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This article was first published in the October 2025 issue of Butterworths Journal of International Banking and Financial Law. Since the time of writing, the Financial Conduct Authority has launched its consultation into its planned industry-wide scheme to compensate motor finance customers who were treated unfairly between 2007 and 2024. For further details of the proposed redress scheme, see the FCA statement.
In this In Practice article we consider what comes next, after the Supreme Court judgment on secret commission payments in motor vehicle finance transactions.
1 Key findings of the Supreme Court
In October 2024, the Court of Appeal surprised markets by holding that it was unlawful for car dealers (acting as brokers and owing to their customers fiduciary and disinterested duties) to receive a commission from a lender providing finance without obtaining the customers' fully informed consent to the payment. This potentially widened the scope of possible motor finance claims beyond so-called "discretionary commission arrangements" (where the dealer can increase the customer's interest rate and receive commission on the difference – an arrangement which was banned by the Financial Conduct Authority in 2021) to other forms of commission (such as straightforward flat fees). It also raised the possibility of a flood of claims in analogous transactions involving intermediaries such as mortgages and insurance. The Supreme Court (in Johnson, Wrench and Hopcraft [2025] UKSC 33) has since overturned significant elements of the Court of Appeal decision. The key findings were as follows:
- Crucially, car dealers did not owe fiduciary duties to the customers. In its judgment, the Supreme Court set out the key characteristics of a "fiduciary"; in particular, that a fiduciary must owe "a duty of single-minded loyalty to his principal", and that there must be the "assumption of responsibility" by the fiduciary to act exclusively on behalf of the other party in the conduct of that party's affairs. The Court also underlined the general rule that, outside of well-established fiduciary relationships (eg, trustee/beneficiary or director/company), one would not normally expect a commercial party to subordinate its own interests to those of another commercial party. Thus, nobody would reasonably think that, by offering to find a suitable finance package, a car dealer was thereby giving up its own commercial objective of securing a profitable sale.
- Examining further a typical tripartite customer-dealer-lender transaction, the Court gave salience to other common features. The dealer did not provide credit brokerage as a distinct and separate service from the sale transaction. Nor did it give any undertaking or assurance to the customer that, in finding a suitable credit deal, it was putting aside its own commercial interest as seller. The dealer was not an agent for the customer in negotiating a finance package; it was undertaking an intermediary activity, without authority to enter into legal relations on the customer's behalf. The Court considered, by analogy, advice given by service providers in other sectors (including plumbers, tailors and sommeliers) to show how these interactions could not be understood to give rise to a duty to act exclusively in a client's interests.
- Several consequences flow from this key finding. Lenders could therefore not be held liable as accessories for breach of a fiduciary duty, since no such duty existed.
- The Court also held that a claim in bribery depends upon the recipient of that bribe owing a fiduciary duty (and not some form of lower duty). It followed that claims under the tort of bribery against the lenders (who, as payers of an alleged "bribe", would have assumed primary liability), therefore failed.
Lenders will have been relieved to hear that, accordingly, no claims were allowed in equity or in tort and so two of the three claims (Hopcraft and Wrench) failed. This finding will have significantly reduced the potential for successful claims, by consumers and businesses alike, against lenders or indeed against any supplier whose new business is facilitated by commission paid to intermediaries.
2 Significance of the judgment
It is important not to underestimate the impact of the Supreme Court judgment. Most cars sold in the UK are bought on credit, involving commission payment to a broker. According to the Finance and Leasing Association, in the 12 months to September 2024, consumers used regulated motor finance to purchase 625,000 new cars, borrowing £17.4bn, and 1.4m used cars, borrowing £21.3bn. The Supreme Court judgment was deemed sufficiently significant (and therefore price sensitive) that it was released on a Friday after markets had closed. In the week before judgment was handed down, it was even reported that the Government might legislate to mitigate the impact of any decision deemed too detrimental to UK listed banks.
3 A sting in the tail for lenders
Nevertheless, one of the claims heard by the Supreme Court (Johnson) was upheld under the Consumer Credit Act 1974 (CCA). This was largely because the size of the commission paid by FirstRand (the lender) to the dealer was particularly high (£1,650.95), amounting to 25% of the advance of credit and 55% of the total charge for credit (comprising interest and fees). Consequently, the relationship between lender and consumer was held to be "unfair" for the purposes of ss.140A-B of the CCA. Other relevant factors were the failure adequately to disclose the commission and the concealment of the commercial tie between lender and dealer (the lender having a right of first refusal over the dealer's business). Accordingly, the borrower in this case was entitled to repayment of the full amount of the commission paid, plus interest dating back to 2017.
This raises the possibility that many aggrieved consumers could still have a valid claim against their lender under the CCA. However, a meaningful degree of uncertainty remains as to who might be entitled to compensation; where to draw the line? As we explore further below, there are significant challenges in undertaking a highly fact-sensitive analysis of multiple claims to determine whether lending relationships were "unfair".
4 What comes next?
Shortly after the Supreme Court judgment was handed down on 1 August 2025, the Financial Conduct Authority (FCA) announced that, starting in October, it will consult on an industry-wide compensation scheme. The aim would be to set rules for how firms assess claims and calculate redress. Assuming the redress program goes ahead, the first payments are expected to be made in 2026 at a projected cost to lenders of between £9 billion and £18 billion. The FCA currently estimates that most individuals who qualify for compensation will probably receive less than £950 in redress per agreement. Firms will be guided by the FCA-mandated compensation scheme as to the appropriate response, but they will already be revising their provision for related costs.
The FCA has indicated that there may be tensions between the principles underpinning a redress scheme. For instance, principles aimed at protecting consumers (eg, comprehensiveness and fairness) will have to be balanced against the need to ensure the long-term integrity of the motor finance market (eg, the goals of simplicity and cost effectiveness).
In this context, a range of vehicle finance contracts will need to be considered. These could include personal loans, hire purchase contracts or so-called Personal Contract Purchase contracts (PCPs) - a car finance agreement where the customer pays monthly instalments to cover the depreciation of the car (rather than its total cost), with the possibility of buying the car outright by making a 'balloon' payment.
5 Assessing CCA claims – the difficulties
It will be important to lenders that the rules of any FCA redress scheme allow them to efficiently calibrate redress payments so as to reflect each individual claimant's circumstances. The test of "unfairness" under section 140A of the CCA is deliberately framed in wide terms with very little in the way of guidance as to the criteria for its application. This permits courts to take account of a very broad range of factors; the test is highly fact-sensitive. Significantly, a factor in Johnson was the finding that the consumer was commercially unsophisticated and could not reasonably be expected to have read and understood the detail of the finance documents. The relevance of the characteristics of the consumer introduces a subjective element into the criteria for lender liability which could further complicate the processing of a large number of claims.
Other factors which may need to be considered include:
- the size of the commission relative to the charge for credit;
- the nature of the commission - for instance, a discretionary commission arrangement may have incentivised a dealer to charge a higher interest rate;
- the characteristics of the consumer;
- the extent and manner of disclosure;
- compliance with regulatory rules.
6 Impact on lenders
Lenders offering motor finance to the public have been inundated with claims from customers in relation to loans arranged by vehicle dealers. The FCA has indicated (not uncontroversially) that lenders may have to pay redress on car loans dating back to 2007. However, whether a particular claim falls within the redress scheme will depend upon whether it would be time-barred before the courts, which in turn may depend upon whether material facts were concealed from the customer. In many cases, lenders may no longer have adequate records of historic lending. Even if redress payments are only calculated on the basis of part (and not the whole) of the commission paid, a significant portion of the compensation bill faced by lenders will flow from the requirement to pay interest on the amount of redress at a commercial rate. The FCA will consult on the level of interest which would be fair and proportionate, but has already suggested a likely interest rate of base rate plus 1%. Interest compounded over a longer period (potentially nearly 20 years in some cases) could therefore be very significant.
It remains to be seen to what extent the FCA will be able to help lenders take account of these variables in order to arrive at appropriate levels of compensation for affected consumers. The FCA methodology for calculating redress will be informed by the degree of harm suffered by the consumer and the need to ensure consumers continue to be able to access affordable loans for motor vehicles. The Supreme Court judgment is in many ways just the end of the beginning when it comes to motor finance claims. The exposure of a lender will be impacted by the profile of their loan book, the profile of their borrowers and the nature of their broker arrangements.
Lenders will be reviewing their approach to the origination of new business, to mitigate the risk of CCA-based claims. Firms will need to revisit their contractual arrangements with dealers and look at best practice in terms of deal execution, so as to mitigate reputational risk. Changes to commission arrangements with brokers will inevitably impact on the economics of commonly used financing products and may lead to a change in focus.
7 Specialty finance transactions
It is common for consumer-facing lenders to raise funds for their loan portfolio from third party funders, pursuant to specialty finance transactions. Such transactions typically take the form of a "borrowing base facility" (BBF) where a funder makes available a debt facility to the consumer finance business which, in turn, lends to consumers. The 2024 Court of Appeal decision sent shockwaves through the specialty finance sector. Although the Supreme Court decision represents a better outcome for the sector than was originally feared, funders and consumer-facing lenders will now be keen to assess the impact of compensation payable pursuant to the FCA redress scheme. To the extent that a live BBF has a significant "back book" of loans originated to date, it will be important for all parties to understand the extent of potential CCA-based claims and the impact on those funding arrangements1.
Footnote
1 In Practice: Car finance commission arrangements in the context of speciality finance transactions - (2025) 1 JIBFL 49
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
