UK lenders await top court’s decision over auto finance payments

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LONDON (AP) — Millions of motorists in the United Kingdom could be entitled to sizeable compensation payments if the country’s Supreme Court decides Friday that certain hire-purchase agreements were unlawful.

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The three judges are set to rule on the legality of apparently hidden commission payments made to car dealers made before 2021.

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The outcome could have major consequences for the financial services sector, which has been rocked over the past decade by a series of scandals, notably in relation to the improper selling of payment protection insurance, or PPI, on loans.

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The Financial Services Authority, the industry regulator, told the Supreme Court last year that almost 99% of the roughly 32 million auto finance agreements entered into since 2007 involved a commission payment to a broker.

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Some dealers received a bigger commission if they were able to secure a higher interest rate on the loan. These so-called discretionary commission arrangements were banned by regulators in 2021, prompting the subsequent challenge from three motorists.

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Banks, including Lloyds, have set aside big sums in the event they are liable for compensation.

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Friday’s decision follows a ruling from the lower Court of Appeal in October that discretionary payments were unlawful.

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The lower court found the three motorists, who all bought their cars before 2021, had not been told either clearly enough or at all that the car dealers, acting as credit brokers, would receive a commission from the lenders for introducing business to them and should thereby receive compensation.

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Two lenders, FirstRand Bank and Close Brothers, took the dispute to the Supreme Court, telling a three-day hearing in April that the decision was an “egregious error.” The FCA also told the U.K.’s highest court that the Court of Appeal ruling “goes too far.”

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If Supreme Court judges side with the claimants it could mean many people who took out car loans before 2021 may be due a payout. If the court sides with the lenders, the ruling is likely to significantly limit the scope of potential payouts to motorists.

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This is not the first time lenders have been accused of mis-selling products.

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British banks had to pay out tens of billions of pounds (dollars) in compensation over the past decade or so in relation to PPI, which was meant to cover loan payments by individuals or small firms in the event they were not able to make them as a result of illness, for example. The courts ruled that many people often didn’t know about the insurance or didn’t need it.

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