Supreme Court clarifies position on undisclosed commissions – but challenges remain

Last Friday brought a degree of relief for those in the Motor Finance sector, as the Supreme Court overturned much of the earlier Court of Appeal ruling on “hidden commissions.” While this decision brings some welcome clarity, it doesn’t represent an outright victory for lenders.

Here, we look at what the latest judgment means for motor finance providers.

The background on motor finance commission cases

The Financial Conduct Authority and the courts are currently reviewing two types of potential mis-selling in motor finance:

• Discretionary Commission Arrangements (DCAs): These gave brokers the ability to increase a customer’s interest rate in exchange for more commission. The FCA banned them in 2021. DCAs were not part of the Supreme Court’s decision.

• Undisclosed Commissions: The Court of Appeal had previously ruled that if an agreement failed to disclose that a dealer was receiving commission, it could render the contract unlawful. That was the issue at the heart of the Supreme Court appeal. If the earlier ruling had stood, it could have triggered an industry-wide compensation programme running into billions of pounds.

Even if the Court of Appeal’s judgment had been upheld, many believed the Government might have stepped in to prevent such a large-scale redress programme, due to the wider impact it could have had on both the motor finance market and other sectors offering credit, such as home retailers.

So while the outcome hasn’t changed things overnight, it has removed a great deal of uncertainty. That’s been reflected in the markets — shares in Lloyds and Close Brothers rose sharply on the Monday after the ruling.

What the ruling means for future complaints and where DCAs go next

Lenders are now awaiting the FCA’s response to the one part of the appeal that the Supreme Court upheld. In that case, the commission was 55% of the total cost of credit, which led the Court to deem the lender-customer relationship “unfair.”

This leaves the door open for further complaints, particularly in cases involving similarly large commissions. Claims Management Companies may also look to bring forward more cases. While this isn’t expected to lead to a redress scheme covering all undisclosed commissions, the FCA has said it will consider what level of commission, if left undisclosed, could amount to unfairness, aiming to create consistency across the sector.

FCA redress for DCAs is still coming

On DCAs, the FCA has confirmed its plans to consult on a redress scheme. Although the recent ruling wasn’t about DCAs specifically, the regulator paused its plans while awaiting the outcome, in case any part of the judgment had an impact.

Now that the ruling is in, the FCA is progressing. A consultation paper is expected in October, likely to run for six weeks, with a view to launching the redress scheme in 2026.

Ongoing tensions between lenders and the regulator

The Finance and Leasing Association (FLA) has warned that investigating cases as far back as 2007 will be difficult, as many lenders may no longer hold the necessary records. The FCA has dismissed those concerns, saying they understand the challenges but that firms should stop “haggling” and focus on doing right by consumers.

The back and forth between lenders and the regulator continues to generate attention and increase consumer awareness.

How firms can prepare

The FCA has advised firms to review and update their liability estimates, taking into account both the excessive commission ruling and the upcoming DCA consultation.

With greater regulatory clarity emerging — but key questions still unresolved — firms will need to ensure their internal governance, historical exposure assessments and forward planning are all robust and defensible in the months ahead.