The car finance industry and Financial Conduct Authority (FCA) are awaiting a Supreme Court decision that could pave the way for a major payment protection (PPI)-style redress scheme for motorists.
The City watchdog has been investigating the car finance market since last year.
The car finance saga relates to “hidden, unfair” commission that lenders and dealers took from customers before 2021.
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The FCA had banned discretionary commissions on the sale of car loans such as Hire Purchase (HP) and Personal Contract Purchase (PCP) in January 2021. But the City watchdog intervened last year after it received what it described as a "high number" of complaints from customers about car loan sales made prior to the ban.
It has told lenders to pause investigating complaints until December 2025 while it looks into the wider sector.
A landmark Court of Appeal ruling last October has also widened the saga to other types of "hidden" commission payments and raised the possibility of millions of motorists receiving payouts.
A Court of Appeal judgement involving lenders Close Brothers and FirstRand Bank ruled in favour of consumers, deciding it was unlawful for car dealers to earn a commission without informing the customer and securing their consent. The judgement related to fixed commissions as well as DCAs. Both lenders intend to appeal and the Supreme Court has been deliberating this week on whether it will allow a case to go ahead.
The lenders are arguing that a car finance broker could not lawfully receive a lender's commission without first obtaining a customer’s consent.
It is unclear if a decision will be made once the hearing concludes today (3 April).
The FCA announced on 11 March that, taking into account the Supreme Court's decision and if it concludes that motor finance customers have lost out from widespread failings by firms, then it's likely it will consult on an industry-wide redress scheme.
Brian Nimmo, head of redress at financial services consultancy Broadstone, said: “The Supreme Court’s decision will have major ramifications for the financial services market and could kickstart one of the largest and costliest redress schemes since PPI.
“While the final judgement is not expected until the summer, banks have already set aside billions of pounds for possible compensation payments. It is set to be a landmark ruling with far-reaching legal and financial consequences.”
Major UK bank Lloyds has already set aside more than £1 billion in potential redress. It is a significant provider of car finance through its Black Horse brand.
Even the Treasury has now raised concerns that firms could legally reduce their corporation tax bills by offsetting compensation payments to customers who were mis-sold car loans between 2007 and 2021.
Other banks have also made provisions, with Barclays setting aside £90 million and Santander £295 million.
What is the FCA motor finance market review?
The FCA banned discretionary commissions for personal contract or hire purchase car finance agreements on 28 January 2021, as it was concerned that they created an incentive for brokers to increase how much people were charged for their car loan.
But the City watchdog was concerned at the level of complaints that firms are rejecting about the issue, which are later being upheld when challenged through other channels.
It said firms are rejecting most complaints because they consider that they have not acted unfairly, nor caused their customers loss based on the applicable legal and regulatory requirements.
However, the Financial Ombudsman Service (FOS) has upheld issues that have been rejected by firms in recent cases and the FCA predicts this could prompt a significant increase in other complaints. Claims have also been brought in the county courts, some of which have been upheld.
The regulator said this suggests a significant dispute between some firms and consumers on whether firms have breached legal and regulatory requirements.
It launched the motor finance market review in January 2024.
The FCA has used its powers to pause all complaints about DCAs until 4 December 2025 as it reviews the sector and these sales more widely.
How would a car finance redress scheme work?
A car finance redress scheme could work in a similar way to the payment protection insurance (PPI) scandal where customer complaints must be considered and there will be rules on the levels of compensation.
Under a redress scheme, lenders would be responsible for determining whether customers have lost out due to the firm’s failings. If they have, the lender would need to offer appropriate compensation. The FCA would set rules firms must follow and put checks in place to make sure they do.
The regulator said a redress scheme would be more simple for consumers than bringing a complaint.
It said: “We would expect fewer consumers to rely on a claims management company, meaning they would keep all of any compensation they receive. It would also be more orderly and efficient for firms than a complaint led approach, contributing to a well-functioning market in the future.”
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