Dealers forced to reveal commission earned on car finance deals

Car dealers and finance companies are reeling from an appeal court decision in favour of consumers, which ruled that ‘secret’ commission rates paid to dealers are against the law in the UK.

A number of lenders have temporarily suspended activities while they assess or reconfigure their processes, meaning some customers buying on finance have been told they can’t have the new cars they had already arranged to collect until the suspensions are lifted.

Lenders including Close Brothers, Honda Financial Services and Zopa are among those who temporarily closed their books to new business following the ruling, but none are expected to be out of action for more than a few days.

The ruling states that in order to be compliant, all commissions on finance arrangements must be fully disclosed to customers, and customer agreement must be obtained before a contract can be entered into. In other words, unless a credit broker - which is very often the car dealer arranging your finance with a third-party lender - tells you how much cash they’re pocketing from the agreement you’re signing up to, the deal can’t proceed.

The ruling has come as a big shock to dealers acting as brokers, and to lenders, many of whom find themselves with huge books of past and existing business that could be exposed to compensation claims - potentially running to billions of pounds across the industry.

The UK’s Financial Conduct Authority (FCA), which is the official industry watchdog that sets out regulations for lenders, also appears to have been wrong-footed by the ruling. ‘Official’ FCA guidance to lenders has until now allowed partial disclosure of the existence of commissions - so unless a customer asked for the figures, it was enough simply to explain that commission would be payable, without any numbers being revealed.

Speaking on a dealer webinar hosted by Auto Trader, the director of motor finance and strategy at trade organisation the Finance and Leasing Association (FLA), pointed out that lenders should have been able to rely on the FCA regulations as “a safe haven”, but the appeal ruling showed this was not the case. Stephen Haddrill, Director General of the FLA, is also looking to the UK’s financial watchdog for urgent leadership.

“This is a significant and unexpected judgement, the implications of which stretch far beyond the motor finance sector, making it an issue that demands the immediate attention of the Financial Conduct Authority,” he says.

So far the FCA response has been limited: “We note the Court of Appeal judgement on 25 October 2024, in Johnson v Firstrand Bank Ltd, Wrench v Firstrand Bank Ltd, and Hopcraft v Close Brothers Ltd, and are carefully considering its decision,” it says.

While consumers will welcome new transparency around commissions, there is also the prospect of a further appeal to the Supreme Court, which could theoretically reverse the latest decisions. However, even an expedited Supreme Court case is likely to take several months, and until then the industry must abide by the new court ruling.

According to a letter to dealers from Honda Europe’s finance director Richard Winter, and reported first by the Car Dealer website, the judgement means dealers and motor finance businesses across the country are looking at existing deals to see whether they can be completed. “Motor finance lenders across the industry will now be considering whether they can execute finance business before they have changed their systems in line with the judgement,” says Winter.

“As a result of this judgement, Honda Finance will pause paying out business until further notice as we continue to assess the judgement and its impact. There will be no exceptions to this.”

Honda has asked for dealer support in “managing customer expectations” after cancelling new car handovers scheduled for the weekend until further notice. However, the implications spread far wider than dealership forecourts, because the latest ruling raises the spectre of potentially billions of pounds in compensation for customers with existing car finance agreements. Some analysts have put the figure on potential payouts at £16 billion, although one of the finance companies named in the appeal court ruling, Close Brothers, has indicated it will challenge the judgement. Meanwhile, Close Brothers’ share price has taken a hammering, as has that of Lloyds Bank, which owns Black Horse Finance - itself said to be “assessing the potential impact” of the ruling. 

Thinking about buying a new car? Click here for our guide on how to buy a car online...