Background and Supreme Court Decision
The UK Supreme Court’s judgment in Hopcraft v Close Brothers Ltd, together with Johnson & Wrench v FirstRand Bank Limited [2025] UKSC 33, clarified the law on secret commissions in motor finance. The Court held that car dealers arranging finance do not owe fiduciary duties to customers, which removed the foundation for claims based on breach of fiduciary duty. It also confirmed that English law does not recognise a free‑standing tort of “bribery” or secret commission absent a fiduciary relationship.
However, the Court significantly tightened the standard for commission disclosure. It held that a statement that “a commission may be paid” is inadequate: lenders and brokers must disclose both the fact and the amount, or the basis, of any commission prior to the finance agreement being signed. The Court reaffirmed that undisclosed or partially undisclosed commissions can render a lender–borrower relationship “unfair” under section 140A of the Consumer Credit Act 1974.
In Johnson, the Court found an unfair relationship where an entirely undisclosed commission – approximately 55% of the total loan– created a misleading impression and contributed to the unfairness. This was held to be sufficiently opaque and extreme to create an unfair relationship, leading to an order that the lender refund the commission together with interest. In the other joined cases, however, the commission arrangements were either less substantial or subject to some level of disclosure, and the borrowers did not obtain relief. The Court also held that lenders can only be liable as accessories to a dealer’s misconduct if they acted dishonestly, which was not established on the facts.
FCA Industry‑Wide Redress Scheme
In response to the judgment, the FCA announced an industry redress scheme under s.404 FSMA, covering motor finance agreements entered from April 2007 to November 2024. The FCA has estimated that approximately 14 million agreements involved undisclosed or excessive commissions, and that around 44% (about 6.2 million loans) may be considered unfair under the new standards.
The FCA published its consultation on the mechanics of the scheme in December 2025, with responses due in early 2026. The FCA has indicated that, subject to feedback, the final rules are expected to be issued in mid‑2026, with the redress scheme going live shortly thereafter
Compensation is expected to average £700 per loan, which implies a total payout of around £8.2 billion, with the possibility that it could reach £9–10 billion. Firms will additionally incur substantial operational expenditure, estimated at £2.8 billion, to administer the scheme. Any FCA fines for misconduct would be imposed separately and would not form part of the compensation pool.
The proposed scheme requires lenders to identify affected customers and provide compensation directly. Dealers and brokers will be expected to supply relevant information, and lenders may attempt to recover a portion of the cost from brokers via indemnity arrangements.
Application to FI Liability Policies:
Motor finance lenders and brokers will look primarily to their professional indemnity (PI) or civil liability policies, and, in certain circumstances, to D&O policies. Many of these policy wordings will be bespoke to Financial Institutions (FIs).
FI PI policies cover claims arising from wrongful acts in the insured’s provision of professional services, which is likely to include providing consumer credit and complying with regulatory disclosure obligations. Many FI PI policies define a “Claim” in broad terms, often including civil claims and regulatory proceedings that could result in an order requiring payment of compensation. An FCA-mandated redress scheme is likely to fall squarely within this definition.
Moreover, if a firm fails to make the payments required under s.404 redress scheme, the FCA can treat that failure as a breach of its rules under s.404F(7) and use the full range of its enforcement powers, including directions, financial penalties and public censure, to compel compliance, while consumers also have a direct right of action under s.404B(1) to sue for the compensation owed. Additionally, the FCA may apply to the courts under its general powers (including ss.380–382 FSMA) to obtain orders compelling a firm to remedy the breach, meaning that both the FCA and the courts ultimately can require an FI to pay compensation. Hence, any such proceedings would, likely, satisfy the definition of a “Claim” sufficient to engage the insuring clause for cover.
Notwithstanding, various coverage issues may still arise as follows.
Key Coverage Issues
Issue 1: Whether Commission Refunds Constitute an Insured “Loss”
A central coverage question is whether returning commission and interest constitutes an insured “Loss.” PI policies usually cover damages or compensation that the insured is legally liable to pay. A redress scheme under s.404 can only compensate customers where they have a private legal remedy so insureds who pay compensation should be able to demonstrate to insurers that they had a legal liability.
As regards loss, the proposed redress scheme generally seeks to restore consumers to the position they would have been in if commissions had been properly disclosed, which suggests a compensatory purpose. However, there is no causation requirement under the FCA’s proposals, in that consumers will not have to prove that they would not have entered into the loan if full disclosure had been made (although the presumption that non-disclosure caused loss is rebuttable by lenders in certain circumstances, e.g. if the consumer was deemed to be “sophisticated”).
Insurers may argue that part of the relief is restitutionary because it involves disgorging a commission that the insured (or its agent) earned. Many PI policies exclude loss consisting of the return of fees or commissions. Some policies include “carve‑backs” where commissions are linked to a wrongful act by an employee, which can restore cover. Courts and insurers often distinguish between returning an improper gain (normally uninsurable) and compensating a third party’s financial loss (insurable).
While there remains a grey area, especially under policies that expressly exclude “improper profit,” it is likely that courts will view these payments as compensatory and therefore insurable. Nonetheless, disputes may arise where policy language is particularly broad or where a settlement includes elements that resemble pure disgorgement.
Issue 2: Regulatory Fines and Penalties
Although consumer compensation would probably be covered, regulatory fines are not. FI PI policies universally exclude fines, penalties, and punitive damages, either expressly or on the basis that they are uninsurable by law. Any FCA fines imposed in parallel to the redress scheme will therefore fall outside insurance cover. Statutory interest added to customer compensation is generally considered part of the damages and is normally covered.
Issue 3: Claims‑Made Basis and Notification
FI PI policies operate on a claims-made basis, making notification a central coverage issue. Many claims will arise in 2025–2026 when consumers complain or are deemed to do so under the scheme. Policies in force at that time should respond unless exclusions for known circumstances apply.
Insurers may seek to frame a failure to disclose commission levels as a material non-disclosure. This would require an insurer to show (i) the information would have influenced a prudent insurer in setting terms, and (ii) the policyholder knew (or ought reasonably to have known) the information. Historically, however, commission setting practices in motor finance were industry‑standard, widely known, and the regulatory risk was already in the public domain due to the FCA’s 2019 work. All of that, will make it harder for insurers to say they were “unaware” of the risk, or that non‑disclosure was material in a fair‑presentation sense.
Insurers are closely examining such arguments but are aware that the hurdle is relatively high, particularly as many had opportunities during renewals to ask targeted questions and add exclusions specifically targeting motor finance commission issues, as occurred with Arch Cru and BSPS.[i] [1]
The effectiveness of “circumstance notifications” is, therefore, critical. Notifying when the Court of Appeal judgment was issued or when the Supreme Court granted permission to appeal would have preserved cover in the corresponding policy period, but insurers may argue that any such notifications were too late and not in accordance with the policy provisions. There may be disputes over when circumstances crystallised to the point of being notifiable. English case law suggests that something more than a remote possibility of claims is required, and the Court of Appeal’s expansive judgment in relation to commission disclosure arguably met that threshold.
Issue 4: Aggregation
Given the potential number of claims, aggregation will have a major impact on available limits and deductibles. PI policies often state that a series of related or continuous acts or omissions will be treated as a single claim, or that claims arising from the same originating source are treated as a single claim.
Depending on the policy wording therefore, all instances of inadequate commission disclosure by a single lender may constitute one aggregated claim.
This approach would benefit insurers in that it would cap the insurer’s liability at a single policy limit (often £10–20 million), regardless of the scale of consumer redress.
However, it would also benefit insureds in that it would mean that only one deductible applies.
Issue 5: Allocation Issues
Where a regulatory proceeding includes both compensatory and non‑compensatory elements, policies usually require allocation between covered and uncovered parts. Although fines are excluded, defence costs for regulatory investigations are often almost fully covered because the work typically relates to the compensatory issues as well.
Further, if policies do not provide for allocation, in accordance with the principle expounded in Wayne Tank and Pump Co Ltd v Employers Liability Assurance Corp [1974] QB 57, where regulatory proceedings are proximately caused by both covered and excluded matters, insurers may argue that the exclusion will prevail to preclude cover. However, it is important to note that Wayne Tank is not in fact authority that defence costs caused by two concurrent and interdependent proximate causes will be excluded, and the actual position is likely to turn on careful analysis of the policy (and the facts, as regards the reasons defence costs were incurred).
Wider Implications for Insurers and Intermediaries
This episode has substantial implications for financial services and insurance markets. PI underwriters are likely to adopt more restrictive terms, including specific exclusions, reduced limits, and higher deductibles. There may also be increased scrutiny of other products involving commission structures, such as mortgage broking or insurance distribution.
The scale of the redress means insurers will need to increase reserves and manage potential disputes within insurance towers, especially regarding aggregation and allocation. Insurers may also look to pursue subrogated claims against brokers under indemnity agreements. Reinsurers will also be significantly affected.
The ruling and redress programme reinforces the importance of transparency in remuneration across all intermediary sectors. Insurance brokers and financial intermediaries should reassess commission disclosure practices in light of the FCA’s broader focus on consumer fairness and the new Consumer Duty. Firms that continue opaque practices may face both regulatory scrutiny and increased insurance restrictions.
Although D&O exposure will, hopefully, be limited, senior managers may also face FCA attention under the Senior Managers & Certification Regime.
Conclusion
The motor finance commission litigation and resulting FCA action create extensive compensatory liabilities for lenders. FI PI policies are likely to respond, subject to limits, aggregation, notification requirements, and exclusions for fines and proven dishonesty. Commission refunds are most likely to be treated as compensatory and therefore insurable. The case underscores the importance of transparent consumer practices, early notification under claims‑made policies, and careful review of policy wording in the context of large‑scale regulatory actions.
[i] [2] Arch Cru was a mis‑selling scandal involving investment funds marketed as low‑risk but in fact exposed to high‑risk, illiquid assets. When the funds collapsed in 2009, the FCA established a consumer redress scheme, and although many PI insurers argued that firms had breached the duty of fair presentation by failing to flag emerging regulatory concerns, those arguments were largely unsuccessful because the issues had already been widely publicised. Insurers later introduced Arch Cru‑specific exclusions once the risks became well known.
BSPS involved unsuitable advice given to steelworkers to transfer out of the British Steel Pension Scheme into riskier personal pensions. The FCA subsequently implemented a statutory redress scheme, and PI insurers again sought to rely on fair‑presentation breaches, but these arguments similarly gained little traction because the regulatory concerns were already in the public domain by the time many policies renewed. Insurers ultimately responded by adopting BSPS‑specific exclusions as the scale of the issue became apparent.
Authors
Chris Ives, [3] Partner (Head of Financial Institutions)
Jonathan Corman [4], Partner
Pawinder Manak [5], Trainee Solicitor