Customers win car finance case in UK Court of Appeal

Principle of fiduciary duty means finance brokers must act in the best interests of the customer

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CX Network
11/01/2024

The brakes have been put on car finance deals in the UK after the Court of Appeal ruled car dealers and finance lenders “could not lawfully receive a commission without obtaining the customer’s fully informed consent to the payment”.

Three combined cases were heard in the Court of Appeal on October 25. The hearing involved just three customers and two lenders, Close Brothers and FirstRand Bank, but the impact of the ruling has been felt across the automotive and finance industries.

In the UK, fiduciary duty means finance brokers – in this case, car dealers and finance brokers working for lenders – “must act in the best interests of the customer and not put themselves in a position of conflict”.

The judgment followed a number of smaller claims brought by consumers in county courts across the UK. They alleged the information and recommendations provided by car dealers and car finance brokers were influenced by the commission they would receive from the finance provider, or that the car dealer didn’t offer the best interest rate available.

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At a glance: The UK’s car finance industry

It is expected millions of customers who bought used and new cars on finance could lodge complaints and receive compensation of around £1,600 each.

The UK’s Financial Conduct Authority (FCA) says two million people a year take out car finance. The Financing and Leasing Association (FLA) says in 2023, as many as 78.6% of all new car sales were financed by loans. Over the same period in the used car market, new loans were estimated to total £22.2 billion for the full year.

Consumer platform Moneysavingexpert.com, founded by consumer rights advocate Martin Lewis, launched a free car finance reclaim tool in February 2024 and by mid-March had received more than one million letters of complaint, some from borrowers with multiple car finance agreements.

UK’s largest consumer payouts

Stephen Haddrill, director general of the FLA, said: “This is a significant and unexpected judgment, the implications of which stretch far beyond the motor finance sector, making it an issue that demands the immediate attention of the Financial Conduct Authority.”

The huge number of car finance deals written across the UK means a multibillion-pound compensation scheme is likely to be on the horizon, funded by lenders. The FCA warned car lenders they should hold back cash for potential payouts, with estimates the bill could total £8bn to £13bn – although some estimate the total will exceed £20bn – making it the largest consumer payout of its kind since the payment protection insurance (PPI) scandal.

PPI was sold on top of millions of loans, from mortgages to credit cards, with the promise of protecting borrowers who were unable to continue payments due to illness or job loss. While banks made huge profits from the additional insurance payments, they were ruled worthless. In 2004, a media investigation found banks were returning just 15 percent of the cover’s value claimants.

In 2005, the FCA stepped in and customers who had bought PPI had until 2019 to lodge a complaint. The FCA said in 2021 that the total compensation paid to consumers exceeded £38.3 billion.

The FCA has been involved in car finance investigations for a number of years, banning discretionary commission arrangements (DCAs) in 2021. The body found DCAs cost car buyers an extra £1,000 in interest over a typical four-year £10,000 loan plan. The findings of its review into motor finance mis-selling were initially due in September, but have been pushed back to May 2025.

“Lenders have taken advantage of consumers”

“This ruling is a massive win for consumer justice,” said Sam Ward, director at Sentinel Legal, the firm representing Johnson alongside HD Law. Consumer Rights Solicitors represented Wrench and Hopcraft. “For too long, lenders have taken advantage of consumers through complex, unfair finance deals. This decision finally puts power back into the hands of consumers, forcing banks to face the consequences of their actions,” Ward added.

As a result of the court’s ruling on October 25, many dealerships and car finance lenders have stopped issuing new loans – some dealers are also temporarily unable to release new cars to customers. Some have stopped commission payments, while others are in the process of changing their terms.

The two lenders in the case have stated they intend to appeal the decision in the Supreme Court. Meanwhile the UK arm of Santander withheld its financial results, due on October 29, as it reviewed the court’s decision; Lloyds Banking Group is “evaluating the implications” following a decline in its share price; and Barclays had already had its own cases heard in the High Court, involving both Personal Contract Purchases (PCPs) and conditional sale agreements, which are similar to HP.

Kevin Durkin, director of HD Law, said: “This case marks a turning point, giving consumers a clear path to seek compensation for unfair finance deals. With £21 billion potentially due to consumers, this decision underscores the importance of holding lenders accountable.”

The next steps for car dealers, banks and customers

The combined cases, Johnson v FirstRand Bank Limited, Wrench v FirstRand Bank Limited and Hopcraft v Close Brothers, were the first of their kind to reach the Court of Appeal and revealed how consumers were misled into PCP deals they alleged were misrepresented at the point of sale.

A PCP sees consumers pay an initial deposit, followed by monthly payments for the length of the contract, usually 24 to 48 months. At the end of the contract, the customer can make a final lump sum payment to own the car outright, or they can upgrade to a new car and start the process over. Hire Purchase (HP) agreements are also available to UK consumers, although at the end of HP contracts, the customer owns the vehicle.

The PCP deals in question led many to believe they were securing competitive finance deals, only to discover hidden fees and excessive interest rates. The ruling on October 25 creates a legal precedent expected to influence future motor finance mis-selling cases.

The FCA may also adjust its oversight of car finance agreements based on this decision, potentially leading to stronger consumer protections.