Motorists can ‘claim billions’ after ruling on car finance commission refunds

Motorists have won a historic legal decision companies that provide car financing offers.
Judges at the Court of Appeal ruled in favor of three car buyers who had claimed hidden commissions on their deals had added thousands of pounds to costs.

“Consumers were very poorly served by both brokers and lenders,” the judges said.

They said consumers have the right to know about the commission arrangements between the lender and the car dealer to ensure fairness.

Until one rule change in 2021Hidden commissions on car purchase agreements meant customers could end up paying many thousands of pounds extra in interest on a loan to buy the vehicle.

The four judges found that car dealers had a legal duty to act in the interests of consumers rather than their own when arranging car finance deals.

They said it was not enough that the commission details were hidden in the contract terms. The ruling could open the door for many more consumers to seek redress.

Lawyers for the customers who brought the case – student nurse Amy Hopcraft, factory supervisor Marcus Johnson and postal worker Andrew Wrench – argued that dealers had a duty to provide them with impartial information or advice.

They asked for a refund of the hidden commission paid to the dealers as credit intermediaries.

The court agreed that the car dealers were the sellers, but also acted as credit intermediaries on behalf of the buyers. As such, they had a duty to seek and offer a financing deal that was competitive and suitable for the customer’s needs.

In 2021, the Financial Conduct Authority (FCA) watchdog banned deals that allowed firms to receive commissions linked to interest paid by customers, saying the practice encouraged car dealers to increase a customer’s borrowing costs.

Thousands of drivers complained they were paid too much. Companies dismissed many of the complaints, arguing that they had not acted unfairly and had not harmed their customers.

The Financial Ombudsman Service has dealt with a number of complaints rejected by companies and ruled in favor of the complainants in two decisions. Some consumers also filed claims in the district courts, some of which were upheld.

The FCA has been reviewing historical cases since January. It has warned lenders to prepare for additional costs as part of a possible compensation scheme.

It is conducting its own research into the car finance sector and it seems likely that lenders will refund commissions.

The watchdog has been inundated with complaints from consumers claiming their loans were unfairly priced. Well over a million claims have been filed Martin Lewis’ Money Saving Expert site.

The FCA said it has paused the time firms have to provide a final response to customers about car finance complaints involving a discretionary commission scheme (DCA). “We have done this to avoid disorderly, inconsistent and inefficient outcomes for consumers and knock-on effects on businesses and the market, while we assess whether car finance customers have been overcharged due to the previous use of DCAs.

It said it had noted the Court of Appeal’s judgment and was carefully considering its decision.

In addition, law firms are taking action on behalf of some drivers. Manchester-based Consumer Rights Solicitors, which acted in the case, believes damages could be as high as £42 billion.

Shares in Close Brothers, the company that provided the financing, fell sharply after the verdict.
The company said: “The financial impact of the Hopcraft case alone is not material,” but warned “that the verdict may set a precedent for similar claims, which… could result in significant liabilities for the group.”

She disagreed with the court’s ruling and is appealing to the Supreme Court. The company said it has halted new UK car 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, which the lender could then pay to the dealer. It was and still is a broken system.”