A bombshell court ruling effectively banning car dealers from making ‘secret’ commission payments off of vehicle sales has left the UK’s vehicle market in stasis – with motorists unable to sign off on deals for new wheels.
Last week, the Court of Appeal ruled in favour of three drivers who took their finance companies to court over loans that saw the dealerships, acting as brokers, paid a commission directly linked to the interest rate on the finance deal.
Car dealers and finance firms are now scrambling to rewrite their paperwork in the wake of the judgement to ensure they are now complying with the law as outlined in the Court’s ruling – delaying some motorists from getting their new cars.
One buyer who spoke to MailOnline today revealed how she had taken the day off from work to buy a nearly-new Mazda hatchback from a big-name dealership – only to go home empty-handed because the paperwork had to be redone.
Caitlin, 32, from Bathgate in West Lothian, spotted the two-year-old car at Arnold Clark in Fife last week and secured a reservation to see the car – and drive it away – on Wednesday.
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Car buyers say their vehicle deals have been put on hold as dealerships scramble to ensure their finance agreements comply with the law
The Court of Appeal has ruled finance brokers must be upfront with consumers on whether they are being paid a commission
Car buyer Caitlin told MailOnline how an Arnold Clark garage in Fife, Scotland (pictured) suspended her car purchase because it needed to rewrite the finance agreement
‘I thought to myself, “I want this car,” and they said I could buy it on a hire purchase agreement,’ she said.
‘I thought it was all alright but then they phoned me on Monday and said, “actually, it’s not alright, this car finance thing that’s just come out means we have to put a red light on all cars with finance.”‘
Caitlin was only able to see the car and test drive it on Wednesday – but could not sign any paperwork for the finance agreement because it wasn’t ready.
She added: ‘I don’t like car salesman already. They need to do their jobs but my personality type just can’t deal with them.’
Finance expert Martin Lewis has advised anyone who bought a car on finance prior to January 28 2021 to look over the paperwork of their finance deal – because they could be due compensation.
Caitlin said she had at least two finance deals predating that time she would be investigating – with compensation of up to £1,100 each potentially awaiting if the firms are found to have mis-sold her finance.
‘I’ve been looking at Martin Lewis so I’m going to see if I can do anything about these two other finance contracts – he was saying it’s up to £1,100 each,’ she added.
She has since received a call from the dealership selling her the Mazda to say she should be able to pick up the car before the end of the week after it finished revising its paperwork.
An Arnold Clark spokesperson said: ‘Arnold Clark, along with the rest of the automotive industry, is aware of the wide-reaching impacts of the recent judgement from the Court of Appeal on the motor finance test case, which we fully expect to be reviewed by the Supreme Court in due course.
‘As the Court of Appeal judgement has gone a lot further than the current FCA rules and guidance, we await full guidance from the Financial Conduct Authority as a result of this judgement.
‘In the meantime, we have updated our customer finance documentation to be in line with the recent court case and we are continuing to trade as normal, giving our customers consistency and access to motor finance should they wish to use this to purchase their vehicles.’
Another car buyer told MailOnline: ‘Our offer fell over on Tuesday when (lender) Alphera pulled all offers. Awaiting new offer from them or others now – our car is sitting in the garage currently.’
There are concerns that people will not be able to access car finance in the wake of the bombshell judgement
Nikhil Rathi, chief executive of the Financial Conduct Authority, has urged car lenders to engage with the watchdog
Close Brothers, one of the firms at the centre of the Court of Appeal case, has suspended new car loans
The judgement – branded ‘PPI 2.0’ because of its similarity to the payment protection scandal – has rattled both the new and used car sectors with some ‘captive finance’ services, directly offered by manufacturers such as Honda, suspending new loans.
The Society of Motor Manufacturers and Traders said today: ‘Manufacturers take their compliance responsibilities seriously and are assessing, with their finance providers, the implications of the judgment in order to ensure correct procedures are followed as a result. Any pause to operations is expected to be temporary.’
Sue Robison, CEO of car dealer industry body NFDA, has urged caution, saying: ‘It is important to emphasise that the present judgement will take time to digest, so drawing firm conclusions at this stage would be premature.’
The Court of Appeal ruled in favour of three car buyers after they separately took FirstRand Bank – trading as Motonovo – and Close Brothers to court in cases that were later merged.
The buyers, who were all on low incomes, successfully argued that they did not consent to paying the dealers a commission that could affect their finance payments because they were not properly informed that this would happen.
Lady Justice Andrews, and Lords Justices Birss & Edis ruled that there was ‘no dispute’ that the commission was ‘kept secret’ from one claimant – and that the others were not explicitly told a commission would be paid.
Some of the commission was even linked to interest levied on the loan; known as ‘discretionary commission arrangements’ (DCAs) or ‘difference in charge’ (DIC) deals, these were outlawed by the Financial Conduct Authority (FCA) in January 2021.
The judges concluded that car dealerships could only lawfully receive commission from lenders if they received the customer’s ‘fully informed consent’ – which, it found, was not always being sought before a deal was signed.
Analysts and lawyers have suggested the backlash following the ruling could see consumers paid billions in compensation.
Stephen Haddrill, director general of the Finance Leasing Association, said last Friday’s judgement was ‘significant and unexpected’ and would have consequences ‘which stretch far beyond the motor finance sector’.
Shares in Close Brothers tumbled as it suspended new loans and warned that that it could face ‘significant liabilities’ as a result of the judgement, while Lloyds Banking Group, a major car financier, is setting aside millions in expected compensation.
Both Close Brothers and FirstRand are appealing the ruling.
And on Tuesday, car finance firms met with the FCA to discuss next steps amid fears some firms could stop offering finance altogether.
Nikhil Rathi, chief executive of the FCA, told a dinner event on Tuesday: ‘Our focus is on ensuring that customers receive fair treatment in line with the law and that the market for motor finance continues to function well, recognising that over two million people rely on it each year to buy a car.
‘We are encouraging firms to engage with us as they consider the impact the Court judgment has on their products and services, and we are grateful for the way firms have acted responsibly so far.’