What is the issue with car loans?

Loans are offered by car dealers (the credit broker) at the point of sale, with more than two million used and new vehicles are bought using motor finance each year. These dealers act on behalf of the motor finance arms of big high street banks, such as Lloyds and Barclays, or more specialist lenders, such as Close Brothers or Paragon.

The relationship between a consumer and the car salesperson, when buying a car, is clear. Most people approach this with a necessary level of caution/scepticism.

However, when finance is offered too, the dynamic changes. On whose behalf is the car dealer acting? Consumers may be less savvy and more trusting in this situation.

The broker (car dealer) usually receives a commission from the lender for arranging the loan. This is an integral part of the whole business model for a car dealer. Dealers will look to make a margin on the finance and, as a result, a profit on the deal as a whole.

The nature of this relationship, where a position of trust may arise (or at least be perceived by the consumer), needs clarification. In particular, where either the existence of a relationship between the dealer and the finance provider, or level of commission, is not disclosed.

Discretionary Commission Arrangements (DCAs) have also been banned since January 2021, where the amount of commission depends on the level of interest negotiated. The more interest a dealer can get, the more commission they get.

The Court of Appeal interpreted the relationship between dealer and consumer differently from prior case precedent in its October 2024 decision. In January 2024, the Financial Conduct Authority (FCA) launched an investigation into historic DCAs (prior to January 2021). This was put on hold in September 2024, pending clarity from the Court of Appeal decision.

Why does this matter to banks and consumers?

For certain banks, the potential compensation claims could be eye-watering, particularly for specialist lenders.

The scope of both issues, particularly for DCAs (ie, the FCA investigation), could go back many years – perhaps even as far as 2007. Some commentators have likened this to the payment protection insurance scandal and estimated that losses could reach as much as £50bn.

With financial services being one of eight key growth areas in the government’s industrial strategy, and rumours of some retail banks (see Santander) considering an exit from the UK market, an adverse decision for banks would not be good news.

It also calls into question regulatory certainty, which is important for encouraging investment.

On the other hand, some consumers are clearly vulnerable (in its widest sense) when they enter a car showroom and may therefore need protection. A new car could potentially end up being a financial millstone for them for many years to come.

What’s all the fuss?

For many years, the usual route for consumers to contest commission arrangements has been the Financial Ombudsman Service (FOS) or the County Courts. Car dealers and finance firms have followed the FCA code, and County Court decisions were largely in favour of the lender.

In October 2024, three test cases were taken to the Court of Appeal. Contrary to the body of past County Court decisions, the Court of Appeal found in favour of the consumer.

The two lenders concerned immediately appealed to the Supreme Court. The immediate effect, in the short term, was for lending activities to be ceased for a week or two. However, the market has since largely returned to normal. 

Dealers/ lenders changed their procedures to: 

• explicitly provide full disclosure of commission arrangements; and 
• to require proactive, signed consent from the consumer, to accept these particular terms.

As the FCA banned DCAs as a practice, the position is clear going forward and lenders have ceased making such deals. The scope of their investigation is historic and is trying to untangle all the arrangements that existed in the past and which may have been unfair to consumers.

The amount of compensation will depend upon the facts of each particular situation. How far back claims can go is another key question.

What did the Supreme Court decide?

The Supreme Court (1 August 2025) disagreed with the Court of Appeal decision of October 2024. It acknowledged the commercial reality of dealers arranging a loan on behalf of lenders.

Importantly, it found that dealers did not owe a duty of care to consumers, in their relationship regarding the finance. However, their decision was nuanced and in two respects, in particular:

1. Consumer Credit Act 1974 (CCA).
2. The facts of the case, including the level of commission and the sophistication of the buyer.

Although the decision does not give a hard and fast rule, the Court has been helpful in setting out some of the key circumstances to consider (in respect of point 2 above), saying:

“Such factors could include:

• the size of the commission relative to the charge for credit
• the nature of the commission, for example, whether it is discretionary
• the characteristics of the consumer
• compliance with regulatory rules
• the extent and manner of disclosure.”

What are the implications?

While the level of payout is likely to be significantly lower than the worst-case scenario feared by banks (up to £50bn), there are indications that the FCA redress scheme could nevertheless result in a substantial compensation bill (between £9bn and £18bn, including 14 million consumer contracts involving DCAs). 

There won’t be any certainty around this until the FCA comes out with its redress scheme in early October.

The Supreme Court’s guidance on the individual circumstances of each case may be helpful to the FCA in designing its redress scheme. It could help it to devise principles for banks to apply that determine whether there should be a payout and the level of compensation applicable.

For other industries and intermediary relationships (eg, insurance brokers, mortgage brokers), the CCA and so on, and individual circumstances should still be considered. However, existing regulation and practice already bakes in a high degree of disclosure and protection for the consumer, so little or no change is likely. In addition, going forward, intermediaries strengthened their practices for proactively disclosing commissions, following the Court of Appeal decision last October.

More widely, this emphasises the need for better financial education for consumers regarding loans in general. The ICAEW has long been an advocate of greater financial education.

Next steps?

The FCA redress scheme, if successful, will be critical, both in providing regulatory certainty and in formulating a practical, efficient, cost effective and quick way for banks to process repayment claims. This is important; the operational costs of processing claims can be as expensive as the payouts themselves. And there could be significant practical challenges for banks, in retrieving records relating to loans that date back as far as 2007.

This redress scheme has been long awaited. The FCA has clarified that it intends to publish its draft redress scheme and consult on it by early October.

Want more information? Why not join our Motor Finance webinar on 7 November (which we’ve scheduled for after the FCA consultation has been published, so that we can discuss it).