The UK supreme court has overturned key parts of a shock court of appeals ruling last year that threatened to leave motor finance providers, including Bank of Ireland, facing massive bills for compensation over commissions paid to car dealers.
Bank of Ireland, which has a 2 per cent share of the UK motor finance market, set aside a provision of £143 million (€172 million) last year for a potential compensation scheme, though many analysts had said the bill could rise.
The UK Financial Conduct Authority (FCA) has said it would decide within six weeks of the keenly-awaited supreme court ruling – which related to three test cases – whether to launch an industry-wide compensation scheme for mis-sold car loans.
Motor finance providers may still face compensation programmes, but the extent of the bill facing lenders is likely now to be significantly lower than some analysts had forecast.
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There had been a view that the final bill could match the almost £40 billion (€45.9 billion) in redress UK banks paid in the 2010s for mis-selling payment protection insurance.
The FCA set up a review early last year into whether motor finance customers were being overcharged because of historical use of discretionary commission arrangements between car dealers and lenders. The examination covers 14 years before such arrangements were banned in 2021 in the market.
The FCA said it aimed to make any redress scheme easy to understand so that affected consumers can take part in it without using claims management companies that take a chunk of compensation in fees in return for helping with a claim. Claims management companies chased business during the payment protection insurance scandal.
Discretionary commission arrangements involved lenders setting a minimum rate for car finance but giving brokers, typically forecourt salespeople, the discretion to set higher rates. Commission paid by the lender was linked to rates charged – meaning the higher the rate the car buyer pays, the more the broker gets.
The FCA has argued, however, that the London court of appeal went too far on a number of test cases, when it decided in October 2024 that motor brokers owed a fiduciary duty to customers.
The supreme court agreed with the FCA. The court’s president, Robert Reed, said on Friday afternoon – after European financial markets had closed at 4.30pm – that car dealers who sold the vehicles and arranged the finance did not owe fiduciary duties to customers.
“The court of appeal failed to understand that the dealer has a commercial interest in the arrangement between a customer and a finance company,” lord justice Reed said as he delivered the ruling.
He added than nobody “could reasonably expect” that car dealerships were doing anything other than “acting in their own commercial interests”.
The three test cases related to car finance arrangements with lenders Close Brothers, based in London, and an arm of South Africa’s FirstRand Bank. The supreme court upheld the lenders’ appeals on two of the cases, but sided with a car purchaser, called Marcus Johnson, in the third case due to the specific circumstances of his case.
The UK treasury said it respected the ruling and would work with regulators and the car finance industry to understand its impact for both lenders and consumers. The chancellor of the exchequer, Rachel Reeves, was reported last week to have been considering pushing through retroactive legislation to limit compensation bills for car finance providers if the supreme court upheld the court of appeals rulings.
