The Financial Conduct Authority (FCA) has warned that a Court of Appeal ruling at the heart of the UK’s motor finance commission scandal risks legal overreach and “goes too far”, as lenders face potential compensation claims of up to £44 billion.
In a written submission to the Supreme Court on Tuesday, the City regulator pushed back against last year’s ruling, which found that car dealers acted unlawfully by failing to clearly disclose commission arrangements to borrowers — and by not securing their informed consent.
The FCA’s intervention comes as two specialist lenders, Close Brothers and FirstRand, seek to overturn the October 2023 ruling. The case has become a flashpoint in UK financial services regulation, with 90% of new car purchases and many used vehicles involving dealership-arranged loans — and millions of consumers potentially eligible for redress.
While the FCA is expected to make oral arguments later this week, it made clear in its filing that the Court of Appeal’s approach, which effectively treated motor dealers as fiduciaries — obliged to act in the borrower’s best interest — is at odds with the regulatory framework.
“The sweeping approach of the Court of Appeal in (effectively) treating motor-dealer brokers as owing fiduciary duties to consumers in the generality of cases goes too far,” the FCA said.
It argued that car dealers do not typically have this legal obligation and warned the ruling could introduce widespread uncertainty across financial markets.
The Treasury, which tried but failed to intervene in the case, is also concerned that the current ruling could spook investors and undermine UK competitiveness. Industry leaders and trade bodies including the National Franchised Dealers Association (NFDA) echoed these concerns, warning of “financial chaos” if such legal duties were imposed without regulatory consultation.
“A novel duty that has not been consulted upon… has the capacity to cause havoc within an established commercial order,” the NFDA said in its submission.
Mark Howard KC, representing Close Brothers, compared car dealers to shop staff, saying they had no greater duty to act in a customer’s financial interest than a retail assistant helping a shopper choose a suit.
“They are there to make a sale,” he told the panel of Supreme Court judges.
However, while the FCA disagreed with the Court of Appeal’s sweeping interpretation, it warned the Supreme Court not to completely dismiss concerns about how commission arrangements may incentivise misconduct, particularly when it comes to “potential bribery” or secret payments that influence sales.
Consumer campaigners criticised the FCA’s position, accusing the regulator of siding with lenders over consumers. Darren Smith, managing director of claims firm Courmacs Legal, said the FCA should be standing up for the millions who may have been mis-sold finance.
“On a day when millions of people’s bills are going up, it’s hard to understand why the FCA aren’t on the side of consumers,” Smith said. “The regulator should be standing up for consumers, not protecting lenders who have taken them for a ride.”
The outcome of the Supreme Court case, which runs until Thursday, is expected to have far-reaching consequences not just for the car finance market, but potentially for other commission-based financial products — including insurance and loans — triggering one of the largest compensation liabilities since the PPI scandal.
With pressure mounting from both sides, the FCA’s balancing act between consumer protection and financial system stability has rarely been more under scrutiny.
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FCA says motor finance compensation ruling ‘goes too far’ as lenders face £44bn claims risk