Supreme Court car finance ruling – what it means for victims and lenders

Written by Eddie Flanagan, Partner and specialist in debt and asset recovery at Shakespeare Martineau

The recent Supreme Court judgment on commissions in car finance deals marks a pivotal moment for the financial services industry. For financial advisers, this ruling is far from just a legal technicality – it highlights serious concerns about transparency, fairness, and the protection of consumer interests, where commission-based sales or charging structures that are not transparent might be involved.

Historically, advisers have faced scrutiny over how they are paid and how that impacts the advice given; understanding the nuances of this judgment is essential. Not only does it clarify what constitutes “manifest unfairness” in commission arrangements, but it also signals potential shifts across the wider financial sector. This article unpacks the ruling’s key legal points, examines the FCA’s redress proposals, and explores what it means for advisers advising clients today – and in the future. 

What Makes a Commission or charging structure “Manifestly Unfair”? 

At the heart of the judgment are two key themes. The major disagreement with that of the Court of Appeal (“COA”) was that the Supreme Court disagreed that a car salesman held a fiduciary duty to his customer when arranging finance. That element of the Supreme court judgement has provided considerable relief to funders and dealers alike. The court held that for a fiduciary duty to exist there must be an assumption that the fiduciary is acting exclusively on behalf of the other in the conduct of the other’s affairs. This is a point worth considering to those advising others as to their financial affairs/investments. This initial point as to the suitability of a charging structure is key to IFAs. The second is the concept of “manifest unfairness.” The Court clarified that a commission becomes manifestly unfair when it is hidden from the consumer and distorts their decision-making process. Simply put, if a customer is unaware that a finance broker is receiving a payment from a lender, and this payment influences the broker’s advice, the commission may be deemed unfair. That will depend on the relationship and the individual context of same. 

However, the Court was careful to note that not all commissions are automatically unfair. Transparency is key. If a commission is clearly disclosed and the customer understands how it affects the cost and nature of the deal, it is less likely to be considered unfair. The ruling therefore balances protecting consumers from half disclosed and especially hidden costs whilst allowing advisers to be remunerated fairly – provided the arrangements are open, transparent and honest. 

The Legal Reasoning and What Wasn’t Dismissed 

The judgment is a nuanced one. While it confirmed that hidden commissions can be unfair, the Court rejected a blanket ban on such payments. It left the door open for commissions that are properly disclosed and structured to avoid conflicts of interest. 

Significantly, the Court affirmed the need for case-by-case assessment. This means advisers and firms cannot rely on general assumptions but must consider the specifics of each transaction – how commissions are handled, what disclosures are made, and how the client’s interests are served. This relates to the case of Johnston where the commission was inordinately high. 

Is the FCA’s £950-per-Claim Estimate Realistic? 

The Financial Conduct Authority (FCA) has estimated that average redress per claim for hidden commissions in car finance could be around £950. This figure has raised eyebrows among industry commentators. Some see it as a practical estimate reflecting typical consumer loss, while others argue it may underestimate the true financial and emotional impact on customers. The House of Lords has questioned both the scope and the mechanics of any redress scheme. 

For advisers, the key takeaway is that potential compensation claims could be significant, especially if scaled across the millions of consumers who have entered car finance agreements over the years. This adds pressure on firms to reassess their commission practices and ensure compliance with the new legal landscape. For IFAs the consideration foremost is as to whether your relationship is that of a fiduciary. If it is then the upmost transparency and good faith should be considered. 

How Might the Redress Scheme Work — And What Are the Challenges? 

The FCA has proposed a redress scheme to streamline compensation for affected customers. Ideally, this scheme would enable swift payments without lengthy litigation, helping consumers get redress more efficiently. 

However, challenges remain. Identifying eligible claimants could prove complex, particularly where documentation is incomplete or customers are unaware of the hidden commissions. Administrating payments fairly and transparently will also require robust oversight. 

Whilst far removed from the automotive industry, IFAs should be prepared for increased scrutiny and and ensure good practices are in place. 

What This Means for the Wider Financial Services Sector 

The implications of the Supreme Court’s ruling has the scope to go well beyond car finance. It sets a precedent that could influence how commissions and incentives are viewed across a broad range of financial products. 

For financial advisers, the judgment reinforces the importance of transparency and putting clients’ interests first. For any Ffirms where commission payments might be involved, they will need to review and possibly revise their commission structures, ensuring full disclosure and avoiding conflicts of interest. The key point for IFAS is what are they doing for their client? Are they a fiduciary or are they carrying out execution type business. Clarity and caution are key. 

Moreover, the decision may open the floodgates to further mis-selling claims in other areas — from insurance to mortgages — increasing regulatory scrutiny and legal risk. 

The Supreme Court’s judgment on hidden commissions is a watershed moment for financial advisers and the financial services industry. It suggests that fairness and transparency are not optional but legal imperatives especially where a fiduciary relationship exists. 

Advisers must take heed, reviewing their practices and disclosures carefully. The ruling is likely to shape the handling of mis-selling disputes for years to come, raising standards and offering greater protection to consumers. 

By embracing this change, advisers can not only avoid legal pitfalls but also build trust and confidence with their clients — a win-win in an increasingly competitive market. 

There is said to be a shortage of good IFAs. That is hardly surprising given the regulatory landscape. As a firm we have seen IFAs with excellent systems, they will benefit from this case and are a beacon to others working in financial services. Those who fail to adapt to the evolving regulatory landscape will be at risk from regulatory scrutiny and claims management pressure.