Millions of motorists will be able to claim compensations for mis-selling of car loans following a Supreme Court ruling. The judgment, which was handed down after financial markets closed on Friday, upheld a finding by the Court of Appeal in October that hidden commissions paid to car dealers by lenders were unlawful.
That ruling, based on test cases, said making such payments to brokers who arrange car loans without disclosing the sum and terms to borrowers was unlawful. The lenders involved in the case, FirstRand Bank and Close Brothers, appealed against that decision to the Supreme Court. Analysts at HSBC said last year the controversy could be estimated to cost up to £44billion.
Firms that could be affected include Barclays, Santander and the UK’s largest motor finance provider Lloyds Banking Group, which organises loans through its Black Horse finance arm.
Lloyds has already set aside £1.2billion to be used for potential compensation.
Chancellor Rachel Reeves fears a ruling against the banks would reflect badly on Britain as a place to do business, reports have suggested.
It is understood that Ms Reeves may step in to effectively overrule the court by introducing legislation to limit the sums of compensation firms have to pay out because the potential impact on the lending market and the wider economy could be so significant.
About nine in 10 new cars are bought on finance, so a decision could lead to billions of pounds being claimed by people who bought cars over many years.
Many thousands of car buyers are already in line for payouts, but this case could widen the pool of potential claimants significantly.
The car finance sector is the second-biggest lender to consumers in the UK, with people only borrowing more in mortgages.
The majority of new cars, and many second-hand ones, are bought with finance agreements.
Motorists pay a deposit, borrow the rest as a loan and drive off in their new vehicle.
Dealers were signing up customers to these finance deals and, behind the scenes, were paid a commission by lenders.
Some dealers were paid more in commission if they secured a higher interest rate on the loan. These were known as discretionary commission arrangements (DCAs) and were banned by regulators in 2021.
The Financial Conduct Authority is likely to set up a central compensation scheme for those drivers who were mis-sold loans that had DCAs.