The car finance scandal proves that the financial sector still has trust issues that need to be sorted

The car finance scandal could have ended up costing UK banks and lenders up to £44 billion^[1] in compensation payments. But after the latest court ruling^[2], the expected bill has been reduced to less than £18 billion^[3].

That still counts as an expensive loss of course. And it may or may not be enough to compensate the millions of motorists thought to have paid more than they needed to for car loans.

But as well as the financial hit taken by both sides, the whole affair has come at a great cost to the relationship between the public and the financial sector. An industry still grappling with trust issues^[4] has once again been accused of long-standing practices that cost consumers dear.

Under the now-banned “discretionary commission arrangements”, car brokers were allowed to increase the interest rate on car finance agreements and receive higher commissions as a result. But customers weren’t necessarily told this at the time, and the deal may have seemed like a standard finance agreement.

The practice was widespread until 2021, when it was banned by the UK’s financial services regulator^[5]. Before that, consumers were often unaware that brokers had both the power – and incentive – to manipulate the cost of their borrowing.

The result is that millions may have overpaid for car loans, sometimes by thousands of pounds, without ever knowing. While the Supreme Court has now clarified the legal boundaries of the case, the fact that such practices were widespread for years raises serious ethical concerns.

For the scandal is yet another reminder of the fragile relationship between financial institutions and their customers. Most people might expect that loan agreements will reflect market conditions – rather than be at the discretion of a salesperson keen to maximise their own commission.

Research shows that trust is fundamental to the proper functioning of financial markets^[6]. In financial services, it depends on transparency, fairness and clear communication^[7].

Discretionary commission arrangements violated all three of these concepts.

In some ways, the case bears similarities to the payment protection insurance (PPI) scandal^[8], where customers were sold policies designed to step in if they were unable to repay loans because of unemployment or illness for example.

Both PPI and the car loans involved financial products being sold under conditions that consumers might not have fully understood, and both relied on misaligned incentives between lenders and borrowers. They also both exposed how a lack of transparency can lead to large-scale consumer harm^[9].

Yet in the case of car finance, the court did not order compensation for the majority of affected borrowers. One claimant won his case^[10], but the court stopped short of declaring all such commission arrangements unlawful by default.

Nonetheless, the Financial Conduct Authority (FCA), the financial regulator, has launched a review^[11] into historical car finance commission practices. Estimates suggest lenders could still face a bill of as much as £18 billion in redress.

This wouldn’t match the £38 billion paid out^[12] over PPI, but it’s still substantial. The industry is also likely to face class action lawsuits and broader scrutiny^[13].

The scandals over car finance scandal and PPI both point to a fundamental issue within the UK financial retail sector – that when the goals of finance companies are not aligned with the best interests of customers, mis-selling becomes the norm rather than the exception.

Research on the PPI scandal^[14] for example, reveals fundamental flaws in how products were sold and regulated. And one of the most troubling aspects of car finance is that discretionary commission arrangement models were in use for years. Yet despite the clear potential for consumer harm, the FCA stepped in^[15] only in 2021.

This delay in turn reflects a broader problem with how financial regulation operates in the UK. Much of the enforcement seems to be reactive.

Intervention typically follows consumer complaints, investigative journalism, or court rulings, rather than being driven by proactive oversight.

The FCA has acknowledged this delay and plans^[17] to consult on a redress scheme by October 2025, with compensation payments potentially starting in 2026.

While this may not lead to immediate compensation for everyone affected, but it exposes yet another chapter in the UK’s long history of financial mis-selling and weak consumer protection.

The case also exposes the limitations of “principles-based regulation”^[18], a system where regulators set broad rules (or “principles”) for firms to follow, rather than detailed requirements. Research^[19] shows that such regulatory models may appear flexible but can also result in inconsistent enforcement and a failure to address harmful practices swiftly enough.

An alternative is a more rules-based system, where detailed requirements clearly set out what firms can and cannot do. But while this model can reduce ambiguity, it may also limit flexibility and innovation. The challenge for regulators is finding the right balance.

The priority now must be clear action^[20]. The car finance industry – and indeed the wider financial services sector – must recognise that trust cannot be rebuilt with compliance alone.

Transparency, fairness and ethical conduct must become the norm, not the exception.

For regulators, this is a chance to move toward a stronger form of supervision – especially in markets where intricate financial products and conflicts over incentives are commonplace. For the public, the scandal is a reminder to remain vigilant, because when finance becomes too complex, it often becomes unfair.

References

1. ^{^} £44 billion (www.theguardian.com)
2. ^{^} latest court ruling (www.bbc.co.uk)
3. ^{^} less than £18 billion (www.theguardian.com)
4. ^{^} grappling with trust issues (www.fca.org.uk)
5. ^{^} banned by the UK’s financial services regulator (www.fca.org.uk)
6. ^{^} proper functioning of financial markets (onlinelibrary.wiley.com)
7. ^{^} transparency, fairness and clear communication (onlinelibrary.wiley.com)
8. ^{^} payment protection insurance (PPI) scandal (www.bbc.co.uk)
9. ^{^} large-scale consumer harm (www.cambridge.org)
10. ^{^} One claimant won his case (supremecourt.uk)
11. ^{^} launched a review (www.fca.org.uk)
12. ^{^} £38 billion paid out (www.fca.org.uk)
13. ^{^} broader scrutiny (www.ft.com)
14. ^{^} Research on the PPI scandal (www.cambridge.org)
15. ^{^} FCA stepped in (www.fca.org.uk)
16. ^{^} Prostock-studio/Shutterstock (www.shutterstock.com)
17. ^{^} FCA has acknowledged this delay and plans (www.fca.org.uk)
18. ^{^} “principles-based regulation” (www.cfauk.org)
19. ^{^} Research (academic.oup.com)
20. ^{^} priority now must be clear action (www.theguardian.com)