In a landmark judgment that has since sent ripples across the UK motor finance industry, the Court of Appeal introduced stricter standards for commission disclosure, raising significant implications for lenders, brokers, and consumers alike. In this article, we summarise what we know so far and any key developments in this ongoing story going into 2025.
Background
Earlier in 2024, the Financial Conduct Authority (FCA) launched an investigation into potential overcharging of car finance customers under Discretionary Commission Agreements (DCAs). The investigation highlighted claims from three consumers who argued that car dealers, acting as brokers, failed to adequately disclose commission payments; undermining the impartiality of the financial advice provided and potentially leading to unfair outcomes for customers.
While the initial investigations focused on DCAs, which were banned in 2021, the Court of Appeal decision significantly broadened the scope to encompass any car finance commissions. The Court of Appeal’s hearing in these matters, delivered against the context of the FCA’s ongoing review, as mentioned above, underscores the complexity and significance of these matters for the industry.
Timeline of events
2024
January - FCA review
On 11 January 2024, the FCA announced that they would be undertaking a review into the past use of DCAs and whether motor finance borrowers had been historically overcharged. This followed a high number of complaints from borrowers claiming compensation for pre-2021 commission arrangements where, in two events, the Financial Ombudsman Service found in favour of the complainants. This finding prompted the FCA to launch a review of historical commission arrangements, using the powers granted to them under s166 of the Financial Services and Markets Act 2000 (FSMA).
October - Court of Appeal ruling
The Court of Appeal issued its judgment in three key cases: Johnson v FirstRand Bank, Wrench v FirstRand Bank, and Hopcraft v Close Brothers Limited. The court ruled:
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Brokers must disclose both the existence and size of commissions.
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Brokers must provide suitable information, advice and recommendations on an impartial basis to the borrower in relation to the credit options available.
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Car dealers acting as credit brokers owe a fiduciary duty when locating finance for borrowers.
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Merely mentioning commissions in loan documents is insufficient for obtaining informed consent.
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All the aforementioned duties would apply, unless the borrower had been adequately and clearly informed that they did not apply or in the event that the broker was unable to act impartially.
November - FCA reviews
The Financial Conduct Authority (FCA) began reviewing its rules on commission disclosure, aiming to align its standards with the Court’s stricter requirements.
The initial market response to the ruling led to significant declines in share prices among those providers involved. On a broader scale, numerous motor finance providers paused underwriting new agreements in order to review their practices in light of the ruling.
Key dates in 2025
April - Supreme Court hearing
On 11 December, 2024, the Supreme Court confirmed that it will hear the appeal of FirstRand Bank and Close Brothers. The hearing is set to take place on 1 April, 2025.
May - FCA updates
Up until 11 March 2025, it was anticipated that the FCA would set out ‘next steps’ in their review of DCAs and provide an update on motor finance non-DCA commission complaints in May 2025. However, in a statement released on 11 March and following the approval of their request to intervene in the Supreme Court hearing, the FCA has indicated it is likely to consult on an industry-wide redress scheme if their review confirms widespread failings in motor finance firms’ use of Discretionary Commission Arrangements (DCAs).
In their statement, the FCA reaffirmed their aim to ensure consumers are compensated fairly and efficiently, with firms required to assess whether customers have lost out and provide appropriate redress where necessary.
A decision on whether to proceed with the scheme will be announced within six weeks of the Supreme Court’s ruling, with further consultations on regulatory changes potentially following.
December - Complaints response deadline
On 19 December, 2024, the FCA confirmed that firms now have until after 4 December 2025 to provide final response to DCA and non-DCA complaints.
Treasury intervention
On Monday 20 January 2025, Chancellor Rachel Reeves sought permission to intervene in the forthcoming Supreme Court case. While the Treasury acknowledges a need to fairly compensate consumers for losses suffered, their intervention is triggered by a desire to also protect car loan providers from potential multibillion-pound pay outs and windfall of claims following any ruling made this year. The Treasury fears this could cause "considerable economic harm and could impact the availability and cost of motor finance for consumers". This intervention has been welcomed by UK lenders, with shares in Lloyds Banking Group and Close Brothers rising significantly following the news.
On 17th February 2025, the Supreme Court rejected the Treasury's application to intervene. The court has also rejected applications from both Consumer Voice (a compensation advisor), and the Financial & Leasing Association (FLA) in this matter. However, applications from the FCA and trade body, the National Franchised Dealers Association, were accepted.
The Treasury has said that they respect the Court's decision, and will monitor the case closely.
Claims Management Company (CMCs) challenges
Lenders are now grappling with a surge in complaints and potential compensation claims, primarily orchestrated by CMCs. This presents a significant challenge for motor finance lenders, one that we have observed intensifying in recent months.
The FCA recently estimated that motor finance lenders could receive up to 470,000 complaints related to non-DCAs in the three months to January 2025. This estimation was based on the 335,000 complaints that lenders received relating to DCAs in the three months following January 2024, when the Financial Ombudsman announced its decision to uphold DCA complaints.
We anticipate this issue will further escalate following the Supreme Court ruling in April. The flood of Data Subject Access Requests (DSARs) and complaints driven by CMCs is not merely a minor inconvenience - the volume is straining resources and inflating costs, particularly through elevated Financial Ombudsman Service (FOS) fees.
The FOS has offered some relief in their recent policy statement which amended their fee structures. From 1 April 2025, CMCs will be charged £250 for each complaint referred to the FOS, after an annual allowance of ten free cases.
- If the case outcome is in favour of the consumer, £175 will be refunded to the professional representative, meaning the CMC will end up paying £75.
- If the case outcome is not in favour of the consumer, the case fee payable by the finance provide will reduce from £650 to £475, and the £250 case fee for the CMC will remain.
This new structure aims to make the arrangements fairer and encourage CMCs to be more selective and diligent in the cases they refer. Nevertheless, the overall financial impact for finance providers remains significant.
There are particular concerns about a potential surge in complaints from CMCs in the seven weeks leading up to the implementation date, as they currently account for nearly 50% of all complaints to the service. The FOS will need to address these concerns and implement measures to mitigate the risk of a complaint surge before the new fee structure takes effect.
However, in line with the FCA’s statement on 11 March 2025, if their proposed redress scheme does come into place, this approach would simplify the process for consumers, and reduce reliance on CMCs to ensure they retain the full value of any compensation. For the lending market, the FCA hopes a redress scheme would provide a more orderly and consistent resolution for firms compared to a complaint-led approach, supporting a well-functioning motor finance market.
Nevertheless, in the meantime, the FCA has still reminded motor finance firms that they must maintain adequate financial resources to handle potential liabilities. Many larger providers have already announced that they have set aside substantial funds in the event of needing to meet potential compensation demands.
Conclusion
The UK motor finance industry is undergoing a transformative period as it grapples with the implications of the Court of Appeal’s landmark ruling. While the upcoming Supreme Court appeal and FCA rule updates in 2025 promise further clarity, the need for transparency and consumer-focused practices has already been firmly established.
[This article was updated on 11 March 2025]
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