In a potentially transformative case for the financial stability of UK banks, the Supreme Court has spent three days deliberating on whether car dealers functioning as credit brokers owe fiduciary duty to consumers. The crux lies in whether commissions paid by lenders—such as Lloyds Banking Group and Close Brothers—can be classified as bribes if not adequately disclosed. If the Supreme Court supports the Court of Appeal’s stance against lenders, the banking sector might face costs nearly matching the £50bn payout from the payment protection insurance scandal.

This legal battle encompasses three interconnected appeals concerning financially inexperienced individuals with modest incomes who engaged car dealers as intermediaries to secure hire-purchase agreements for used cars under £10,000. In each scenario, only one financing option was presented, accepted by all claimants. The dealers profited both from car sales and commissions tied to introducing business to lenders, incentivized to maximize interest rates within allowable limits to boost commission amounts.

One instance involved undisclosed commissions, while in others, although commissions were referenced in standard terms or documents signed by claimants, the information wasn't clearly communicated. Claimants seek the return of these commissions, arguing that dealers misrepresented their roles in securing competitive deals aligned with customer interests.

Robert Weir KC, representing the claimants, emphasized the expectation of unbiased service. Conversely, Mark Howard KC, defending FirstRand, likened dealers to shop salespeople prioritizing sales over customer welfare. The government and Financial Conduct Authority (FCA) have taken keen interest, with the FCA intervening due to the vast motor finance market (£41bn) and numerous pending claims.

Jemima Stratford KC, speaking for the FCA, cautioned against overly broad classification of motor dealers as fiduciaries but warned courts against dismissing bribery law applicability too hastily. Regardless of the verdict, some form of redress scheme seems inevitable, affecting how consumer compensation is managed fairly without crippling the motor lending sector.

Experts predict this process will be more intricate than previous cases like PPI due to the complexities of discretionary commissions. While larger banks may absorb potential losses better due to robust capital reserves, smaller entities remain vulnerable. A final judgment is anticipated by July.

The outcome of this landmark case could redefine fiduciary relationships in financial transactions, influencing everything from car loans to mortgages and insurance products sold via third-party intermediaries. Whether it triggers widespread changes across financing sectors or remains confined to motor lending, the decision promises significant implications for both consumers and financial institutions alike.