Car finance in the UK has been thrown into chaos with many customers unable to collect their cars after Friday’s ‘shock’ Court of Appeal decision.

Car dealers have spoken of showrooms unable to deliver cars as finance companies pause paying out on deals already written and refuse to draw up new business.

Not all finance firms have halted payments – Volkswagen Group has continued to pay out on finance deals – however BMW has stopped, Honda has changed its terms and Stellantis has stopped commission payments to remain on the right side of the law.

A large number of car finance lenders have now paused writing new business leaving car dealers up and down the country unable to find finance.

It comes in the wake of Friday’s decision in the Court of Appeal that ruled in favour of three customers which said ‘a broker could not lawfully receive a commission from a lender without obtaining the customer’s fully informed consent to the payment’.

This means, as it stands, car dealers cannot receive commission payments for arranging finance without customers knowing the full details. 

Car finance firms are rushing through new systems and procedures so car dealers can disclose commission payments they receive to customers and get their approval for it ahead of handing cars over.

One senior car dealer executive said if these problems are not ironed out quickly it could spell ‘financial armageddon’ for some dealers that are reliant on finance income.

‘It could take as much as 10 days for this to be sorted out – it’s a temporary problem while the finance companies get new procedures in place,’ he said.

‘But it’s not helpful and causing big problems in the industry.

‘For those dealer groups that are reliant on car finance commission to be profitable this could cause serious problems.’

Industry sources said the new procedures would be similar to mortgage brokers’ paperwork which specifically outline how much they are earning from setting up a mortgage for customers, but it would be a significant change in the way car finance is arranged.

Yesterday, more lenders said publicly that they will be pausing lending. Car Dealer understands MotoNovo, Northridge Finance and Blue Motor Finance have all joined Close Brothers in pausing payments.

The Times reported BMW, Secure Trust Bank, Zopa and Investec had also paused car finance deals.

Santander has delayed its results as it assesses the impact of the ruling while Lloyds is doing the same.

Car finance companies are scrambling to work out how they get their systems compliant in light of the ruling, which came late on Friday afternoon.

Most lenders are believed to have called in their teams to work all weekend as the industry struggled to work out the ramifications with legal teams scrabbling to work out what the judges’ decision means.

Some analysts have warned this decision could bring the car industry to a stop. Around 90 per cent of all car sales are arranged using some form of finance.

Gary Greenwood, an analyst at Shore Capital, said there was a ‘very real risk that the industry comes to a grinding halt’ as lenders were ‘scared to provide credit to customers’.

The Finance and Leasing Association told Car Dealer yesterday that the decision was an ‘unusual judgement’ and ‘very unexpected’.

It is said to have held urgent talks with the Treasury and the FCA to try to find a solution to the problem.

Director of motor finance and strategy at the FLA, Adrian Dally, said the ruling superseded advice and guidance from the Financial Conduct Authority.

‘With the Court of Appeal judgement, it shows that actually, historically, the regulator rules were less than the law,’ he said.

Speaking to The Times, FLA director general Stephen Haddrill went further, adding: ‘It makes a nonsense of the claim that Britain is becoming a more investible place to do business. I find it absolutely incredible the Court of Appeal made this decision.’

Coalface problems

Peter Smyth, director of car dealer group Swansway, thinks that disclosing commission payments that dealers receive from finance companies is not something to worry about.

‘Most customers need finance to buy their cars and we’ll just have to explain, like mortgage brokers do, that we receive a commission for setting up the finance,’ he said.

‘I can’t see it being a problem. It doesn’t stop you signing the mortgage paperwork and I don’t think it will stop customers buying cars.

‘Most finance deals are done on PCP and that’s not something that a bank can set up or a personal loan can be used for.

‘What I do worry about is that finance companies might use this as an excuse to reduce the amount of commission they pay us, or worse, not pay us any commission at all.’

A senior industry source told Car Dealer that two finance providers – Stellantis and Black Horse – had stopped paying out commissions altogether to get around the issues.

Used car dealer Umesh Samani said he has already had to set up a customer with new style paperwork following the ruling.

He sold a car on Saturday with one finance partner, which pulled lending at the weekend, so had to find another on Monday.

‘I used DSG and they had paperwork in place that disclosed the commissions to the customer and I had to explain to her that rules had changed and I had to disclose I would earn £200 out of the deal,’ said Samani, who is also chairman of the Independent Motor Dealers Association.

‘She was fine and happy to go ahead, but it was a headache to sort the finance again. 

‘We are hearing from most finance companies that it could take a few days to sort out new paperwork.

‘The issue is what does that new paperwork have to look like. On what page do they ask the customer to sign about agreeing to the commissions. Is it page one, five, 10? What’s compliant. The problem is no one knows.’

Chaos

James Tew, CEO of iVendi, a supplier that provides finance technology to dealer websites, said the situation was ‘chaos’.

His firm works with the vast majority of finance companies and has set up a live status page on its website of which finance companies are lending and which are not.

‘A lot of finance companies are trying to work out what the right way is to do this,’ he told Car Dealer this morning.

‘The issue is the commission needs to be disclosed in a “timely manner”. That could mean at the point of handover for the car that is too late.

‘The problem lies with the lenders being able to evidence the commission has been disclosed, that’s easier online but at the point of sale not so much.

‘The legal departments and compliance teams are very worried about getting it right.’

He explained that another problem is some complex commission structures that make it impossible for a dealer to know how much commission they will get until the customer signs the deal. 

‘It’s hard to disclose the amount if they don’t know it so a lot of lenders are working on simplifying these commissions,’ added Tew.

Auto Trader commercial director Ian Plummer said the Court of Appeal ruling was a ‘shock decision’.

He said: ‘While the court’s judgement and its impact on past sales of finance will very likely be appealed at the Supreme Court, that will take months. 

‘What’s urgently needed now by both consumers and the automotive industry is for the regulator to clarify the implications of this ruling to ensure a transparent and functioning market for all.’

Honda paused car finance payouts at the weekend but has now had time to assess the impact and has made some changes to its policies to allow for some business to be resumed.

A spokesperson said: ‘Following the Court of Appeal judgement regarding motor finance commissions cases, Honda Financial Services took the decision to pause funding finance business in order to assess this ruling. 

‘We apologise for any impact that this may have had on our customers and retailer partners during this time.

 ‘We have now had time to review the situation and have been able to put in place interim measures to allow us to resume the funding of some finance business.’

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