Civil News: Motor Finance Scandal – Advance Commissions and Costlier Car Loans
The UK’s motor finance scandal continues to widen, with new evidence suggesting that lenders paid “advance commissions” to car dealers in ways that may have driven up costs for borrowers. Legal filings and court hearings now reveal that this practice, which allegedly ran into the millions of pounds, created serious conflicts of interest.
For consumers, the scandal is being compared to the Payment Protection Insurance (PPI) mis-selling crisis, which cost banks over £50bn. Analysts warn that compensation for mis-sold motor finance loans could reach £44bn, making it one of the most expensive financial scandals in recent memory.
This article explains:
- What “advance commissions” are and why they matter.
- The role of key lenders such as Lloyds, Santander, Close Brothers and Barclays.
- How the courts and regulators are treating the issue.
- The potential for compensation claims.
- Practical steps for consumers who may be affected.
What Are Advance Commissions?
“Advance commissions” refer to lump sum payments made by lenders to car dealerships upfront, rather than on a per-loan basis. In theory, they were designed to support dealer cashflow. In practice, they allegedly created strong incentives for sales staff to push loans from certain lenders, regardless of whether those loans were the best value for the customer.
Key points include:
- Undisclosed arrangements: Customers were not told about these payments.
- Conflicts of interest: Dealers were rewarded for steering buyers toward a specific lender, even if the loan had higher rates.
- Financial risk for dealers: If a dealership failed to sell enough loans to justify the advance commission, they faced negative consequences — including strained relationships with the lender.
Consumer campaigners argue that this amounts to secret commissions, which English law has long regarded as a form of civil bribery.
The Lenders Involved
Court documents and public filings link advance commission practices to several major lenders:
- Lloyds Banking Group (Black Horse Finance): Its £15bn motor finance arm was still paying advance commissions to some dealerships as late as April 2024. Lloyds has since set aside nearly £1.2bn for potential payouts.
- Santander UK: Its car finance division still offers advance commission arrangements, according to its own website, though it has increased disclosure rules since the Court of Appeal’s 2024 decision.
- Barclays: Offered advance commissions before closing its motor finance division in 2019.
- Close Brothers: Currently defending legal action over unlawful secret commissions.
- FirstRand (MotoNovo Finance): Confirmed that advance commissions were historically used, but claims they represented only a “negligible portion” of relationships.
The Legal Context
The scandal escalated in October 2024, when the Court of Appeal held that secret commission payments in motor finance deals were unlawful. The judgment dramatically widened the scope of the Financial Conduct Authority’s (FCA) ongoing investigation.
The key legal issues are:
- Disclosure: Commissions paid to brokers or dealers must be disclosed to the borrower. Failure to disclose creates a conflict of interest.
- Civil Bribery: Under common law principles, secret commissions can be treated as a form of bribery, entitling the customer to rescind the agreement or claim damages.
- Supreme Court Appeal: Close Brothers and FirstRand are seeking to overturn the Court of Appeal ruling. A three-day Supreme Court hearing is scheduled for 1–3 April 2025.
Notably, the advance commission issue itself is not directly under consideration in the Supreme Court appeal. However, pressure is growing from campaigners and parliamentarians for the FCA or the courts to address it explicitly.
Political and Regulatory Scrutiny
Concerns have reached Westminster.
- Sharon Bowles (House of Lords Financial Services Committee): Pressed FCA chief executive Nikhil Rathi to explain whether advance commissions had been investigated. She described the practice as “an example of how a practice, over time, goes from bad to worse, seemingly without anyone there to exert a moral compass.”
- Consumer Voice (campaign group): Attempted to intervene in the Supreme Court case, highlighting evidence of dealerships being paid nearly £15m in advance commissions. Although their intervention was rejected, co-founder Alex Neill argued that “millions of hardworking people [were] overcharged” and that claims must be brought against lenders.
- FCA: States that motor finance customers must be given enough information to make informed decisions. However, its current investigation focuses only on the discretionary commission model banned in 2021, not advance commissions.
This regulatory gap leaves advance commissions in a grey area — outside the FCA’s direct ban but potentially actionable under common law.
Comparisons with PPI
The PPI scandal revolved around banks selling costly and often useless insurance products alongside loans. Customers were frequently unaware they had purchased PPI or of the high commissions involved.
The parallels are striking:
- Undisclosed commissions: Both scandals involve payments hidden from customers.
- Mass compensation risk: Like PPI, motor finance could result in tens of billions in payouts.
- Systemic scale: Advance commissions appear to have been widespread across multiple banks and dealerships.
While PPI cost the industry £50bn, estimates suggest the motor finance fallout could reach £44bn.
Consumer Rights and Remedies
If you took out a car loan in recent years, you may have been affected by undisclosed commission arrangements. Possible legal remedies include:
- Rescission of the loan agreement – effectively undoing the deal.
- Compensation for losses – including overpayments of interest.
- Restitution of secret commissions – requiring the lender or dealer to repay any undisclosed commission.
Courts may treat advance commissions as a form of civil bribery, which carries strict remedies even where the borrower cannot show specific financial loss.
Practical Guidance for Consumers
If you think you may have been mis-sold, here are steps to consider:
- Check your loan documents: Did they disclose any commission to the dealer? Most did not.
- Review your payments: Were you steered toward a particular lender despite higher costs?
- Contact your lender: Ask if your agreement involved any commission arrangement.
- Seek legal advice: Specialist solicitors can assess whether you have a claim.
- Act promptly: Limitation periods may apply, though courts sometimes extend them in cases of concealed wrongdoing.
Industry Response
The industry is split on advance commissions.
- The Financing and Leasing Association (FLA): Claims the FCA has already examined commission arrangements “in every detail” and has not flagged advance commissions as a concern.
- Lenders: Santander says it has improved commission disclosure; FirstRand insists its use of advance commissions was minimal; Lloyds, Barclays, BMW and Close Brothers declined comment.
- Dealerships: The National Franchised Dealers Association (NFDA) also declined to comment.
This silence leaves consumers uncertain about how widespread the practice was — and how many may be entitled to redress.
What Happens Next?
- Supreme Court Ruling (April 2025): A decision in favour of consumers could set binding precedent, confirming that secret commission arrangements are unlawful and strengthening claims.
- Potential FCA Action: If political pressure grows, the FCA may be forced to expand its investigation to cover advance commissions explicitly.
- Compensation Schemes: As with PPI, lenders may eventually face pressure to establish redress schemes, either voluntarily or through regulatory compulsion.
Key Takeaways
- Advance commissions represent another layer of the motor finance scandal, potentially inflating costs for millions of borrowers.
- The legal principles around secret commissions make this practice highly vulnerable to challenge.
- The financial impact could rival the PPI crisis, with banks already setting aside billions.
- Consumers who suspect mis-selling should act now to preserve their rights.
Conclusion
The motor finance scandal shows how undisclosed financial incentives can corrode trust and distort markets. Advance commissions, though little-known outside legal and regulatory circles, may prove to be one of the most costly practices in modern consumer finance.
For borrowers, the message is clear: if you arranged car finance through a dealership in the last decade, you could have been overcharged. For lenders, the lesson is equally stark: transparency and disclosure are not optional extras, but essential safeguards against systemic mis-selling.
Parachute Law will continue to monitor the Supreme Court proceedings and FCA developments closely. Consumers concerned about their own car finance agreements should seek independent legal advice without delay.
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