Supreme Court rejects Reeves’ intervention in car loan case
The UK’s Supreme Court has rejected Chancellor Rachel Reeves’ attempt to intervene in a high-profile case concerning controversial car finance commissions. The case, set to be heard in April, involves an appeal by financial firms challenging a Court of Appeal ruling that declared it unlawful for lenders to pay commissions to car dealers without informing customers.
The ruling has significant implications, as it also determined that customers who were not made aware of such commission arrangements should be compensated. Estimates suggest that compensation payouts could reach as high as £30 billion, making this one of the largest financial redress schemes since the payment protection insurance (PPI) scandal.
The Treasury had stepped in due to concerns about the potential financial impact on the broader car finance industry. While acknowledging the Supreme Court’s decision, a spokesperson stated that the government remains committed to ensuring fair redress for affected consumers while also safeguarding the viability of the UK motor finance sector.
Car finance agreements are a dominant form of vehicle purchasing, covering the majority of new car sales and a significant portion of second-hand purchases. The case revolves around discretionary commission arrangements, which were banned by the Financial Conduct Authority (FCA) in 2021. Prior to the ban, some car dealers received commissions from lenders based on the interest rates charged to customers, creating a potential conflict of interest and leading to consumers paying higher-than-necessary rates.
The FCA has been reviewing whether consumers who entered such agreements before 2021 should be compensated. A recent Court of Appeal ruling expanded the number of consumers who could be eligible for compensation, leading to fears that lenders may have to make substantial payouts, potentially affecting bank competitiveness in the UK.
Alongside Chancellor Reeves, the Supreme Court also denied intervention requests from Consumer Voice, a compensation advisory service, and the Finance & Leasing Association, a trade body representing the industry. However, it approved intervention requests from the FCA and the National Franchised Dealers Association, suggesting the court intends to hear perspectives directly relevant to the regulatory framework.
Legal expert Wayne Gibbard, who heads the automotive finance practice at Shoosmiths, described the government’s attempted intervention as highly unusual, given that it was not a direct party in the dispute. He noted that the April hearing would be the final legal step in resolving the issue of undisclosed commission payments. Following the Supreme Court’s verdict, the FCA is expected to determine the nature of any potential consumer redress, with a likely decision emerging around May 2024.
The FCA has set the end of 2025 as its deadline to conclude all related cases, meaning financial firms may face prolonged uncertainty regarding compensation liabilities.
The financial sector reacted swiftly to the latest developments. On Tuesday morning, shares in Close Brothers Group, one of the lenders involved in the case fell by 2%, while Lloyds Banking Group saw a 0.7% increase according to sources, following sharp declines on Monday. The financial industry is now closely watching the Supreme Court proceedings, as the final ruling could have wide-reaching implications for the UK’s car finance market and banking sector.