UK Car Dealers in Turmoil as Court Ruling on Commission Disclosure Stalls New Finance Deals

Highlights: 

• Finance Halted by Major Lenders: Close Brothers, MotoNovo, and several others pause new car loans as commission disclosure rules remain unclear. 
• Dealers Struggle with New Disclosure Compliance: Dealerships are scrambling to implement systems to disclose commission levels to customers. 
• Industry Disruption Leaves Buyers Waiting: Some customers cannot collect financed cars due to lenders withholding funds. 

The UK car finance market has been thrown into upheaval following a recent Court of Appeal decision requiring car dealers to disclose commission payments on finance agreements. In response, several major lenders, including Close Brothers Group PLC (LSE:CBG), have suspended new car loan financing until they receive clarification on how to implement the ruling. The sudden halt in new finance deals has left car dealerships and consumers in a state of uncertainty, as dealerships struggle to comply with the new requirements without official guidelines. 

Widespread Impact on Car Finance Lenders 

The decision, handed down last week by the Court of Appeal, has significant implications for the car finance industry. Close Brothers, one of the plaintiffs in the court case, announced a temporary halt to its car loan services until the details of commission disclosure rules are clarified. Several other lenders have followed suit, including MotoNovo, Northridge Finance, Blue Motor Finance, BMW, Secure Trust Bank, Zopa, and Investec. Each of these financial institutions has suspended new finance arrangements while they work to understand the full impact of the ruling. 

In the meantime, Lloyds, one of the banks most exposed to potential claims under the new rules, has stopped paying bonuses to car dealers and introduced a no-commission contract for new deals. This abrupt change reflects the need for compliance with the Court of Appeal’s ruling, as lenders seek to minimize exposure to regulatory and legal risks associated with non-disclosure of commissions. 

Customers Unable to Collect Financed Vehicles 

One of the immediate effects of the finance suspension has been disruption for consumers, with some unable to collect cars they purchased through finance plans. Lenders are withholding funds until they fully understand the implications of the new disclosure requirements, leaving dealerships without the necessary financing to complete transactions. Customers who rely on car finance to make vehicle purchases are now experiencing delays, as dealerships await further guidance on implementing the required commission disclosures. 

Trade reports indicate that customers awaiting financed vehicles may face continued delays while dealerships rush to adopt disclosure systems. Dealerships are exploring options to display commission levels transparently, but without formal guidelines, the implementation of these systems is a challenge. According to industry sources, it could take up to ten days for dealerships to adjust their processes and establish compliance measures, exacerbating disruptions for both customers and dealers. 

Dealerships Face Financial Pressure from Commission Disclosure 

The Court of Appeal’s ruling has placed significant pressure on dealerships, many of which rely heavily on commission income from arranging finance deals. The new requirement to disclose commission payments is a drastic shift for the industry, where dealers have traditionally received commissions without transparent disclosure to customers. As dealerships adapt to this change, they may face a reduction in commission-based income, which could impact profitability and overall business viability. 

To comply with the ruling, dealerships are working to introduce systems that clearly display commission payments within customer finance agreements. However, the lack of standardized guidelines means that each dealership may adopt different approaches, leading to inconsistencies and possible confusion among consumers. As the industry scrambles to establish disclosure systems, some experts suggest that car dealers may follow a model similar to mortgage brokers, who already disclose commission payments as part of their standard customer documentation. 

Potential Long-Term Effects on the Car Finance Market 

The Court of Appeal’s ruling may lead to a long-term shift in the way car finance agreements are structured and presented to customers. With commission transparency now a legal requirement, the industry may undergo a broader transformation, aligning more closely with other finance sectors that emphasize transparency. The mortgage industry, for instance, has long required brokers to disclose commission payments within documentation provided to clients. A similar model is expected to emerge in the car finance sector, potentially increasing consumer trust but challenging dealers to adapt their business models. 

The car finance market may also see lenders adopt alternative payment structures that reduce reliance on commissions, while dealers may explore other revenue streams to offset the potential loss of commission-based income. As regulatory scrutiny intensifies, dealerships will need to carefully evaluate their compliance measures and adjust their operations accordingly. The impact of these adjustments could result in significant operational changes for dealerships and lenders alike, with potential cost implications as they work to meet the new disclosure standards. 

Market Reaction and Industry Outlook 

Shares in Close Brothers dropped by 1.4% to 240p, while Motorpoint, another company affected by the ruling, saw a decline of 1.9% to 155p. These share price movements reflect investor uncertainty surrounding the financial implications of the commission disclosure requirements, as both lenders and dealerships face potential reductions in revenue. 

The industry-wide pause on new finance agreements highlights the seriousness of the Court of Appeal’s decision, with car dealers and lenders scrambling to implement measures that meet the disclosure standard. As dealerships navigate these regulatory changes, the path forward will likely involve both operational adjustments and an increased focus on transparency in customer dealings. However, until clear guidelines are issued, the car finance industry remains in a state of flux, with dealers and lenders facing the challenge of adapting to a new era of commission disclosure. 

Conclusion: An Industry in Transition 

The recent ruling mandating commission disclosure has sent shockwaves through the UK car finance industry, leaving dealerships and lenders grappling with immediate changes. With several major lenders halting new finance deals and customers left waiting for financed cars, the ruling’s impact has been both swift and far-reaching. As dealerships work to establish compliant disclosure systems, the industry may see significant shifts in revenue models and operational processes. 

In the long term, the introduction of transparent commission disclosure could help build consumer trust in the car finance process, aligning the industry with standards in other financial sectors. However, the transition is likely to bring short-term disruption, as dealerships adapt to new regulatory expectations and navigate potential financial challenges. Until clear guidelines are established, the car finance market will remain uncertain, with dealerships and lenders adjusting to a new landscape shaped by regulatory compliance and increased transparency.