Car finance: Millions denied payouts after Supreme Court ruling

The UK Supreme Court largely sided with finance companies in two out of three test cases concerning hidden commissions on car loans, significantly curtailing the potential for widespread compensation claims akin to the PPI mis-selling scandal. However, the ruling did allow for redress in cases of demonstrably 'excessive' commission, and crucially, millions of motorists who secured loans under now-banned discretionary commission arrangements (DCAs) before 2021 may still be eligible for substantial payouts. The Financial Conduct Authority (FCA) is actively considering a redress scheme for DCAs, with industry estimates suggesting potential liabilities for lenders could range from £5-£13 billion or more, and is expected to confirm its consultation plans by August 4th.

Analysis

The UK Supreme Court's ruling has materially altered the risk landscape for motor finance lenders, significantly curtailing the threat of a widespread, PPI-scale compensation event based on the general application of hidden commissions. By siding with lenders like Close Brothers and FirstRand and rejecting the argument that car dealers had a fiduciary duty to customers, the court has removed a major legal tail risk. However, the situation remains complex and far from fully resolved. The court did establish a precedent for redress in cases of "excessive" commission, as seen in the specific ruling against FirstRand where a 55% commission was deemed unfair. The primary overhang for the sector now shifts entirely to the Financial Conduct Authority's (FCA) investigation into discretionary commission arrangements (DCAs), which were common for an estimated 40% of car loans before being banned in 2021. The potential financial liability from a mandated DCA redress scheme is substantial, with industry estimates cited in the article ranging from £5 billion to £13 billion. The key near-term catalyst is the FCA's forthcoming announcement, due by August 4th, which will provide clarity on whether it will proceed with a formal redress framework, a decision that will dictate the ultimate financial impact on the industry.

Key Decisions for Investors

• Investors in the UK motor finance sector should view the upcoming FCA announcement on a potential Discretionary Commission Arrangement (DCA) redress scheme, expected by August 4th, as the primary catalyst, as it represents a remaining liability risk estimated between £5-£13 billion.
• For Close Brothers (CBG), the court's decision is a net positive that reduces a key legal uncertainty, but the stock's future performance remains heavily contingent on the scope and financial impact of any FCA action on DCAs.
• Despite winning the broader appeal, FirstRand (FSRB) faces a distinct risk from the precedent set by its specific case loss due to "excessive" commission, which could invite further individual claims beyond the industry-wide DCA issue.
• Given the mixed outcome, where a major legal risk was removed but a significant regulatory risk remains, it may be prudent to monitor for updates on the scale of any potential FCA redress scheme before significantly increasing exposure to the sector.