Britain’s lenders are bracing for a pivotal ruling at the country’s top court over motor finance misselling that threatens to rival some of the largest UK consumer scandals. 

On Friday afternoon, the Supreme Court in London will rule on a series of claims by motorists who took out loans to buy cars without knowing that commission was paid by lenders. The decision will set parameters for the UK regulator who is responsible for imposing a huge redress scheme on banks that some analysts estimate could cost them more than £30 billion . 

The judges have moved quickly to publish the market sensitive ruling in order to allow for the Financial Conduct Authority to set out the compensation program within six weeks.

Here’s what to watch for in what Jefferies analysts said could be “the most consequential ruling for lenders in recent history.”

Will the Supreme Court side with consumers?

The ruling comes nine months after a lower court effectively ripped up historical consumer finance practices by declaring it unlawful for banks to pay commission to a car dealer without obtaining the customer’s informed consent. 

The judgment — that motor dealers owed duties of loyalty to their customers — stunned the consumer finance industry and prompted steep declines in several bank stocks. Although decision will come outside of European trading hours, several lenders have American Depositary Receipts that while thinly traded, do attract attention when major news hits. 

The judges declared that the customers placed “trust and confidence” in the brokers to secure a competitive agreement — and that trust was broken. A ruling in favor of customers will change the way consumer finance is arranged across the board. 

Explainer: UK Banks Brace for Court Ruling on Missold Car Loans

In the three cases before the Supreme Court, each motorist obtained finance to buy a second-hand car. In one case, neither the lender nor the broker disclosed that commission was payable. In the other two, the possibility of a commission being paid was disclosed in the documentation but there was no evidence that the customer was made aware of it at all. 

“Burying such a statement in the small print which the lender knows the borrower is highly unlikely to read will not suffice,” judges previously said.

The cases are being appealed by Close Brothers Group Plc, which had to briefly pause the writing of new UK motor finance business after the Court of Appeal ruling, and South Africa’s FirstRand Ltd. 

What duties are owed by a car dealer to a customer?

Among the key legal questions will be whether the car dealers, acting as credit brokers, owed duties of loyalty to the customer when they arranged the finance for the car. Those duties — known as a disinterested duty and a fiduciary duty — all feed into the question of whether the commissions needed to be disclosed. 

The Court of Appeal declared that a lender would be liable where a secret commission was paid to the broker in breach of those duties of loyalty. 

If the judges uphold the finding of a disinterested duty — that the dealers have a duty to provide information on an impartial basis — lawyers warned that the obligations on lenders would be enormous. It would mean that almost any user of car finance could apply for compensation.

Even if the lenders succeed in overturning the ruling, they’re still likely to face claims from customers who were charged discretionary commissions. The practice, which allowed brokers to adjust the interest rates on financing deals, was banned in 2021, with the Financial Conduct Authority saying it incentivized car dealers to increase a customer’s borrowing costs.

Eyes will also be on Chancellor of the Exchequer Rachel Reeves’ response. HM Treasury had sought to intervene in the case arguing that the suit was hindering Britain’s regulatory environment. The Supreme Court judges refused that application but there have been reports that government lawyers are looking at changing the law to protect the lenders. 

With assistance from Ronan Martin.

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