UK Supreme Court Ruling on Car Finance Commissions Eases Burden on Banks

On August 1, 2025, the UK Supreme Court delivered a landmark judgment overturning a previous ruling that had deemed certain car finance agreements unlawful due to undisclosed commissions paid to car dealers. This decision significantly reduces potential compensation liabilities for UK banks and sets the stage for a new industry-wide redress scheme.

The Supreme Court's ruling determined that car dealers do not owe fiduciary duties to customers, thereby absolving lenders from liability for undisclosed commissions. While this alleviates the financial burden on banks, the Financial Conduct Authority (FCA) has announced plans to consult on a compensation scheme estimated to cost between £9 billion and £18 billion, aiming to address consumer grievances and restore trust in the motor finance market.

The Supreme Court's decision addressed three key issues:

1. Fiduciary Duty: The court ruled that car dealers, when arranging vehicle financing, do not owe fiduciary duties to customers. This means dealers are not legally obligated to act solely in the best interests of the customers in this context.

2. Bribery Allegations: The court found no evidence of bribery in the commission arrangements between lenders and dealers.

3. Unfair Relationships: While the court dismissed the fiduciary duty and bribery claims, it acknowledged that certain commission arrangements could render the relationship between the customer and the finance company unfair under the Consumer Credit Act 1974.

The ruling significantly reduces the potential compensation liabilities for UK banks, which had been estimated at up to £40 billion. Following the decision, the Financial Conduct Authority (FCA) announced plans to consult on an industry-wide redress scheme, estimating compensation costs between £9 billion and £18 billion.

The financial markets responded positively to the ruling. Shares in British banks surged, with Lloyds Banking Group experiencing a 7% increase, Close Brothers jumping 21%, and Barclays rising by 2.3%. This reflects investor relief and reduced uncertainty regarding potential liabilities.

The FCA has been proactive in addressing the implications of the ruling. Nikhil Rathi, chief executive of the FCA, urged banks to stop resisting the proposed redress scheme for consumers mis-sold car finance, emphasizing the need for the sector to collaborate on finding workable solutions.

Consumers who believe they were mis-sold car finance due to undisclosed commissions are advised to lodge complaints. The FCA plans to implement an industry-wide compensation scheme, with estimated average payouts under £950 per agreement. The consultation on this scheme is expected to launch by early October, with the first payments anticipated in 2026.

The automotive industry has expressed relief over the ruling. Sue Robinson, chief executive of the National Franchised Dealers Association (NFDA), stated:

"We are pleased with the Supreme Court’s decision in relation to the FCA’s Motor Finance Review. NFDA provided both written and oral submissions that have helped the Supreme Court reach this verdict."

This case draws parallels to the Payment Protection Insurance (PPI) scandal, where UK banks paid out approximately £40 billion in compensation. However, the current ruling and subsequent FCA actions aim to prevent a repeat of such extensive liabilities.

The UK Supreme Court's ruling on motor finance commissions marks a significant moment in the financial and automotive sectors. While it alleviates potential massive liabilities for banks, it also underscores the importance of transparency and fairness in financial agreements. The forthcoming FCA consultation and redress scheme will be pivotal in addressing consumer grievances and restoring trust in the motor finance market.