close
close

Association-anemone

Bite-sized brilliance in every update

UK car finance in disarray after court rules against hidden commissions
asane

UK car finance in disarray after court rules against hidden commissions

Britain’s car finance industry is in disarray as companies take emergency measures to try to limit the fallout from a landmark decision which could lead to tens of billions of pounds in damages and other legal costs.

Late last month, the Court of Appeal ruled that it is illegal for car dealers to receive kickbacks from car finance providers unless the payments have been properly disclosed to the customer and consent has been given.

The ruling prompted FTSE 250 lender Close Brothers, which has the largest relative exposure to car finance of any lender, to cease all car finance lending. Lloyds Banking Group, which owns Black Horse, the UK’s largest car finance provider, has suspended fee payments on new car finance loans.

At the same time, the finance divisions of BMW and Honda briefly stopped offering new car loans last week, while the industry held emergency talks with the Treasury and the Financial Conduct Authority to try to find a solution.

Loan sales have since resumed, but only after dealers working with brands such as Nissan and Ford took steps to ensure they comply with the ruling’s requirements. These include disclosing the amount of commission paid by finance providers and how it was calculated.

“We have measures in place to ensure customers have clear visibility of the fees associated with their finance arrangements in good time before entering into a contract,” said a spokesman for Volkswagen Financial Services UK.

Some auto finance companies have replaced automated systems with manual paper processes, with customers signing to indicate they have given their informed consent to the fee being paid.

“Acknowledgment (of the fee) is no longer enough and there has to be specific consent, which is challenging for most lenders,” said the head of a major car finance company.

Lawyers said the decision could have wider implications, affecting other consumer finance markets that involved undisclosed fees.

Following the ruling, Metro Bank last week halted the completion of some of its asset finance transactions where fees are paid. Analysts also expect premium financing – where customers borrow to spread the cost of general policies – to be affected.

The situation also evokes memories of the £50bn Payment Protection Insurance (PPI) scandalindustry-wide mis-selling of credit card and loan repayment coverage that has exploded into a costly problem for banks

For car finance, RBC analysts currently estimate that the industry as a whole could be forced to pay up to £23 billion in reparations and legal costs.

“In terms of the overall (financial) impact on the banking industry, it could be as bad (as PPI) if not worse,” said Jamie Patton, managing director at Johnson Law Group.

Compensation for consumers would depend on the nature of the fees the lenders paid the car dealers in each case, lawyers said.

In cases involving prohibited “discretionary commission arrangements” (DCAs) – where interest rates paid by customers were linked to fees earned by dealers – Patton estimated the average claim would be between £1,200 and £1,500. On flat fee commissions the figure would be lower, but still around £400 on average.

“Think about how many people have bought a car through finance,” he said, adding that many people could be eligible for compensation for multiple purchases. In the three months to June, the Financial Adviser Service received 15,925 complaints about car finance, up from 3,678 in the same period last year.

Car finance sales practices were already on the regulatory radar: FCA banned DCAs in 2021. It followed with an investigationannounced earlier this year about the potential historical mis-selling of DCAs.

It also extended the deadline for car finance companies to respond to customer complaints about DCA to December 2025 to give the regulator more time to assess the issue and “the best way forward”.

However, the scope of the October Court of Appeal ruling was much broader than the DCA. It found that other forms of car finance fees – including flat fees – were also illegal unless they were properly disclosed to customers.

Burying the relevant information “in fine print that the lender knows the borrower is highly unlikely to read will not suffice,” the Court of Appeal found.

Industry executives say, however, that there is a gap between the ruling’s interpretation of the law and FCA regulations, which lenders have argued do not require full disclosure of fee arrangements.

The industry resisted urgent discussions with the Treasury and regulators, while asking the FCA to present its interpretation of the ruling and intervene to restore market stability.

FCA chief Nikhil Rathi said last week that he was awaiting the outcome of a potential Supreme Court ruling on the Court of Appeal ruling before taking further action. “We need clarity if this is the last word of the courts on this issue,” he said.

“The FCA has been wrong twice in relation to motoring commissions, firstly as a result of the ombudsman’s decisions in January 2024 which led the FCA to impose a moratorium on complaints and now following this Court of Appeal decision,” he said Guy Wilkes, Law Partner. Mishcon de Reya company. “If the Court of Appeal’s decision stands, the FCA will have to review its rules on fee disclosure.”

Car finance has historically been a profitable and stable business for car manufacturers, with between 80 and 90% of UK new car purchases made on credit. Last year £52bn of car finance loans were issued by members of the Finance and Leasing Association.

A potentially costly mis-selling scandal comes at a time when carmakers are already struggling with high costs and reduced profits caused by the shift to electric vehicles and increasing Chinese competition. Meanwhile, dealers are under pressure to meet ambitious UK electric vehicle sales targets and offer price cuts that are squeezing their margins.

“It’s a perfect storm,” said Michael Yeates, who runs a car finance consultancy. “It’s hard to imagine that EU consumer groups won’t start asking questions if the scale of the problem here turns out to be large.”