Car dealer commissions: A landmark judgment from the Supreme Court

In summary

• The Supreme Court overturned two of the Court of Appeal's ruling on car dealers' commission payments from lenders 
• However, in the case of unfair commission arrangements, it upheld the Court of Appeal decision
• The FCA has announced that it will publish a consultation for a redress scheme in October, with first payments likely in early 2026
• Unfair commission arrangements will be within its scope 
• The specifics of the redress scheme are to be determined but it will likely facilitate car finance compensation for affected consumers, with the FCA estimating total costs of up to £18bn

On Friday, the Supreme Court (SC) delivered its much-anticipated car finance judgment, overturning elements of the Court of Appeal’s (CoA) earlier ruling. Unfortunately for finance firms and credit brokers, this only relates to non-discretionary commission models (nDCMs).

It was closely followed by the FCA confirming that it will start a consultation in October in respect of a redress scheme to compensate customers that were treated unfairly. 

Additionally, the SC upheld the CoA ruling on one particular case that there was an "unfair relationship" between consumer and lender. All the potential factors that could make such a relationship unfair were not discussed, but the SC relied on the following in the test case:

• The commission constituted a high proportion (55%) of the finance cost
• There as a commercial tie between the dealer and lender such that the dealer would put forward the terms offered by a preferred funder, despite the dealer giving an impression of choice
• It was not relevant that the customer had not read the documentation provided, as the disclosure was insufficient

In January 2024, the Financial Conduct Authority (FCA) launched an investigation into the selling of car finance, focusing on discretionary commission arrangements. Under these discretionary commission models (DCMs), brokers or dealers could increase their commission by signing consumers up for car finance at higher interest rates. The FCA banned this practice in January 2021, but the investigation was to examine whether a significant number of people could be due compensation for sales before the ban.

On 25 October 2024, however, a Court of Appeal case expanded the scope of scrutiny beyond discretionary commission arrangements. It ruled that any commission payments from lenders to car dealers were unlawful unless disclosed transparently to customers, with their informed consent.

Following this ruling, the FCA extended its deadline, initially introduced when it launched its investigation, for car finance firms to process consumer complaints. This was designed to ensure they could be handled consistently and effectively while avoiding disorderly and inefficient outcomes for both consumers and firms. It also broadened the scope of the extension to cover non-DCM agreements, as well as vehicle leasing agreements.

Over the weekend, the FCA has announced a new consultation will launch in early October, and, if the compensation scheme goes ahead, the first payments should be made in 2026. It also said that it will likely, once again, extend the deadline for processing complaints to tie in with the launch of any scheme. Either way, the clock is once more ticking for finance firms and credits brokers.

To add to the uncertainty, in December 2024, the High Court published a judgment in a judicial review of a Financial Ombudsman Service (FOS) decision, which found against the firm in a motor finance complaint concerning a DCM commission. The court dismissed the judicial review and affirmed that the FOS’ findings in relation to redress were appropriate. Permission to appeal this decision has been granted.

The FCA has said that it will consult on the terms a consumer redress scheme (CRS) to facilitate compensation from those involved:

• Regulated finance firms – All finance firms operating in the UK must be FCA-authorised to comply with consumer credit regulations. These firms are subject to the CRS and may face claims for redress
• Authorised credit brokers – Car dealers acting as credit brokers, those who help customers arrange financing, must also be FCA-authorised and regulated. As a result, they too fall within the scope of the CRS
• Unregulated credit brokers – The investigation may uncover unregulated firms acting as credit brokers. Enforcement action against such firms will be pursued under the general prohibition outlined in the Financial Services and Markets Act 2000 (FSMA)

On 3 August 2025, the FCA announced that it will formally launched a consultation on an industry-wide redress scheme to compensate motor finance customers who were treated unfairly – particularly where commission arrangements were not properly disclosed.

The FCA’s review to date found widespread non-compliance with disclosure rules in historic car finance agreements and noted the Supreme Court ruling that some of these practices may have resulted in “unfair relationships” under the Consumer Credit Act.

Key points arising were:

• The consultation will be published by early October
• The scheme would begin paying compensation in 2026
• It will focus on discretionary commission arrangements and may include some non-discretionary ones
• Compensation could involve repayment of commission or other remedies
• Redress may cover agreements dating back to 2007
• Consumers won’t need a lawyer or claims management company to participate in the redress scheme
• Views about consumers opting-in or opting-out will be considered

If they have not already, authorised firms must take immediate steps to navigate the potential challenges posed by redress claims:

Firms must assess the scope of potential claims and evaluate the financial impact of redress. They need to establish sufficient reserves to cover these costs without jeopardising operational stability.

Large lenders are already taking precautionary measures. Close Brothers, for example, has suspended dividend payments pending clarity on FCA investigations. Last week, it also announced the sale of Winterflood, boosting its capital ratio ahead of the SC ruling. Similarly, Lloyds has set aside £1.2 billion to compensate affected consumers.

Part of the challenge for firms remains a difference in approach between the courts and the FOS as to how any quantum for redress should be calculated. For example, the courts have favoured an approach where the commission paid is returned to the customer, whereas the FOS has used a methodology applying a different interest rate to the agreement. It remains to be seen how any CRS would deal with this.

In its June statement on a potential CRS, the FCA seemed to distance itself from the FOS methodology, seeming to associate it with “some highly speculative figures by some CMCs [claim management companies] and law firms”. The statement suggested it will turn away from what many in the industry saw as a FOS overreach. The August statement provides limited further clarity on this point.

Since the FCA announced its investigation, consumer champions and CMCs have highlighted the potential for customer detriment. This, as well as the investigations themselves, could erode consumer trust in car finance providers.

Firms may consider initiating remediation processes for potentially affected clients to preserve their reputation and relationships with future customers.

The estimated cost of the redress scheme to the industry will be between £9bn and £18bn, with most payouts expected to be under £950 per agreement. The guiding principles to underpin the redress scheme will be fairness, transparency, timeliness, cost-effectiveness, and market integrity.

Consumers are advised that, if they suspect they overpaid due to undisclosed commissions, they should complain now. It's also been stressed that they won’t need to pay a claims company – and may risk losing up to 30% of your compensation if they use one.

The complaint handling deadlines are likely to be updated to align with the redress scheme. 

Ensuring capital reserves are adequate was a key message from the FCA, but we also feel there are other steps firms can and should take: 

Handling large-scale claims efficiently requires a clear strategy and robust operational capacity. As well as dealing with any existing backlog of complaints, Firms should have plans in place for how to manage an influx of claims. Without these, the claims process could exacerbate negative impacts on the firm.

As well as preparing for the CRS, Firms need to consider the likelihood that the regulatory environment for new sales will change. Systems and processes will need to be reviewed and assessed to ensure commission structures are compliant and sufficiently transparent with any updated law or regulations.

Firms must engage in strategic and transparent communication with regulators. Regular updates on internal investigations, corrective actions, and preventative measures will demonstrate accountability.

Establishing a dedicated regulatory affairs team ensures consistent and effective communication with the FCA, and in particular with the FOS until such time as a CRS potentially minimises its involvement. It also supports monitoring government guidance to maintain compliance.

Independent investigations can provide firms with credible evidence to present to regulators. Engaging impartial and competent advisors showcases a genuine commitment to resolving issues, while allowing employees to focus on core operations during this challenging period.

At S&W, our experienced professionals, including those with FCA expertise, specialise in managing complex investigations, engaging with regulators, and achieving the best outcomes for businesses.

Our advisory team focuses on complaints support, drawing on significant experience working with the FCA and FOS. We are well placed to support firms with volume remediation management, ensuring a seamless claims process that is both efficient and compliant with regulatory standards. Our regulatory consulting services can also support with assessments of existing systems, processes, policies and procedures to ensure ongoing compliance with regulatory changes.

We work alongside leading professional associations representing those working with car finance and affected by the issues relating to DCMs. We understand the sensitivities of dealing with this subject, the inherent complexity facing firms and potential ramifications of the regulators’ decisions.