Motor finance - Implications of the Supreme Court’s unfair relationships ruling for firms and the FCA’s redress scheme

As we noted in our previous article, the ruling came as a significant relief to the motor finance industry, overturning the Court of Appeal’s findings on bribes and the fiduciary duty owed by dealers.

However, the Supreme Court’s findings in relation to unfair relationships have introduced uncertainty in relation to the potential scope of an FCA redress scheme. The Supreme Court found in favour of the customer on the grounds of unfair relationships under the Consumer Credit Act, but, crucially, noted that such assessments must be fact-specific and determined on a case-by-case basis. This presents a significant challenge for any future redress framework, especially given that the look-back period could reach as far back as 2007 and encompass non-discretionary commission arrangements.

What are the broader implications?

As outlined above, the Supreme Court’s decision was based on four key factors. Firms will need to assess what information they currently hold, what may be missing, and how any information gaps relating to those factors might be addressed. While it is important for firms to begin shaping a strategic response, execution should be deferred until the FCA publishes its consultation setting out details of its proposed redress scheme, critical aspects of which are yet to be finalised (see, for example, discussions about the scope of the scheme between the FCA and Lord Forsyth).

A central issue is the proportion of commission relative to the total interest charged. The complexity lies in what the FCA includes in its definition of ‘commission’; in a recent call with analysts, it was suggested that the definition may encompass additional forms of remuneration paid to dealers, such as head office payments and support payments.

This raises critical operational questions:

• Does the lender possess sufficient data to identify and allocate these payments on a case-by-case basis?
• Where data gaps exist, can they be reliably filled?
• Is the available information dependable, or should further validation be undertaken?

Another key factor is disclosure: what was disclosed to customers regarding commission arrangements, and what was the arrangement between the lender and the dealer. This will likely require direct engagement with dealerships. However, challenges may arise:

• Some dealers may no longer exist or may have been acquired, resulting in lost documentation;
• Retrieval of historic data will become harder the further back the review period (especially if it goes as far back as 2007); and
• Lenders must assess whether they had preferential arrangements with dealers (e.g. 'first refusal' rights) and whether these were adequately disclosed to customers.

From past experience, this is an area where firms often face challenges.

A further critical aspect, requiring significant judgment, is customer sophistication. Previous remediation exercises, such as the Interest Rate Hedging Products review, revealed that deficiencies in assessing customer understanding can lead to significant regulatory scrutiny and the reopening of thousands of cases.

While the FCA’s approach is yet to be finalised, firms can proactively assess customer sophistication using objective metrics, such as:

• Income level
• Employment history and job role
• Credit score

These indicators can be used individually or in combination to build a more robust understanding of customer profiles.

What should motor finance lenders do to prepare?

In light of the Supreme Court’s ruling, motor finance lenders should take proactive steps to assess their exposure and readiness. Preparation should begin with a thorough analysis of their customer population to identify cases where the threshold set by the Supreme Court, particularly regarding the size of the commission amount compared to the total interest charges, may be met. This will help firms estimate the potential scale of the issue.

A critical part of this exercise involves understanding data limitations. Firms should evaluate whether commission-related fees are consistently recorded at the case level, and whether the total interest charge reflects the original ‘day one’ position. Gaps in data quality or completeness could significantly impact the accuracy of exposure assessments.

Collaboration with dealers will be essential. Lenders should work with their dealer partners to begin constructing an operational plan that enables secure and efficient information sharing. Establishing clear protocols and mutual expectations will be key to ensuring cooperation.

Finally, firms must develop a strategic framework to address data and documentation gaps. This strategy should be agile, designed to evolve in response to the FCA’s forthcoming consultation, and capable of being operationalised rapidly. Timely access to accurate information will be critical to meeting regulatory expectations and managing reputational risk.