UK top court gives banks partial win in car loan scandal worth billions

Britain's highest court on Friday partially overturned judgments that controversial car loans were unlawful, in a boost for banks, which had been bracing for billions of pounds in potential compensation claims.

The Supreme Court ruling closes the door to widespread compensation for millions of motorists.

It did, however, uphold one case, which allows the claimant to seek compensation on different grounds.

The Supreme Court decision mostly overturns judgments made by the Court of Appeal last year that ruled it was unlawful for car dealers to receive a commission on loans without sufficiently informing borrowers.

In some cases, these loans -- available for 14 years from 2007 -- allowed car dealers to offer higher interest rates in return for a bigger commission from banks.

The ruling means that dealers have leeway when arranging loans, without requiring explicit consent from borrowers for terms that may benefit lenders.

It was estimated that millions of drivers would have been eligible for compensation if the court had sided with borrowers, following its three-day hearing of three cases in April.

"It's a disappointing result for our clients and I think a lot of consumers," said Kavon Hussain, a lawyer for two of the claimants against British bank Close Brothers.

The case that was upheld involved Marcus Johnson, who in 2017 bought a Suzuki Swift from a car dealer in Cardiff for £6,500 ($8,560 today) including loan costs -- unaware that interest paid on the loan amount would fund a commission of more than £1,600.

When the Court of Appeal ruled in favour of Johnson, ordering South African lender FirstRand Bank to refund the commission plus interest, it sparked panic across the finance sector.

That ruling was upheld by the top court due to the high level of commission Johnson was charged and the complexity of the contract setting out the fee, which limits the scope of other compensation claims.

No big hit  

British banks set aside considerable sums in preparation for the ruling, including Lloyds, which has earmarked nearly £1.2 billion.

HSBC bank analysts had suggested before the trial that the total cost to the banking sector could have come to £44 billion.

"It's not the big win that consumers were hoping for, but it's still a massive win, " said Sam Ward, lead investigator at Sentinel Legal, who has worked on several of these car finance cases.

"There is still definitely a lot of compensation to be paid out by the banks, but it's not the big hit that the banks were envisaging," Ward added.

In the three cases judged by the Supreme Court, consumers faced off against FirstRand Bank and British bank Close Brothers.

The Financial Conduct Authority, which banned undisclosed commissions in 2021, had considered proposing a mandate for a collective automatic compensation programme.

It said it would confirm whether it will do so within six weeks of the Supreme Court's judgment.

The Labour government made an unsuccessful attempt to intervene in the case earlier in the year, on concerns about the economic fallout.

Analysts said the government may be concerned about the impact on banks' willingness to provide credit amid economic uncertainty caused by US tariffs and geopolitical unrest.

Finance Minister Rachel Reeves was reportedly considering changes to the law to limit the banks' exposure.