Car finance scandal: “Customers should not be punished as firms face increased pressure”

In the latest twist in the ongoing car finance scandal, the Supreme Court has overturned a landmark ruling on mis-sold commissions in car finance. 

The case had been set to rival the PPI scandal, with estimates it could have cost lenders up to £44bn. However, the new ruling on Friday 1st August has reduced the eligibility of millions of UK drivers who may have previously been able to claim against hidden commissions. 

But with the fresh development, the case is far from over, as the Financial Conduct Authority (FCA) is due to publish a consultation on a potential redress scheme. 

So how did it get to this point, and what could this mean for both motorists and lenders? Red Marlin’s account director Harriet Evans shares her thoughts on one of the biggest industry shake-ups in recent years. 

What has caused such a huge issue for the car finance industry? 

Two types of commission have sparked this probe into car finance agreements.

In January 2024, the FCA launched an investigation into Discretionary Commission Arrangements (DCAs) which allowed brokers and dealers to choose from a range of interest rates, and to earn more commission if they charged a higher one without telling the customer – a move some experts have likened to bribery. 

DCAs were applied to around 40 per cent of car finance deals before 2021, until this practice was banned – millions of people have already put in complaints against this type of commission. 

The second complaint was for Commission Disclosures, which was taken to the Court of Appeal in October 2024, which ruled that commissions were unlawful if they did not inform customers of the full details, including the amount. This includes DCAs, as well as other forms of commission, and applies to up to 99 per cent of car finance cases – opening the door to potentially billions in compensation payouts. 

What has happened this week on the car finance case? 

Friday’s ruling overturned October’s judgement on the unlawful nature of these agreements – meaning that not all secret commissions were automatically unfair. 

So now it seems that only the most extreme cases, such as ones with particularly high or hidden fees, may qualify for compensation. For example, in some of the cases reviewed, this commission was more than half (55 per cent) of the finance agreement. 

What does this mean for drivers? 

Contrary to some of the speculation in the run up to Friday’s ruling, this now means that most drivers with car finance secured before 2021 are now ineligible for compensation based merely on non-disclosure of commissions.  

The FCA has said it will publish further information on a compensation scheme by October, meaning thousands of motorists could still get compensation – although most are expected to get less than £950. 

While drivers can still pursue a complaint, Money Saving Expert Martin Lewis advises that the redress scheme could be automatic – meaning you may not need to do anything to receive the compensation if you are entitled to it. 

What does this mean for lenders? 

While banks and car finance companies are no longer facing the prospect of enormous compensation payouts of over £40bn, this news could still cause major disruption to the industry. 

Excessive agreements could still call for compensation for motorists of between £9 – 18bn according to the FCA. As well as payouts, lenders could face additional regulation and scrutiny. The FCA is advising firms to ‘refresh their estimates, ensuring they cover both liability for compensation and the administrative costs.’ 

With such uncertainty and pressure, it is not unfeasible to see a world where this pressure put onto the customer with less accessible finance agreements, or fewer lenders to choose from as smaller firms buckle under the compensation requirements. 

What will happen next? 

The FCA is responsible for defining the compensation process, aiming to strike a balance between serving consumers and market stability. 

Nikhil Rathi, FCA chief executive, said: “It is clear that some firms have broken the law and our rules. It’s fair for their customers to be compensated. We also want to ensure that the market, relied on by millions each year, can continue to work well and consumers can get a fair deal.” 

The consultation is expected in October, detailing how the scheme could work and what would class as ‘unfair’ regarding the lender / borrower relationship on cases going as far back as 2007, with payments potentially being made in 2026.   

Red Marlin’s take on the ongoing impact for car finance 

In what has been a huge shake up for the industry, it is right that consumers are treated fairly, and compensated where they have been put in a worse position through misleading agreements. However, it’s clear to see this outcome will still put huge pressure on lenders – and potentially consumers.  

As well as a significant financial burden and the hit this will take to profitability, a compensation scheme will also create a surge in administrative workload which will have an additional impact on margins for lenders.

Increased costs and risk aversion could lead lenders to restrict access to car finance, tighten underwriting, or increase interest rates, making it potentially more difficult or expensive for many people to access vehicle finance in the future. 

It’s important that customers should not be punished further as firms face increased pressure. 

Looking at the bigger picture, reputation in the industry has taken a massive hit, so firms will need to work hard on their public relations efforts to rebuild trust and credibility with justifiably sceptical motorists.  

We also expect to see more industry consolidation as some smaller finance providers may struggle to absorb losses, prompting exits or takeovers. This could lead the way for larger providers to potentially take a larger chunk of the market, while having the infrastructure to place a greater focus on transparency and compliance. 

And this brings us to a huge positive to come out of this whole saga – while consumers have increased awareness of their rights, and how to challenge when these have been abused, these cases put greater responsibility on the industry to be fair and open.  

In the long-term this can only be a good thing, as by raising standards, we will see improvements in perception and trust, ensuring this critical area of the automotive industry can thrive in offering consumers an accessible and fair route to car ownership. 

For more information about Red Marlin and how we support automotive-related companies, visit redmarlin.co.uk