists, Theo Leggett writes

  • The Treasury says it recognises "the issues this court case has highlighted" and it is working with regulators and the industry "to understand the impact for both firms and consumers"

  • Tell us about your experience with car finance

Live Reporting

Edited by Jamie Whitehead

  1. What is motor finance?

    The vast majority of new cars, and many second-hand ones, are bought with finance agreements.

    About two million are sold this way each year, with customers paying an initial deposit, then a monthly fee with interest for the vehicle.

    The car loan scandal payouts row being addressed in our coverage today comes after the City regulator, the Financial Conduct Authority (FCA) banned deals in which the dealer received a commission from the lender, based on the interest rate charged to the customer. These were known as discretionary commission arrangements (DCAs).

    The FCA said this provided an incentive for a buyer to be charged a higher-than-necessary interest rate, leaving them paying too much.

    Since January, it has been considering whether compensation should be paid to people with these deals before 2021.

    Currently, any claims on this issue made to the ombudsman, which has 80,000 open cases, or the courts are effectively on hold.

  2. Government concerned judgement could affect banks' willingness to lend

    Helen Catt
    Political correspondent

    There is no doubt that the government has concerns.

    The Treasury took the unusual step of trying to intervene in the court case earlier this year.

    They hope the Supreme Court ruling will provide some clarity on what should happen next.

    Among their worries is the potential scale of compensation affecting banks' willingness to lend.

    Sources also say that they worry that it could create a perception that regulation in the UK can change retrospectively which could also put companies off operating in this market.

    Rachel Reeves wants to make the UK the "number one destination for financial services companies by 2035" so it seems likely she will want to head off any threat to that.

  3. How much compensation could car buyers get?

    Dearbail Jordan
    Senior business and economics reporter

    It is really hard to say how much money affected motorists could get back. It is likely that they would receive the difference between the interest rate they paid when they signed their car finance agreement and the rate they should have paid.

    An additional 8% interest would then be paid on that sum.

    What we don’t know is how the interest rate that buyers should have paid will be calculated.

    Will it be a flat rate for all car-buyers entitled to claim or will it be calculated on an individual basis?

    Also, it is going to take a while before we learn what shape a compensation scheme will take.

    The Financial Conduct Authority will confirm within six weeks of today’s ruling if it will pursue a redress scheme.

    It will then consult on what the scheme will include - such as the years it will cover - for a further six weeks.

    In short, don’t start spending money in your head just yet.

  4. Court rejected government attempt to intervene

    A file photo of Rachel Reeves - she is seated and looking off cameraReuters

    The Treasury attempted to intervene in this Supreme Court case amid concerns over the possible impact it could have on the wider car financing sector.

    The government has said that while it wanted to make sure customers get redress, it also wanted the motor sector to be able to continue "supporting millions of motorists to own vehicles".

    And it has expressed concerns that the size of the compensation bill for lenders could undermine the competitiveness of UK banks.

    But the Supreme Court did not grant the Treasury’s application to intervene - a decision the government said it respected.

  5. A closer look at the cases behind the ruling

    Kevin Peachey
    Cost of living correspondent

    Marcus Johnson

    The Supreme Court is considering whether nearly all hidden commission arrangements in the car finance market were unlawful.

    Judges are considering three test cases, including that of Marcus Johnson, 34-year-old, from Cwmbran, Torfaen.

    Johnson said that when he bought a blue Suzuki Swift in 2017 he simply did not know that the commission had been paid, although the lender said he had signed a document.

    The solicitors in these three cases say that the commissions amounted to bribes at common law.

    At the heart of this case is the duty of the motor dealer. When selling the car, the dealer is trying to seal the best deal for the business.

    But in a previous judgement, the Court of Appeal effectively said that when the dealer then became a broker for the loan, it had a duty to act solely in the best interests of the buyer, not the lender.

    The car finance sector insists it complied with the law as it was understood, and as regulation required.

  7. At a glance: The car finance scandal

    Kevin Peachey
    Cost of living correspondent

    Cars at a dealerGetty Images

    The vast majority of new cars, and many second-hand ones, are bought with finance agreements where customers pay an initial deposit, then a monthly fee with interest.

    Two accusations of mis-selling have raised the possibility of wide-scale compensation schemes. The first, the narrower of the two, is not the primary focus of today’s judgement.

    It’s related to a decision by the City regulator, the Financial Conduct Authority (FCA), in 2021 that banned deals in which the dealer received a commission from the lender, based on the interest rate charged to the customer.

    These were known as discretionary commission arrangements (DCAs).The FCA said this provided an incentive for a buyer to be charged a higher-than-necessary interest rate, leaving them paying too much.

    The FCA is currently considering whether compensation should be paid to people with these deals agreed before 2021, but an announcement on that is on hold until after today’s judgement, and is now expected within six weeks.

    And that takes us to the second accusation of mis-selling - which is at the heart of today’s judgement.

    The Supreme Court is effectively examining whether a much broader range of hidden commission payments - paid to car dealers by the lenders - are unlawful.

  8. Millions could claim compensation for car finance mis-selling if ruling upheld

    Kevin Peachey
    Cost of living correspondent

    A ruling by the UK's most senior judges this afternoon could pave the way for millions of motorists to claim compensation for motor finance mis-selling.

    The Supreme Court will decide whether or not to uphold an earlier ruling which found that hidden commission payments to car dealers were unlawful.

    Around nine in 10 new cars are bought on finance, so a decision could lead to billions of pounds being claimed by people who bought cars over many years.

    But the industry says it did nothing wrong, leaving lenders, drivers and the government waiting for clarity from the Supreme Court later.

    Many thousands of car buyers are already in line for payouts, but this case could widen the pool of potential claimants significantly.

    Major lenders, such as Lloyds, have set aside huge amounts of money in preparation for such a scenario, with the possibility of payouts approaching the levels seen during the payment protection insurance (PPI) scandal.

    We'll be bringing you updates, analysis and reaction on the judgement when it lands at 16:35 BST, and explaining what it means for you.