Motorists have won a landmark legal decision against companies providing car finance deals after Appeal Court judges ruled in favor of three car buyers who claimed that hidden commissions on their deals added thousands of pounds to the cost.
“The consumers were very poorly served by the brokers and the lenders alike,” the judges said.
They said consumers have the right to know about the commission arrangements between the lender and car dealer to ensure fairness.
Until a rule change in 2021, hidden commissions on car purchase deals meant customers could end up paying many thousands of pounds extra in interest for a loan to buy the vehicle.
The four justices held that car dealers had a legal duty to act in consumers' best interests instead of their own when arranging car finance deals.
They said it was not sufficient for commission details to be hidden in a contract's terms and conditions. The ruling could open the door for many more consumers to seek redress.
Lawyers for the customers bringing the case – student nurse Amy Hopcraft, factory supervisor Marcus Johnson and postal worker Andrew Wrench – argued that dealers had a duty to provide impartial information or advice.
They asked for the return of the hidden commission paid to the dealers as credit brokers.
The court agreed that the car dealers were the sellers but also acted as credit brokers on behalf of the buyers. As such they had a duty to search for and offer a finance deal that was competitive and suitable for the customers' needs.
In 2021, the Financial Conduct Authority (FCA) watchdog banned agreements under which firms could receive commission linked to the interest rate paid by customers, saying the practice incentivized car dealers to increase a customer's borrowing costs.
Thousands of drivers complained that they have been overcharged. Firms rejected many of the complaints arguing that they had not acted unfairly nor caused their customers loss.
The Financial Ombudsman Service considered some complaints rejected by firms and found in favor of complainants in two decisions. Claims were also brought by some consumers in County Courts, some of which were upheld,
The FCA has been reviewing historical cases since January and has warned lenders to prepare for additional costs as part of a possible compensation scheme.
It is carrying out its own inquiry into the motor finance sector and looks likely to make lenders pay back commissions.
The watchdog has been flooded with complaints from consumers claiming that their loans were priced unfairly. Over one million claims have been submitted through Martin Lewis's Money Saving Expert site.
The FCA said it had paused the time firms have to provide a final response to customers about motor finance complaints involving a discretionary commission arrangement (DCA). “We did this to prevent disorderly, inconsistent and inefficient outcomes for consumers and knock-on effects on firms and the market while we review whether motor finance customers have been overcharged because of the past use of DCAs.”
It said it had noted the Appeal Court judgment and is carefully considering its decision,
Separately, legal firms are taking action on behalf of a number of drivers. Manchester-based Consumer Rights Solicitors, which acted in this case, believes the compensation bill could be as high as £42bn.
Shares in Close Brothers, the company that provided the finance, fell sharply after the verdict. The company said: “The financial impact of the Hopcraft case in isolation is not material,” but warned “the judgment may set a precedent for similar claims, which may… result in significant liabilities for the group.”
Close Brothers disagreed with the court ruling and will appeal to the Supreme Court. It said it was pausing new UK motor finance business while it reviews its processes.
Kavon Hussain, of Consumer Rights Solicitors said: “These hidden commissions meant that the consumer could pay anything from a few hundred pounds to many thousands extra to a lender through interest payments, for the lender to then pay this to the dealer. It was, and still is, a broken system.”
