Motor finance: what now?

The UK Supreme Court’s decision on 1 August created general relief in the financial services industry, particularly for car dealers who provide credit broking services and for lenders. The Court held that car dealers do not typically owe fiduciary duties in their credit broking activity, and lenders are therefore far less likely to face claims for bribery or dishonest assistance in breach of fiduciary duty. However, the judgment leaves some residual concern, because the emphatic conclusion that there had been an unfair lending relationship in the Johnson case made clear that lenders may still face significant liability relating to motor lending, which is not confined to discretionary commission arrangements (DCAs). 

The Financial Conduct Authority (FCA) seems to have understood that concern and tried to respond to and contain it with its announcement on Sunday 3 August that it intends to consult on a consumer redress scheme, with the consultation to be published by early October 2025 and remain open for six weeks. 

This update briefly summarises what the Supreme Court has decided, but it focuses on what remains and what happens next. 

How did we get here?

In January 2024 the Financial Ombudsman Service (FOS) published two decisions about DCAs, and the FCA announced a pause in complaints handling (which remains in place until at least December) while it conducted a detailed review. 

The FOS decisions were significant for lenders, because they implied potentially widespread liability where DCAs had been used, and they indicated that paying redress could retrospectively strip lenders of substantial revenues. Clydesdale, the lender who was the subject of one of the FOS’s decisions, sought judicial review: Clydesdale argued that the Ombudsman had made various legal errors, and had reached an irrational result on the amount of compensation payable. Clydesdale’s challenge failed in the High Court, and an appeal is pending. 

The Hopcraft, Wrench, Johnson litigation against lenders FirstRand and Close Brothers, concerning secret and partly secret commissions, was decided in the Court of Appeal in October 2024. The Court of Appeal’s bombshell judgment found that car dealers acting as credit brokers owed fiduciary duties and similar ‘disinterested’ duties, which the Court of Appeal considered was essentially inevitable because of the nature of the dealers’ role as credit broker in the transaction. Crucially, this meant deep-pocketed lenders (and not-so-deep-pocketed ones) could be sued for bribery and dishonest assistance in breach of fiduciary duty, giving rise to potentially enormous liabilities. The Court of Appeal also found that Mr Johnson’s claim for relief under the Consumer Credit Act (CCA), arising from an unfair relationship between a lender and borrower, should be upheld.

What has happened now?

Supreme Court judgment

On 1 August, the Supreme Court overturned the Court of Appeal’s decision in Hopcraft: the dealers owed no fiduciary duties and consequently there was no basis for suing the lenders for bribery or dishonest assistance. In a reversal of the Court of Appeal’s view of the factual context, the Supreme Court decided that car dealers’ roles in these transactions, as retailers who want to make a sale, is inherently incompatible with a fiduciary duty or similar duty of loyalty to their customers.

However, the Supreme Court also found, in the one unfair relationship claim it had to consider, that there was a ‘very clear’ case of an unfair relationship. The Court considered a range of factors: size of commission relative to the charge for credit, nature of commission (e.g., is it a DCA?), characteristics of the consumer, extent and manner of disclosure, and compliance with regulatory rules (a non-exhaustive list of relevant factors, adopted from FCA submissions). 

Having done so, the Court concluded the relationship in Mr Johnson’s case was unfair, and the judgment highlight three indicators of unfairness on the facts of that case: 

• High commission. The size of commission relative to the total charge for credit (it was 55%) was high. 
• Undisclosed commercial tie. There was a ‘commercial tie’ between the dealer and the lender FirstRand, under which the dealer had to give FirstRand first refusal on potential loans, which was not disclosed. In fact, the pre-contract documents misleadingly stated that the dealer had considered the customer’s information and was proposing the loan that best met his individual requirements.
• Inadequate disclosure. The Supreme Court doubted that FirstRand could in any case have relied on its disclosure of commission arrangements. A clause in the lender’s Ts&Cs document said commission may be payable to the broker, and the amount is available from the broker on request. But this was not in the credit agreement and was among a mass of other information. The Supreme Court held that a term this important should have been displayed more prominently and the customer’s attention should have been expressly drawn to it. This third point about inadequate disclosure might seem superfluous, given the separate finding that the commercial tie had been misleadingly hidden. However, it sends a clear message about the nature of disclosure which is required if a lender wants to avoid a finding that its inadequate disclosures point towards an unfair relationship. 

The emphatic decision that there was an unfair relationship in those circumstances makes clear that there could still be significant liability arising from commission arrangements, and that the liability is not necessarily limited to the DCAs that were the original focus of the FCA’s review. The Supreme Court ordered the lender to pay Mr Johnson an amount equal to the £1,650.95 commission paid, plus interest at a commercial rate.

The FCA’s response to the judgment 

The FCA’s announcement on Sunday suggests the FCA is aware that significant uncertainty remains and it understands and is addressing that. The FCA went beyond confirming it would consult on a consumer redress scheme for DCA claims, which surprised nobody. The announcement largely sets out things which will be consulted on in due course, but it sends a message, sets a tone, and shows direction of travel. We think some significant points are: 

• Not just DCAs. The redress scheme may not be limited to DCAs and may include claims about other commission arrangements if inadequately disclosed. This makes sense because it could minimise the uncertainty arising from unfair relationship claims. 
• Claims back to 2007. The FCA intends the redress scheme to cover credit agreements dating back to 2007. This is clearly an attempt to ensure the scheme encompasses all claims arising from this issue. 
• Containment / managing expectations. The announcement suggests the Supreme Court’s award to Mr Johnson (£1,650.95 plus interest at a commercial rate) is probably the high end of what claimants might receive. Most individuals are likely to receive less than £950 compensation, and interest on compensation is likely to be base rate+1%. This undermines some statements about substantial pay-outs: the FCA shooting the claims management companies’ fox. 
• Estimate of total cost of redress. An estimated total cost of about £9bn to £18bn (albeit heavily caveated). 
• Firms to refresh their own assessments now. Notwithstanding that the redress scheme parameters will only become clear later in the year, the FCA wants firms to refresh their assessments of the impact on them now. 
• A warning to CMCs. Customers are advised not to use CMCs or lawyers in any scheme. The FCA also refers to action it has taken against misleading promotions from CMCs, in what seems to be a threat of enforcement action against CMCs. This message is consistent with a joint news release by the FCA and the Solicitors Regulation Authority on 31 July. The FCA and SRA raised concerns about some CMC and law firm practices, and said the regulators expect CMCs and law firms to make their clients aware of a redress scheme which would allow the clients to pursue a claim for themselves, free of charge, even if the redress scheme is not yet confirmed.   

What now? 

Lenders who were braced for Friday’s judgment will have moved past the initial relief and now be considering their exposure, if any, to unfair relationship claims. Questions include:

• How high was the commission the lender paid to car dealers?
• Did the lender have commercial ties, rights of first refusal, etc.?
• What was disclosed to customers about any commission or commercial ties?
• Was any potentially high commission disclosed prominently, and attention drawn to it? 

Some lenders may have a head start, because they will have been considering similar issues in relation to DCAs for some time, and many lenders will already have considered the possibility of exposure outside of DCAs. Nevertheless, answering questions like this, for a period stretching back to 2007, will be very challenging. So, lenders, and their dealer-broker partners have plenty to get on with between now and the time when they learn the details of the FCA’s proposals and consultation. The FCA have indicated that will be ‘by early October’. 

There is one potentially loose end. As mentioned above, Clydesdale sought judicial review of a FOS decision which upheld a complaint about a DCA and ordered Clydesdale to pay compensation. Clydesdale’s challenge failed at first instance, but Clydesdale appealed. In July, the Court of Appeal postponed hearing that appeal, so that it could do so after the Supreme Court decision in Hopcraft, and indicated the appeal might be heard in September. If that appeal goes ahead, there could be a further Court of Appeal decision, perhaps in or around early October, on matters which are relevant to the FCA’s proposed consumer redress scheme.