August 1, 2025
Finance

Major car finance ruling could see 23 million drivers owed compensation


The outcome of Supreme Court ruling on hidden commission paid to car dealers could “shake the foundations” of consumer lending, says Martin Lewis, with implications for the wider economy

The estimated pay-out for car finance mis-selling has been put at up to £30bn - but final bill may be much lower
The estimated pay-out for car finance mis-selling has been put at up to £30bn – but final bill may be much lower (Image: PA Archive/PA Images)

Millions of motorists could be due compensation depending on the outcome of a bombshell car finance court on Friday.

Banks are already braced for a big payout, with some estimates putting the bill at up to £30billion. Consumer champion Martin Lewis warned the outcome of the case had huge economic and political implications and could “shake the foundations” of consumer lending.

The controversy centres on hidden commission pocketed by car dealers from banks and other finance firms. And the higher interest rate buyers paid, the bigger the commission. The Supreme Court’s ruling – which isn’t expected until 4.35pm after stock markets have closed for the day – could dramatically widen the number of potential victims.

Mr Lewis, founder of MoneySavingExpert.com, said: “This is going to be a shock announcement coming. It has ramifications not just for car finance firms but right across the financial services sector. Depending on what the decision is, it could even have ramifications across the economy.”

One survey suggested over 23 million people are expecting to win compensation for mis-sold car loans. It comes after a major broadband provider introduced a new £60 charge and issued a deadline to act.

Banks stand accused of paying fat commissions to dealers to sell finance deals with higher interest rates
Banks stand accused of paying fat commissions to dealers to sell finance deals with higher interest rates (Image: Getty Images)

However, reports suggest the Supreme Court may provide some relief for lenders, prompting analysts to cut their payout forecasts.

The anticipated ruling by the highest court in the land has proved political implications too, with Chancellor Rachel Reeves concerned that a hefty compensation bill will mean less money for banks to lend out, in another potential drag on economic growth.

The vast majority of new – and many second hand – cars are bought on finance agreements under which buyers normally put down a deposit and take out a loan for the remainder.

But it is claimed dealers were signing-up buyers to Personal Contract Purchase (PCP) or Higher Purchase deals and then, unknown to the customers, taking a fat fee – or Discretionary Commission Arrangements (DCA) – between 2007 and 2021. These account for about 40% of car finance deals.

Martin Lewis" It has ramifications not just for car finance firms but right across the financial services sector"
Martin Lewis” It has ramifications not just for car finance firms but right across the financial services sector”(Image: PA Archive/PA Images)

If that were not bad enough for lenders, the Court of Appeal – the second highest court in the land – sent shockwaves through the industry with a ruling last year. It decided that, if the level of commission was not disclosed, then that too was a breach of the rules. The consequence was that it would widen the scope of compensation to include 99% of all car loans. It is on this case – involving Commission Disclosure Complaints – that the Supreme Court is ruling.

Mr Lewis said: “If the Supreme Court upholds the Court of Appeal’s decision the knock on effects could be substantial on other forms of lending and on the economy. To be honest it could shake the foundations of consumer lending in the country, meaning less possible available credit for many. So much so that I have concerns that it could do more harm than good.”

City regulator the Financial Conduct Authority launched an investigation into DCA mis-selling in January last year. The FCA has said it will decide within six weeks of the Supreme Court decision whether to introduce a free industry redress scheme for motor finance customers.

It comes amid concerns that people risked losing up to 30% of any payout by signing-up to paid schemes they do not need. The FCA and the Solicitors Regulation Authority (SRA) are warning law firms and claims management companies (CMCs) to ensure they are complying with rules around how motor finance commission claims should be handled. They want such firms to inform clients of the existence of the redress scheme, if and when it is set up, which would allow them to pursue a claim for themselves, free of charge.

Paul Philip, chief executive of the SRA, said: “We are very concerned about some of the practices we are seeing in the motor finance commission claim market. Law firms have a regulatory duty to act in the best interests of their clients. But if they mislead clients, fail to get their explicit consent, do not explain cost information clearly or are not sharing the required information on free alternative routes before signing them up, they are clearly failing to meet their obligations.”



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