The UK motor finance industry is navigating choppy waters after a landmark Court of Appeal ruling that could reshape how car loans are sold, and how transparent businesses must be. For those of us watching the automotive retail landscape closely, this situation raises big questions about compliance, customer trust, and financial stability.
WHAT’S THE ISSUE?
At the core of the turmoil is the Court of Appeal’s decision that car dealers cannot receive commission payments from finance providers without clear disclosure and explicit customer consent.
This ruling doesn’t just tweak the rules, it flips the table.
It applies to all types of motor finance commissions, including fixed fees, and not just the more controversial discretionary commission arrangements (DCAs), which regulators banned in 2021.
The judgment sent shockwaves through the sector:
- Pause and Reset: Close Brothers, a significant motor finance lender, temporarily halted all lending. Others, like Lloyds’ Black Horse and BMW’s finance division, quickly suspended commission payments or paused lending until processes were reworked.
- Emergency Action: Dealers for major brands, including Nissan and Ford, adopted stricter measures to ensure compliance. This involves not just revealing the commission amount but also explaining how it’s calculated, with some switching to manual paper-based processes to obtain customer consent.
FINANCIAL IMPLICATIONS
Industry analysts estimate redress and legal costs could hit up to £23bn, comparable to the infamous PPI mis-selling scandal. Average compensation claims range from £400 for fixed-fee arrangements to as much as £1,500 for DCAs. The financial ramifications could be colossal with millions of car finance agreements potentially affected.
The ruling also has broader implications. Other consumer finance sectors, such as insurance premium finance, are now under the microscope, with some lenders already pausing deals involving commission payments.
A WIDER PROBLEM FOR THE INDUSTRY
The motor finance sector has been a reliable profit engine for carmakers, with 80-90% of new car purchases in the UK financed through credit. In 2023 alone, the Finance & Leasing Association reported £52bn in loans issued.
But this storm couldn’t come at a worse time:
- EV Transition Pressure: Dealers are balancing the shift to electric vehicles (EVs) with tighter margins.
- Global Competition: The rise of Chinese automakers has intensified pricing pressures.
- Regulatory Uncertainty: With the Financial Conduct Authority (FCA) awaiting a potential Supreme Court ruling on the matter, clarity remains elusive.
WHAT HAPPENS NEXT?
The FCA faces calls to align its regulations with the court’s interpretation of disclosure requirements. Industry players are also urging government intervention to stabilise the market. But until a definitive legal or regulatory framework emerges, the industry must tread carefully.
For car dealers and finance providers, this is a wake-up call to audit processes, bolster transparency, and ensure compliance is baked into every customer interaction.
The stakes are high, not just financially but also reputationally.
WHAT DOES THIS MEAN FOR AUTOMOTIVE RETAILERS?
For those of us advising automotive retailers, the takeaway is clear: proactivity is key. Dealers need to:
- Reassess Customer Communication: Ensure all commission disclosures are crystal clear and prominently highlighted, no more small print.
- Invest in Compliance Systems: Automation might need a rethink if manual oversight is now the gold standard.
- Prepare for the Long Haul: With the FCA extending the deadline for DCA-related complaints to December 2025, businesses must prepare for sustained scrutiny.
The UK motor finance sector is in a state of flux. But with challenge comes opportunity. Retailers who adapt now will be better positioned to build trust and navigate the road ahead.
Our Automotive team at Cooper Parry is here to keep you ahead of the curve. Whether it’s navigating complex regulations or tackling the latest market trends, we’ve got the insights and expertise to keep your business prepared for whatever comes next.
Got questions or challenges? Let’s talk, get in touch today.
