The UK’s financial regulator has estimated that a new compensation scheme addressing the mis-selling of car loans could potentially cost up to £18 billion. A recent Supreme Court ruling has undone these previous rulings. This hefty tax just became a financial burden of the court’s making by permitting dealer markup on auto loans to continue in secret. The decision—which ruled in favor of claimant Marcus Johnson—could have dramatic implications for the future of car finance as wronged individuals pursue restitution.
In its unanimous opinion, the Supreme Court pointed out that car dealers make about 55% of their income from the fee or credit obtained. This total is made up of interest and fees. This unusual commission structure led the court to question the fairness of the relationship between Johnson and her lender, FirstRand. The court considered this commission an overwhelming indication of an imbalanced dynamic. It highlighted the immediate need to make these impacted drivers whole.
The Financial Conduct Authority (FCA) cheered the Supreme Court’s decision. As they wrote, it explains what unfair, deceptive and abusive practices means in the industry. The FCA noted, “This helps us because we have been looking at what is unfair and, prior to this judgment, there were different interpretations of the law coming from different courts.” This new clarity will help all parties involved ensure that any compensation scheme introduced does effectively tackle these long-standing injustices embedded in car finance.
If approved, the first payouts through the compensation scheme should start in 2024. Yet the vast majority of people affected are unlikely to be compensated anything close to £950. This likely upcoming payout sheds light on a common occurrence within the federal government. Millions of drivers, who don’t even know they’re subject to these commissions in their loan contracts, are caught in the crossfire here.
Legal experts are encouraged by this decision, as they think it will inspire more aggressive scrutiny for predatory car financing practices throughout the industry. This ruling extends well beyond financial compensation. Perhaps most significantly, it would lead to the adoption of stronger rules to prevent consumers from getting defrauded in the future.
