Lenders will not have to pay compensation to millions of drivers after the Supreme Court ruled that they are not liable for hidden commission payments in car finance schemes.

Supreme Court president Robert Reed reversed a Court of Appeal ruling last year that sent shockwaves through the car dealer and motor finance industry.

The Court of Appeal had ruled that commission payments to car dealers, as part of finance arrangements without the motorist’s fully informed consent, were unlawful.

Mr Reed said the Court of Appeal had “failed to understand that the dealer has a commercial interest in the arrangement between a customer and a finance company.”

The door is still open to a more limited compensation scheme being considered by the Financial Conduct Authority. The regulator is likely to announce a central compensation scheme for those consumers whose loan agreement had a “discretionary commission arrangement” – a type of loan that has now been banned.

A Treasury spokesperson said: “We respect this judgment from the Supreme Court and we will now work with regulators and industry to understand the impact for both firms and consumers.

“We recognise the issues this court case has highlighted. That is why we are already taking forward significant changes to the Financial Ombudsman Service and the Consumer Credit Act.

“These reforms will deliver a more consistent and predictable regulatory environment for businesses and consumers, while ensuring that products are sold to customers fairly and clearly.”

Market reaction

Lenders will be relieved that they’ve avoided having to potentially pay out millions of pounds in compensation, says Danni Hewson, head of financial analysis at AJ Bell.

“Most people buying a car in the UK take out finance and most won’t have scrutinised the small print before pocketing the keys and driving off the forecourt and it was this lack of transparency which formed the basis for the original court case.

“But the Supreme Court was clear that an earlier ruling in favour of motorists was wrong, that the commission paid to dealers was neither a bribe nor could anyone have expected a dealer not to have a commercial interest in selling cars.

“But the ruling did potentially leave the door ajar on future cases after it upheld one of the claims relating to the relationship between a motorist, Mr Johnson, and his lender.

“It also doesn’t bring an end to the long running saga as another case related to discretionary commission agreements is still being dealt with by the Financial Conduct Authority and a redress scheme could be created within months.

“There will be plenty of motorists who had been hoping to pocket a few extra quid off the back of the ruling, who will be disappointed, but a different outcome could have had huge implications for the economy as a whole.

“People rely on finance to enable them to afford homes and cars, big ticket items today that they would otherwise have to wait years or even decades to afford.

“That finance could have become harder to get hold of and more expensive which is why the Treasury had tried to intervene.

“But the episode has raised big questions about how we buy cars and what needs to be done to make the experience better for customers.”