How did we get here?

The car loans scandal has been rumbling on for more than 18 months but ballooned after a court of appeal judgment that sided with three consumers in October 2024.

Before that point, the Financial Conduct Authority (FCA) was running a narrower investigation into discretionary commission arrangements (DCAs), where motor finance lenders gave dealers the power to set interest rates on car loans. The higher the interest rate, the more commission the dealer received. The controversial practice – which allegedly incentivised dealers to overcharge customers – was eventually banned by the FCA in 2021.

In the meantime, three car buyers took their cases to the court of appeal, which ruled on the much wider issue of how commissions were disclosed. In October 2024, that court sided with the claimants and ruled that it was against the law for the dealers to receive any sort of commission from the lender without first telling the customer and getting their informed consent.

Why was the appeal court ruling so important?

The shock decision had ramifications for all hidden commission arrangements, not just DCAs. Across the UK, 80-90% of new cars, and an increasing number of used vehicles, are bought with the help of a loan, the vast majority of which would be arranged by a broker who is paid commission by a lender.

The judgment threw open the door to a huge compensation bill for car lenders –including Santander UK, Close Brothers, Barclays and Lloyds – that some analysts said could top £44bn. That would be comparable to the payment protection insurance (PPI) saga, which cost banks £50bn. It also raised concerns that other types of loans involving commission payments to brokers could be in play, such as those for appliances and furniture.

The two specialist lenders involved in the court of appeal case, Close Brothers and FirstRand, challenged the ruling in the supreme court, which has now revealed its verdict.

What did the supreme court decide?

It has partly overturned the decision, apparently closing the door to compensation except in more serious cases.

In their ruling, a panel of justices led by the supreme court president, Lord Reed, upheld only one consumer’s case, originally filed by Marcus Johnson. Cases brought by two other consumers – alleging that commissions paid to car dealers were bribes and that dealers owed a duty of loyalty to the customer – were rejected.

The decision will be a blow to many consumers and the claims industry, but the fact that part of the earlier ruling was upheld has complicated the picture and meant that immediately after the verdict, experts had differing views about the potential impact.

Friday’s judgment followed a three-day hearing at the start of April.

What happens now?

The FCA will confirm within six weeks – ie by 12 September – whether it is setting up a redress scheme for consumers whose agreements included a DCA.

Many believe the FCA is likely to still announce a central compensation scheme for these individuals. That could add up to many thousands – potentially millions – of vehicle buyers.

The Johnson aspect of the case could also increase the chances of redress for cases in which the relationship between the finance company and the customer is deemed to be unfair.

Richard Coates, a partner and the head of automotive at the law firm Freeths, said: “It is anticipated that the FCA will bring redress for those cases where it is deemed that the relationship is unfair, and we expect to learn more from the FCA about this redress scheme within the next six weeks.”

However, any scheme could be challenged in court by interested parties, who will have six weeks to refer it to the upper tribunal. That could put the brakes on any mass redress programme.

But barring any legal challenge or further delay, the FCA redress scheme would probably start operating next year, meaning former car loan customers could start receiving compensation in 2026.

Who could be eligible for compensation?

Those most likely to be eligible are those whose agreement included a DCA, though the FCA could restrict or widen eligibility depending on its own continuing work and its views of the latest judgment.

DCAs were by far the most common commission arrangement before they were outlawed: on average, between 2007 and 2020, about three-quarters of all agreements had a DCA of some sort, says the regulator.

The “end date” for potential eligibility for any redress has been suggested as 28 January 2021, when DCAs were banned.

How much compensation could harmed borrowers end up getting?

This is still unclear and will hinge on the scope of the FCA’s redress scheme – assuming it definitely happens – with more details likely in the coming weeks and months.

The FCA has indicated it would need to balance the interests of consumers, firms and the broader economy when setting up a compensation scheme. The regulator has said that as well as being “fair to consumers who’ve lost out”, any scheme must “ensure the integrity of the motor finance market, so that it works well for future consumers”.

In the case of DCAs, the regulator has estimated that consumers may have been overcharged by £1,100, as a result of paying too much interest on a typical £10,000, four-year car finance deal where this arrangement was used. But whether individuals would get back all or just a part of their “loss” remains to be seen. It could also require firms to pay interest on top of any compensation, which could add up to a lot if it is several years’ worth.

Meanwhile, claims law firms have said some clients were charged much more, amounting to several thousand pounds more in hidden commission.

Should aggrieved consumers use a claims firm?

Social media and websites have been littered with adverts claiming consumers could be entitled to thousands in compensation, and urging them to act fast.

But the FCA and Solicitors Regulation Authority (SRA) are concerned that some firms are not telling consumers about free alternatives, are making bold and sometimes misleading claims about payouts, and are charging fees worth up to 30% of any compensation payout.

Over the past year, the FCA has forced 224 motor finance commission adverts to be changed or pulled entirely, while the SRA is now investigating 73 law firms for potential breaches.

Some claims management companies are merely fishing for customer “leads”, which are then passed on to third-party law firms for a fee.

How has the government reacted?

The Treasury said: “We respect this judgment from the supreme court and we will now work with regulators and industry to understand the impact for both firms and consumers.”

The government has been the target of heavy lobbying by the car loan industry, which had warned that a big compensation bill could force lenders to claw back their losses – resulting in some car finance providers offering fewer or more expensive loans, while others could go bust.

The Treasury has also been concerned that the scandal is deterring investment in the financial services industry, and therefore putting the UK’s economic growth at risk.

The Guardian revealed last week that the chancellor, Rachel Reeves, had been considering overruling the supreme court’s decision with retrospective legislation, in order to help save lenders billions of pounds, in the event that it upheld the entirety of October’s court of appeal ruling. Given Friday’s verdict, that will not happen.