Motor Finance Supreme Court Decision: Common Sense Prevails - But Lenders Are Not Out of the Woods Yet

The announcement from the UK Supreme Court will be welcomed by those across the motor finance industry. It has been deemed that non-discretionary commission does not amount to a bribe, nor does it constitute a breach of fiduciary duty. As such, motor dealerships were permitted to accept commission without disclosing the amount or nature of it, and lenders were permitted to pay this, given the commercial interests of the dealership and the structure of the relationships involved in the transaction.

It is important to note that, since the Court of Appeal’s announcement in October 2024, the disclosure of commission and customer agreement to this has become common practice across the industry. I do not think this practice will stop overnight. Quite the opposite, lenders and brokers are likely to continue viewing this as best practice.

Clearer pre-credit disclosures are still needed to avoid dealerships being seen to take advantage of a captive audience, as was previously the case with GAP insurance. The industry must provide better information to customers regarding the scope of service being provided and the customer’s ability to shop around under the Consumer Duty. I would expect the FCA to consult on changes to disclosure requirements, regardless of this decision.

Not out of the woods yet!

The Supreme Court’s decision to uphold the Johnson case’s finding of an unfair relationship may provide some customers with a route to challenge the fairness of their agreements with lenders. However, this will require claims to be reviewed by the courts on a case by case basis. The likelihood of customers pursuing this route is relatively low, given the costs of preparing such a case and the uncertain chances of success.

The FCA is still expected to develop a redress solution for the historic use of discretionary commission arrangements, with an update due within six weeks of this announcement. As I’ve previously noted, this will be no easy task, given the way dealerships used discretionary commission to tailor packages to individual customers, based on the agreed vehicle price and the sale of other add-on products such as warranties, service plans, paint protection, and GAP insurance.

This will be a difficult process to unwind. Given that the FCA only prohibited discretionary commission in 2021, the practice was at the time legal and considered within the regulatory framework. My expectation is that the FCA will develop a calculation methodology aimed at identifying the amount of additional interest paid by the customer under a discretionary commission agreement, which would then be refunded, plus statutory interest (typically 8%), dating back to 2007.

It is unlikely this redress would take into account any reduction in the cost of the vehicle or bundled add-on sales. This reflects the FCA’s historic view of packaged sales and its emphasis on distinguishing the relationships within a transaction.

Additionally, CONC 4.5.2R of the Consumer Credit sourcebook states: "A lender should only offer to, or enter into with, a firm a commission agreement providing for differential commission rates or providing for payments based on the volume and profitability of business where such payments are justified based on the extra work of the firm involved in that business."

This principle ties back to the original FOS decisions that triggered renewed scrutiny around commission disclosure in 2023.

Next Steps

The next steps for the industry will be to await the FCA’s proposals on redress and to consider how they will meet any revised timelines for complaint handling.

Given yesterday's announcement, lenders and motor dealerships receiving complaints related to non-discretionary commission arrangements are now in a position to respond to these with a greater degree of certainty.