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Decades after tens of millions of consumers were mis-sold payment protection insurance, banks are facing another potential scandal in what has been dubbed PPI 2.0. In a major test case in 2024, the Court of Appeal held that car buyers who took out loans offered by dealers were entitled to reclaim fees paid in secret to the dealers by finance firms.
One of the fees cited in the test case was £1,650 or 70% of cost of the loan (25% of the cost of the car).
Significantly, the court held that the buyers could claim the value of the commission, plus interest, from the lender instead of the dealer if they preferred. Since finance firms tend to be large, reliable institutions with deep pockets this is usually the better option.
The majority of new and used car purchases in the UK are made using credit, and the ruling has made some lenders fearful of making new finance offers. The liabilities of Lloyds Bank may amount to £2.5 billion and Santander £1.1 billion, for example.
The lenders in the test case (FirstRand Bank and Close Brothers) are now taking their appeal to the Supreme Court. Given the magnitude of the case, it is not surprising the hearing has been expedited to April 1-3 2025.
What is at stake are the precise conditions necessary for a successful claim. The case also raises questions as to why this ruling caught lenders by surprise and whether making them liable for repayments is legitimate and fair. Until the regulator, the Financial Conduct Authority, introduced rules demanding commission be disclosed from 2021, a lender or dealer could argue that they were not obliged to disclose the details of any fee.
It is true that the English law of contract takes a laissez-faire attitude to these matters, and neither is there any legislation directly addressing such fees. But a branch of the law called “equity” has long demanded greater transparency over remuneration. The real issue is why and when these rules, created centuries ago for aristocratic land settlements called trusts, now apply to loan-brokers.
Old law, new use
The rules were developed to deal with trustees who, managing land on behalf of a family, could siphon off money from sales and purchases. This is some way from the test cases. But this “fiduciary law” has long been in development. By the 1990s it was clear that it could be applied in many general instances where there was a degree of trust in or vulnerability to an agent-like person or company. Such cases then became commonplace.
The first consumer loan-broking case successful under these rules was decided in 2007. This case established that a couple who took out a loan needed to know the amount of commission paid to the broker in order to be alert to potential conflicts of interest. Following a quiet period, another leading case was decided in 2015 by the Court of Appeal, where the critical point again was that the consumers did not know the amount of the fee. In the present test cases, the court said the 2015 case was “strikingly similar” to them. And there have been others, so the outcome was not surprising.
The court reasoned that the law applied because the dealers were effectively recommending, whether spelling it out or not, a competitive choice to a vulnerable buyer. This includes at least ordinary consumers but not commercial buyers.
Therefore the buyers should have been fully informed of the fee, enabling them to understand the finance deal and properly consent to it.
The biggest issue is how prominent the disclosure must be. While dealers and lenders could argue they had declared its existence in the small print, the court held this was not enough, especially if the details were hard to find. Other important matters, such as any lender having a right of first refusal, should also be highlighted.
In the three test claims, disclosure was poor and, in one, the court thought the dealer went to “some lengths to conceal the true position”. This may not be the case across car finance more generally.
To claim against the lender, there is an extra hurdle. Here the law stated by the Court of Appeal is complex. At the moment insufficient disclosure of the size of the fee is enough. But it followed up by saying “if this is wrong” (judicial code for anticipating an appeal) it must be proved that the lender was dishonest in concealing the details. This could be, for example, by turning a blind eye to the dealer not disclosing the fee or the dealer’s other actions. This is potentially a high bar.
As such, the Supreme Court is likely to address this point. It may also give more clarity around what is sufficient disclosure of the fee. It may also determine whether it can be assumed that a car buyer has consented to a small enough fee. And it may also try to make the law simpler and more suitable for claims at volume.
While the law remains uncertain, it is impossible to reliably advise whether a car buyer’s claim is likely to succeed. And only when the law is clear can settlement systems be created that allow buyers to claim directly from the institutions rather than through the expensive and slow court process.
This case highlights a problem with old law being adapted for new circumstances. The courts move cautiously and incrementally – and this case might not be the last word on the issue. But it matters for the regulation of consumer services, not to mention the car buyers who are legitimately aggrieved and want their money back.
Derek Whayman does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.
