On August 1, 2025, the UK Supreme Court delivered a landmark ruling that could reshape the car finance industry and affect millions of motorists across the country. The decision centers on whether car dealers and brokers must fully disclose the commissions they earn when arranging finance deals, a practice that has been under intense scrutiny for potentially misleading customers and inflating loan costs.
At the heart of the controversy are two intertwined cases. The first involves the non-disclosure of commission payments to car dealers, which applies to an estimated 99% of car finance agreements. When consumers purchase a vehicle on finance, they borrow money and repay it with interest over time. Brokers facilitating these loans earn commissions, typically a percentage of the interest charged. However, until recently, many customers were unaware that dealers received such payments, which were often added to the cost of their loans.
Last year, the Court of Appeal ruled in favor of three motorists who argued they were not informed about a 25% commission paid to dealerships, which was unlawfully added to their bills without their consent. This ruling stated that it was illegal for car dealers to receive commissions from lenders without the customer's informed agreement. British lender Close Brothers and South Africa's FirstRand challenged this decision, escalating the matter to the Supreme Court.
The second case, driven by the Financial Conduct Authority (FCA), focuses on discretionary commission arrangements (DCAs). Under these, brokers and dealers could increase the interest rates charged to customers without informing them, earning higher commissions as a result. This practice, which incentivized dealers to maximize interest rates, was banned by the FCA in January 2021. However, many consumers have complained about being overcharged before the ban came into force. The Financial Ombudsman Service reported handling around 20,000 such complaints by May 2025.
In January 2024, the FCA launched a review into whether motor finance customers were overcharged due to past use of DCAs, investigating multiple firms, all of which deny wrongdoing. The regulator is considering a "consumer redress scheme" that would require firms to compensate affected customers. Estimates suggest that up to 40% of car finance deals between 2007 and 2021 could be eligible for compensation under this scheme.
The Supreme Court's ruling could significantly influence the scale and reach of any compensation scheme. The FCA indicated in March 2025 that it would consider the court's decision before consulting on an industry-wide redress scheme. Such a scheme would allow affected individuals to receive payouts without needing to lodge individual complaints, streamlining compensation.
Major lenders are already preparing for potential financial repercussions. Lloyds Banking Group, through its Black Horse finance arm, has set aside £1.2 billion for possible compensation claims. Other banks, including Barclays, Santander, Close Brothers, and FirstRand, have also allocated substantial funds, collectively nearing £2 billion. Analysts at HSBC estimate that the overall cost to the industry could reach up to £44 billion, rivaling the scale of the infamous payment protection insurance (PPI) scandal.
The car finance sector is the UK's second-largest consumer lender after mortgages, with approximately 90% of new cars bought on finance. This widespread use means the ruling has vast implications, potentially opening the door for millions of motorists to claim compensation for mis-sold loans.
Voices from affected consumers bring a human perspective to the issue. Jemma Caffrey from Blackburn, who purchased a car in 2009, described feeling "taken advantage of as a vulnerable new mum" after being charged a high interest rate she later learned was linked to undisclosed commissions. Similarly, Marcus Johnson from Cwmbran, who bought a Suzuki Swift in 2017, was unaware that commissions were paid to the dealer, despite signing documents. Their cases, among others, are part of the test cases before the Supreme Court, with legal teams arguing that undisclosed commissions amount to bribes under common law.
The legal debate hinges on the duty of car dealers when acting as brokers. While dealers naturally seek to secure the best deal for their business, the Court of Appeal ruled that when acting as brokers for loans, dealers owe a duty to act solely in the best interests of the buyer—not the lender. If upheld, this principle could transform how car finance agreements are structured and regulated.
Industry representatives, including the Finance and Leasing Association (FLA), maintain that they have complied with existing laws and regulations. The FLA has called on the Supreme Court to clarify the rules for the future, seeking certainty for lenders and consumers alike.
The UK Treasury has expressed concern about the ruling's potential economic impact. Reports suggest Chancellor Rachel Reeves is considering legislative measures to limit the compensation bill and protect the car finance market's competitiveness. A Treasury spokesperson emphasized the desire for a "balanced judgment" that fairly compensates consumers while allowing the motor finance sector to continue supporting millions of motorists. The Treasury also noted it would let the appeals process run its course without commenting on speculation.
Experts warn that if lenders face massive compensation payouts, the cost could be passed on to consumers through higher interest rates, not only in car finance but also across credit cards, personal loans, and mortgages. Stuart Masson, editor of The Car Expert UK, remarked, "That's not money they're going to find down the back of the sofa. They're going to have to get that back from increasing the costs of future lending." Conversely, Liberal Democrat MP Bobby Dean, a member of the Treasury Committee, argued that protecting consumers through good regulation fosters confidence and supports the economy.
The FCA has cautioned consumers against signing up with claims management companies or law firms offering to pursue compensation, warning that such services may charge up to 30% in fees and may not be necessary if compensation is distributed automatically through a redress scheme.
The Supreme Court's judgment, delivered after the close of financial markets on August 1, 2025, marks a pivotal moment in the UK's consumer finance landscape. Its outcome will determine not only the immediate financial liabilities of lenders but also the future of transparency and fairness in car finance agreements, with ripple effects potentially felt across the wider economy for years to come.
