Following a landmark ruling by the Court of Appeal, the UK car finance industry faces significant disruption as major lenders temporarily suspend new finance deals.

The unexpected decision placed lenders under greater liability for non-disclosure of fee payments, prompting urgent consultations with regulators and ministers to find a quick solution.

The the verdict of the courtwhich requires brokers to explicitly disclose the commission they receive to clients has shaken up the industry. At least three prominent finance providers — Close Brothers, MotoNovo and Honda Finance Europe — have announced an immediate halt to new credit approvals, while others such as BMW, Secure Trust Bank, Blue Motor Finance and Zopa have also suspended lending .

Gary Greenwood, financial analyst at Shore Capital, warned of an imminent shutdown in car sales, with financing accounting for the majority of new and used vehicle purchases. “There is a very real risk that the industry will grind to a halt,” he said. Lenders, he explained, are currently “too cautious to extend credit to customers.”

With around 5,200 new cars sold every day in the UK – the majority of which are financed through credit arrangements – the potential impact on the car sector and the wider economy is severe. Stephen Haddrill, chief executive of the Finance and Leasing Association (FLA), criticized the timing of the decision, coming just ahead of a government budget aimed at boosting growth. “This ruling undermines the claim that Britain is becoming a more investable place for business,” Haddrill commented, adding that European counterparts were puzzled by the decision, as Britain’s credit regulations are already among the strictest.

Following the ruling, lenders are required to disclose the size of fees and seek explicit customer consent, processes that were previously discretionary. Haddrill indicated that without a resolution, vehicle sales could slow to a decline. He noted that transactions are either pending or delayed to accommodate new compliance documents.

The Financial Conduct Authority (FCA) is closely monitoring the situation. Its chief executive Nikhil Rathi acknowledged the need for clarity in the industry and expressed hope that the Supreme Court would review the case soon to resolve the ongoing uncertainty. The ruling’s impact extends beyond the auto market, potentially affecting business equipment leasing and other credit-based transactions. For the auto finance industry, the financial liability could be considerable.

Banks exposed to the effects of the decision are preparing for further impacts, drawing parallels with the costly ones payment protection insurance scandal (PPI). Analysts are predicting substantial debt, with Santander UK expected to incur costs of £1.1bn, while Lloyds Banking Group – which is already setting aside £450m in provisions – could face a bill of up to to £2.5 billion. close brothers, Barclaysand Investec also announced possible repercussions.

Santander UK has delayed its third quarter results as it calculates potential car finance liabilities. Parent company Grupo Santander noted that the impact on future financial statements remains uncertain, with the chief financial officer indicating a likely cost of less than £500m. However, analysts at Royal Bank of Canada take a more cautious view, estimating debts could reach 1.8 billion pounds.

As the UK car finance industry navigates this legal and regulatory turmoil, industry leaders are calling for an urgent solution to prevent long-term damage.

Jamie Young

Jamie is an experienced business journalist and senior reporter at Business Matters, bringing over a decade of experience reporting on UK SME business. Jamie holds a degree in Business Administration and regularly attends industry conferences and workshops to stay on top of emerging trends. When not reporting on the latest business developments, Jamie is passionate about mentoring budding journalists and entrepreneurs, sharing his wealth of knowledge to inspire the next generation of business leaders.