When purchasing a new car, buyers often enter into a finance agreement with the car dealership - some 81% of new car purchases were purchased using car finance in the 12 months up to August 2024[1]. The motor finance industry is no doubt waiting with bated breath for the outcome of the lenders’ appeal to the Supreme Court in the litigation brought against certain financial institutions in respect of commission payments. If the Supreme Court upholds the Court of Appeal’s decision, could this be the new Payment Protection Insurance (PPI) scandal?
As we know, the Court of Appeal ruled that with respect to disclosing commission to customers purchasing their car via car finance, the brokers “owed the claimants the disinterested duty, or alternatively, if that does not suffice for these purposes, an ad hoc fiduciary duty, and the lenders, in making payment of the commission knowing of the "agency" relationship, are liable as accessories to the brokers' breach of that duty[2].” For those individuals who pursued litigation against their lenders, this meant those brokers would have to pay back the commission plus the interest paid on the original loan. The Supreme Court will hear the appeal of the Court of Appeal’s judgment on 1-3 April 2025.
So, subject to the Supreme Court’s judgment, what does this mean for those lenders whom this may potentially impact? It is worth noting that complaints to the Financial Ombudsmen Scheme (FOS) in this regard rose in 2024 significantly. Over 42,000 complaints were regarding car loans during the year to September 2024 – this was 3 times higher than 2023.
Of course, this will likely also shine a light on commission disclosures in other sectors where finance is offered, such as the selling of large home appliances for example. It is understandable that lenders are already setting aside funds for when the potential floodgates open. Additionally, they are having to rewrite their documentation that is provided to customers when they purchase car finance, so much so to avoid what is likely the inevitable, having switched to a zero-commission format.
42K complaints regarding car loans during the year to September 2024
Those lenders that don’t have the big parent company to fall back on, may face insolvency if the Supreme Court upholds the Court of Appeal’s ruling. We note that the FCA released a statement on 11th March 2025 updating the public on the next steps in their investigation. No doubt lenders will appreciate the now revised deadline of 6 weeks post-Supreme Court ruling to announce whether there is to be a redress scheme. This may bring about a further rule change with consumer protection being very much at the forefront of the FCA’s strategy.
The impact of the decision could mean that lenders will look to their insurance programmes for a way to transfer the risk. As with the PPI scandal, this often triggered the ‘fees exclusion’ under Professional Indemnity (PI) policies, whereby any fees or commissions earned were not recoverable under the policy. It is likely that this will follow suit. However, where there is a redress to be made by way of compensation, lenders will want to know if their PI policy will provide the comfort it needs. This will very much depend on the breadth of the coverage, and indeed applicable Retentions and Limits of Liability. For the larger lenders who are publicly listed, this may cause share prices to drop and therefore bring about investor concerns and lawsuits to likely follow. Directors & Officers’ (D&O) insurance is likely to come into play in this regard, particularly if there are allegations against directors.
As always, do discuss any questions around notification with your insurance broker. Both PI and D&O policies are “claims made” policies, which means it is the policy in place at the time a Claim is received which is engaged, rather than the policy in place when the wrongful act is alleged to have occurred. Also beware that in most policies the definition of claim, which is usually the trigger for making a notification, is often broader than the receipt of legal proceedings. So it is really important to ensure you notify the appropriate policy in a timely manner (and certainly before the policy expires) to avoid any issues around late notification.
