How Much Could the Motor Finance Commission Scandal Cost the Industry?

The motor finance industry in the UK is grappling with an enormous potential financial liability following revelations and legal defeats relating to undisclosed commissions tied to finance agreements. With potentially over 95% of motor finance agreements involving undisclosed commissions, and an estimated average commission of £700 per agreement, the scale of possible compensation claims is vast. When factoring in statutory compensation calculated at 8% per annum, the costs to the industry escalate even further.

Claims could stretch back as far as April 2007, spanning over 17 years, meaning millions of agreements could be subject to scrutiny. In this blog, we’ll delve into the numbers, the legal framework, and the additional burden statutory interest places on a potential staggering liability.

The Scale of the Issue

The Financial Conduct Authority (FCA) has again been slow off the mark. The issue of undisclosed commission has long been known to the FCA, but it has allowed the practice to continue. Indeed, it only banned one type of hidden commission models in 2021. Discretionary commission models enabled dealerships and brokers to inflate interest rates to increase their commission, often to the detriment of the customer. Other type of hidden commission models have continued to be added unopposed until the landmark Court of Appeal judgment in October 2024.

It is estimated that up to 95% of motor finance agreements over the past two decades included some form of undisclosed commission payments. This means the vast majority of these agreements could be subject to legal and regulatory challenges, resulting in significant financial exposure for the motor finance industry.

The Numbers: Calculating the Financial Impact

• 1. Average Commission per Agreement: Your Money Claim suggests that the average commission paid to dealerships could be approximately £700 per agreement.

• 2. Number of Finance Agreements Since 2007: The Finance & Leasing Association (FLA) reports over 2.4 million new motor finance agreements annually. Over 17 years, this translates to 2.4 million agreements per year × 17 years = 40.8 million agreements.

• 3. Agreements with Undisclosed Commissions: If 95% of these agreements involved undisclosed commissions, this suggests the agreements potentially affected to be 40.8 million agreements × 95% = 38.76 million agreements.

• 4. Total Potential Refunds Refunding an average commission of £700 per agreement for all affected agreements results in 38.76 million agreements × £700 = £27.13 billion.

• 5. Adding Statutory Compensation at 8% per Annum: Statutory interest is calculated at an 8% annual simple interest rate, added to refunds from the date the commission was paid to the date of settlement. Assuming an average claim age of 10 years, the statutory interest adds £700 × 8% × 10 years = £560 per agreement. This increases the total compensation per agreement to £1,260 (£700 refund + £560 interest). For all affected agreements 38.76 million agreements × £1,260 = £48.82 billion

• 6. Costs to Administer Claims: At present the motor finance industry is doing all it can to defend cases and delay justice. Eventually though, as with PPI, it will have to face up to its poor conduct and deal with the mounting number of valid claims for compensation. This won’t come cheap, and could add millions more to the bill.

Legal Framework: Why April 2007 Matters

The legal framework underpinning claims dates back to April 2007, when the Consumer Credit Act 2006 introduced provisions to address “unfair relationships.” Courts and regulators have ruled that undisclosed commission payments create an unfair relationship, as customers were not provided with clear and accurate information about how their finance terms were influenced by such arrangements.

This framework allows claims to stretch back nearly two decades, significantly amplifying the financial exposure for motor finance providers.

Why the Motor Finance Industry is Fighting a Losing Battle

Despite mounting legal defeats and increasing consumer awareness, the motor finance industry continues to resist accountability. By challenging rulings, disputing claims, and lobbying for delays in regulatory enforcement, the industry appears intent on stalling justice rather than addressing its systemic failings.

Delaying Justice at Every Turn

Every attempt to delay the inevitable—whether through appeals or procedural hurdles—only prolongs the industry’s reckoning. Meanwhile, statutory interest continues to accrue on outstanding claims, further increasing the ultimate cost.

Broader Implications for the Industry

• 1. Financial Fallout: With potential liabilities exceeding £48 billion, including statutory interest, the motor finance industry faces an existential crisis. Smaller lenders may be unable to survive the financial strain, while even the largest players will need to make significant provisions to cover compensation payouts. Lenders have sought to warn regulators and all who will listen that this will result in increased costs for finance. However, if the commission paid is either removed or reduced (and disclosed), there is little evidence to suggests increased costs for credit is likely.

• 2. Regulatory Crackdowns: The FCA banned discretionary commission models, albeit belatedly, but this may only be the beginning. Given the scale of historical wrongdoing, regulators must seek to impose stricter compliance requirements and may demand proactive consumer redress programmes.

• 3. Loss of Consumer Trust Public confidence in the motor finance sector has been severely damaged. Customers are increasingly sceptical about the fairness of finance agreements, and the ongoing scandal only deepens perceptions of an industry driven by greed rather than integrity.

What Can the Industry Do to Address the Crisis?

To mitigate the damage and begin rebuilding trust, the motor finance industry must take decisive action:

• Identify and Compensate Affected Consumers: Voluntary redress programmes could reduce the costs associated with prolonged litigation and restore some consumer goodwill. This is unlikely though given the costs involved.
• Enhance Transparency: Clearly disclose all costs and commission arrangements in future agreements to ensure compliance and rebuild consumer confidence.
• Promote Ethical Practices: Adopting customer-centric policies and prioritising fairness over profit will be essential to repairing the industry’s reputation.
• Engage in Proactive Reform: Demonstrating a genuine commitment to ethical practices and regulatory compliance will help to minimise further regulatory sanctions.

Conclusion

The motor finance commission scandal could cost the industry upwards of £48 billion, including statutory compensation at 8% per annum. With claims spanning back to April 2007, this scandal represents the biggest conduct issue since the PPI saga and has the potential to eclipse the £40bn PPI bill.

While the motor finance sector continues to resist accountability, the courts, regulators, and consumer advocates are sending a clear message: justice for affected consumers cannot be delayed indefinitely. For an industry that has already lost so much credibility, the time for reform is now.

Delaying justice only compounds the damage—both financial and reputational. The question remains: how much longer will the motor finance industry continue to fight a losing battle?