Behind the wheel: lender liability in car finance

Motor dealers and the lenders whose finance they arranged have recently faced intense scrutiny, as Financial Ombudsman Service (FOS) and court decisions on commission payments and disclosure have challenged long-standing practices once considered standard and acceptable.

The road to now

The FCA ban on DCAs

What happened: In 2021, the Financial Conduct Authority (FCA) banned Discretionary Commission Arrangements (DCAs) in motor finance.

Why: These arrangements allowed brokers to raise interest rates to increase their commissions—often without borrowers knowing.

Impact: The ban led to a surge in consumer complaints over potential overcharging.

FOS rulings shake up motor finance

In 2023, the FOS upheld complaints from two borrowers who took out motor finance before the DCA ban. It found they overpaid due to commission-linked interest rates and ruled they were owed compensation equal to the interest paid above the lender’s base rate. The FOS said DCAs created conflicts of interest, breached FCA rules on commission variation, and likely made the borrower-lender relationship unfair under the Consumer Credit Act. See our previous article for more detail on the decisions.

Clydesdale Financial Services (Barclays Partner Finance) challenged the FOS decision on Ms. Jenna Lewis via judicial review. In 2024, the High Court dismissed the challenge, confirming the FOS correctly interpreted FCA rules and the Consumer Credit Act 1974 (CCA). It affirmed the FOS—not the courts—can determine FCA Principle breaches and award compensation accordingly. See further details of the judgment here in FIN.

Clydesdale’s was originally due to be heard by the Court of Appeal on 1 July 2025. However, it was adjourned because the Court took the view that the Supreme Court's decision Johnson v FirstRand Bank would be a relevant factor (particularly for context) in the judicial review.

FCA puts the brakes on DCA complaints

In response to the FOS rulings and Clydesdale’s planned judicial review, the FCA paused standard complaint-handling deadlines. This pause, later extended, means firms handling complaints involving DCAs are currently not required to issue final responses until 4 December 2025 – although this now looks set to be extended further.

The cases that changed the game

Johnson v FirstRand Bank Limited, Wrench v FirstRand Bank Limited and Hopcraft v Close Brothers [2024] EWCA Civ 1282

In three related cases, financially inexperienced consumers bought vehicles through dealerships that arranged hire purchase agreements. The dealers earned profits from both the vehicle sales and commissions from lenders. While none of these involved DCAs, the higher the interest rate on the loan, the more commission the dealer would get, and it would also have a financial incentive to deal with lenders who would pay it a higher percentage of commission in relation to the value or the loan or cost of the credit, creating a potential conflict of interest with the consumers.

In 2024, the Court of Appeal ruled appeals from these borrowers in which they claimed they weren’t properly informed about commissions paid by lenders to motor dealers arranging car finance. They argued this non-disclosure breached duties owed to them. The cases focused on lenders’ broader responsibilities, not DCAs or FCA CONC breaches. County Courts had previously dismissed the claims.

The Court held lenders must repay commissions in all three cases. It found dealers acted as credit brokers and owed a “disinterested duty” to customers unless their bias was clearly disclosed.

Importantly, the Court ruled brokers owed fiduciary duties to borrowers. Unlike optional products like PPI, finance was essential, and brokers’ roles placed them in a position of trust. Stating commission “may” be paid was insufficient for informed consent, as borrowers wouldn’t know if, how much, or the nature of the dealer-lender relationship.

Because of these fiduciary duties, the Court found lenders could be secondarily liable. Lenders aware of commissions couldn’t rely on ignorance or lack of disclosure. Turning a blind eye wasn’t enough to avoid liability. See also our FIN post here.

The Supreme Court's decision

The lead judgment in [2025] UKSC 33 was given jointly by Lord Reed, Lord Hodge, Lord Lloyd-Jones, Lord Briggs, and Lord Hamblen.

"The central issue in all three appeals… is whether the continuing status of the dealer as seller of the car… is fatal to the recognition of any fiduciary duty owed by dealer to customer… sufficient to ground a claim in dishonest assistance by the lender, or any lesser ‘disinterested’ duty… sufficient to found a claim against the lender in bribery.” (paragraph 57).

The Supreme Court overturned the Court of Appeal’s finding that lenders were liable for bribery or dishonest assistance in breach of fiduciary duty.

The Supreme Court undertook a detailed analysis of fiduciary principles, concluding that fiduciary duties arise where a party undertakes to act exclusively in another’s interests, excluding their own. The dealer’s role in these transactions was not fiduciary. Dealers remained arm’s length sellers, pursuing their own commercial interests. The mere fact that a dealer sourced finance did not imply a duty of undivided loyalty. Trust, confidence, or customer vulnerability are not sufficient to establish fiduciary duties.

The Court reaffirmed the existence of the tort of bribery, rejecting arguments for its abolition. Bribery is a distinct civil wrong, historically rooted in equity. Liability arises only where the recipient of the payment owes a fiduciary duty (and the Court of Appeal had been wrong to proceed otherwise). In all cases, the dealers were not fiduciaries. They were pursuing their own commercial interests. This meant that the claim in bribery failed. "We conclude… the tort of bribery is not engaged by anything other than the receipt of a benefit by a person who is subject to a fiduciary duty… to which the beneficiary… has not given fully informed consent." (Paragraph 288)

Mr Johnson, however, had also brought a claim under section 140A of the CCA, and this claim succeeded. The Supreme Court found that commission (£1,650.95) was very high (26% of the loan, 55% of the cost of credit). The commission was not disclosed, which the Court found to breach CONC 4.5.3R. The dealer was contractually tied to FirstRand, but did not tell Mr Johnson that. The Suitability Document the dealer provided to him falsely suggested impartiality and access to a panel of lenders. The Court said Mr Johnson’s failure to read documents did not absolve the lender, especially given the lack of prominence and clarity of the relevant terms.

For lenders, it is welcome news that the Court has decided that dealers are not fiduciaries in typical car finance transactions. However, they may face claims under the CCA even if they are not liable in tort. Regulatory compliance with FCA Rules (especially CONC and more widely the Consumer Duty) will continue to be critical.

FCA redress scheme

The FCA will consult on an industry wide scheme to compensate motor finance customers who were treated unfairly. The consultation will be published by early October 2025. See further details here in FIN.

The FCA will need carefully to craft the parameters of the scheme and what it will cover, but its initial thoughts are that it will cover all DCAs but it will be consulting on which non-DCA arrangements will fall within scope. The scheme would:

• Set rules for assessing claims and calculating redress.
• Be designed to be simple and accessible, so consumers don’t need to use claims management companies (CMCs) or lawyers
• Include checks and oversight to ensure firms comply with the rules.

The FCA has outlined seven principles for any redress scheme:

1. Comprehensiveness – wide enough to avoid court action.
2. Fairness – to both consumers and firms.
3. Certainty – finality for all parties.
4. Simplicity and cost-effectiveness – easy to use and affordable for firms.
5. Timeliness – resolve most claims quickly.
6. Transparency – clear decisions and public data.
7. Market integrity – maintain a healthy, competitive finance market.

Any such scheme is unlikely to be operational before 2026.

So we await the consultation, and the FCA's confirmation that it will be further extending the current stay on the date by which firms need to respond to relevant customer complaints past the 4 December 2025 deadline.

The ruling in favour of lenders limits or eliminates liability for undisclosed commissions in many cases. It will significantly reduce compensation claims. Firms will likely resume normal complaint handling focussing on individual assessments under the CCA and pause compensation provisioning.

The judgment will help to stabilise the motor finance market, restore investor confidence, and reduce pressure on other sectors using commission-based models.