Lenders are being warned to prepare for a Supreme Court judgment which could see them forced to pay out tens of billions in compensation for selling deals with 'secret' commissions.
The Supreme Court is currently hearing an appeal related to the disclosure of commission by motor finance providers. Originating from the Court of Appeal's ruling against undisclosed commissions, the case has significant implications for the motor finance industry with most major players already reporting significant provisions for anticipated redress.
Lenders urged to 'accelerate their plans'
Before January 2021, some motor finance lenders allowed brokers (usually car dealers) to adjust the interest rates on financing deals offered to customers. The higher the interest rate, the more commission the broker received. This was known as a discretionary commission arrangement (DCA), and the FCA banned this practice in the motor finance market in 2021.
There have since been a high number of complaints from customers about firms failing to disclose details about commission arrangements before the ban. Firms were rejecting most of these complaints, because they believed they haven’t acted unfairly and haven’t caused customers to lose out.
The Court of Appeal decided it was unlawful in the circumstances of three cases for the car dealers to receive a commission (whether discretionary or a fixed percentage) from lenders providing motor finance without giving the customer sufficient information about the commission and getting their informed consent to the payment.
At the same time, the latest data from FOS on complaints for 2024/25 reveals a massive spike for the motor finance sector.
Industry experts are now warning lenders to accelerate their plans in preparation for the outcome of the Supreme Court ruling.
FCA confirms potential redress scheme
In March, the FCA announced a potential industry-wide redress scheme for customers affected by motor finance failings.
The regulator is currently reviewing the past use of motor finance discretionary commission arrangements (DCAs) to understand if firms failed to comply with requirements relating to DCAs and if consumers lost out as a result. If they have, the FCA says it wants to make sure "consumers are appropriately compensated in an orderly, consistent and efficient way.
The FCA said that if, taking into account the Supreme Court’s decision, it finds motor finance customers have lost out from widespread failings by firms, "then it’s likely we will consult on an industry-wide redress scheme".
Miles Roberts, CEO of complaint solutions firm Kaizian, said: “The number of complaints referred to FOS for hire purchase (motor) has more than trebled year-on-year. For 2023/24 there were 21,441 complaints but this has escalated to 76,160 for 2024/25. And it’s critical to remember these are just the complaints that have been referred to FOS. The numbers the sector is handling as a whole are much bigger, in no small part fuelled by the land-grabbing activities of the CMCs.
“Of course, there is still so much unknown about the outcome of the Supreme Court case; but what is an absolute certainty is that car finance lenders are already experiencing huge volumes of complaints and these will, undoubtedly be impacting their capabilities to handle ‘business as usual’ activities.
“The burning question for motor finance providers right now is how they manage these significant levels of consumer complaints – coming predominantly via the CMCs. And once the Supreme Court outcome is known and the FCA consultation published, what resources they will need to interrogate their customer data, possibly going back to 2007. As well as calculating the value of redress and managing customer contact.”
Kaizian believes that waiting for the final ruling or consultation paper is not a strategy — it’s a risk, stating that firms should already be reviewing complaint-handling capacity, historic data retention, and operational preparedness.
