UK motor finance in disarray after court rules against hidden commissions

Britain’s motor finance industry is in disarray as companies take emergency measures to try to limit the fallout from a landmark ruling that could result in tens of billions of pounds of compensation and other legal costs.

At the end of last month, the Court of Appeal ruled it was unlawful for car dealers to receive commissions from motor finance providers, unless the payments had been properly disclosed to the customer and consent had been given.

The ruling prompted FTSE 250 lender Close Brothers, which has the highest relative exposure to car finance of any lender, to pause all motor finance lending. Lloyds Banking Group, which owns Black Horse, Britain’s largest car finance provider, has suspended commission payments for new motor finance loans. 

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

Sales of the loans have since resumed, but only after dealers working with brands including Nissan and Ford adopted measures to ensure they complied with requirements set out in the judgment. These include disclosing the amount of commission paid by the finance providers and how it was calculated. 

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

Some car finance companies have replaced automated systems with manual paper-based processes, with customers signing to indicate they have given full informed consent to the commission payment.

“Acknowledgment [of the commission] is no longer sufficient and there has to be specific consent, which causes the challenge for most lenders,” said the head of one major motor financing company. 

Lawyers said the ruling was likely to have wider implications, affecting other consumer finance markets that involved undisclosed commissions.

After the ruling, Metro Bank last week paused the completion of some of its asset finance deals where commissions are payable. Analysts also expect insurance premium finance — where customers borrow to spread the cost of non-life policies — to be affected.

The situation also evokes memories of the £50bn payment protection insurance (PPI) scandal, the industry wide mis-selling of cover for credit card and loan repayments that blew up into a costly problem for banks

For motor finance, RBC analysts currently estimate the industry as a whole could be forced to pay out up to £23bn in redress and legal costs.

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

Redress for consumers would depend on the nature of the commissions that lenders paid to car dealers in each case, lawyers said.

In cases involving now banned “discretionary commission arrangements” (DCAs) — where the interest rates customers paid were linked to the fees earned by the dealers — Patton estimated the average claim value would be between £1,200 and £1,500. On fixed fee commissions, the figure would be lower but still about £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 on multiple purchases. In the three months to June, the Financial Ombudsman 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: the FCA banned DCAs in 2021. It has followed up with an investigation, announced at the start of this year, of historic potential mis-selling of DCAs.

It has also extended the deadline for motor finance companies to respond to customer complaints about DCAs until December 2025 to give the regulator more time to assess the problem and “the best way forward”.

Yet the scope of the Court of Appeal’s October ruling was far broader than DCAs. It found that other forms of motor finance commissions — including fixed fees — were also unlawful unless they were properly disclosed to customers.

Burying relevant information “in the small print which 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 the FCA’s regulations, which lenders had assumed did not require full disclosure of commission arrangements. 

The industry has held urgent talks with the Treasury and regulators, while calling on the FCA to set out its interpretation of the ruling and intervene to restore market stability. 

Nikhil Rathi, the head of the FCA, said last week it was waiting for the outcome of a potential Supreme Court ruling on the Court of Appeal judgment before taking further action. “We need clarity on whether this is the courts’ final word on the issue,” he said.

“The FCA has been wrongfooted twice on motor commissions, firstly following the decisions of the ombudsman in January 2024 causing the FCA to impose a moratorium on complaints and now following this decision by the Court of Appeal,” said Guy Wilkes, a partner at law firm Mishcon de Reya. “If the Court of Appeal decision stands, the FCA will need to review its rules on disclosure of commissions.”

Motor finance has historically been a lucrative and stable business for carmakers, with between 80 and 90 per cent of new car purchases in the UK made on credit. Last year, £52bn of motor finance loans were issued by members of the Finance & Leasing Association. 

A potentially expensive mis-selling scandal comes at a time when carmakers are already struggling with the high costs and squeezed profits caused by the shift to electric vehicles and the rise of Chinese competition. Dealers meanwhile are under pressure to hit the UK’s ambitious EV sales targets and offering price discounts that cut into their margins.

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