Millions of motorists could be in line for compensation as the Supreme Court prepares to hear a landmark case this week into the car loan finance scandal.
The hearing follows a decision by the Court of Appeal last year, which found that undisclosed commission payments to car dealers were unlawful.
With lenders now facing potential compensation payouts of up to £44 billion, the case could rival the infamous Payment Protection Insurance (PPI) scandal.
The Financial Conduct Authority (FCA), which regulates the industry, has urged affected drivers to come forward with claims if they suspect they were misled because they were not told that commissions were being added to loan repayments.
The final ruling, expected this summer after a three-day hearing, will determine whether the court upholds the appeal from finance providers or confirms the original verdict. Regardless of the outcome, banks and lenders have already begun setting aside substantial provisions to cover potential claims.
Marcus Johnson, a 34-year-old from Cwmbran, Torfaen, bought a blue Suzuki Swift in 2017, unaware that the dealer allegedly received a commission of £1,650—a quarter of the total loan amount.
“I had no idea commission even existed as part of the industry,” he told the BBC.
The Court of Appeal ruled that such undisclosed commissions were illegal unless consumers were fully informed and explicitly consented to them.
This decision cast doubt over a widespread practice in the car finance sector, where dealers received incentives from lenders without buyers’ knowledge.
The sector, the second-largest consumer lending market in the UK after mortgages, heavily relies on finance agreements. Most new and many used cars are bought using finance, often with hidden fees attached.
This case has called into question the transparency of these deals and the legitimacy of commission structures employed by banks and dealerships alike.
The financial impact of this ruling could be staggering. Industry giants such as Santander UK, Close Brothers, Barclays, and Lloyds could be bracing for massive compensation payouts.
Lloyds, which operates Black Horse, the UK’s largest motor finance provider, has already allocated £1.2 billion in preparation. Close Brothers has set aside £165 million and taken drastic measures, including suspending dividends and selling off assets, to shore up its finances.
The sheer scale of the potential fallout prompted an unprecedented intervention from Chancellor Rachel Reeves.
The Treasury warned judges that compensating borrowers on such a vast scale could cause “considerable economic harm” and deter foreign investment in the UK.
Although the Supreme Court dismissed this intervention, concerns remain that the ruling could extend beyond car loans to other financial products sold on commission, such as insurance policies, potentially amplifying the financial ramifications.
The FCA has already banned discretionary commission arrangements (DCAs), which allowed dealers to earn more by inflating interest rates. However, millions of past agreements remain under scrutiny.
Consumer groups argue that the Supreme Court ruling could set a precedent similar to the PPI scandal, potentially unlocking tens of billions in compensation for affected drivers.
Alex Neill, co-founder of Consumer Voice, emphasised the significance of the case, saying: “If the Supreme Court upholds the Court of Appeal’s ruling, it could lead to one of the biggest compensation payouts in history.
“Even if only discretionary commission agreements are affected, the sums involved are still in the billions.”
As the Supreme Court weighs its decision, the FCA has promised to clarify within six weeks of the ruling whether it will mandate a compensation scheme.
If implemented, lenders may be forced to proactively contact affected borrowers, a move that could further escalate costs for banks while diminishing the role of claims management firms.
With the shadow of PPI still looming over the banking industry, financial institutions and consumers alike are watching closely.
