Vehicle dealerships will have to wait until July at the earliest for the outcome of a landmark court case that will determine the future of motor finance agreements.
The UK Supreme Court recently concluded a three-day hearing into legality of commissions paid by car finance providers to dealerships. This marks the final stage of a long-running legal battle surrounding the propriety of commissions, and specifically whether they are adequately disclosed to consumers.
The saga, which has been compared to the payment protection insurance (PPI) misselling scandal, began when three vehicle owners launched test cases claiming they had not been aware that commissions worth thousands of pounds we paid to the dealers they bought cars from when they signed up for finance arrangements.
Those cases were initially rejected, but in October 2024, the Court of Appeal found in the appellant’s favour, ruling that failure to disclose the commissions amounted to a breach in the fiduciary duty on companies to act in their customers’ best interests. In the court’s reckoning, not making the financial arrangements that have long existed between lenders and dealerships transparent to customers amounts to coercing them to sign up for loans in bad faith.
Two lenders, Close Brothers Motor Finance and FirstRand Bank, appealed that decision. The Supreme Court has indicated that it will give its final judgment in the summer.
What does this mean for car dealerships?
Banks and lenders are already preparing for a heavy blow should the Supreme Court uphold the earlier decision. It will effectively mean that all customers who signed finance agreements where commissions were paid but not disclosed were mis-sold them in the eyes of the law. That will open the door to compensation claims running to billions of pounds.
Vehicle dealerships won’t be in the line of fire for paying out any compensation. But a ruling against the current system of commissions will have a significant impact on the industry. Finance commissions have become a lucrative source of income for many dealerships, especially those in the second-hand trade. The amounts vendors can earn from commissions are often more than the profits they can get from cash sales. Many dealerships have therefore adjusted their business model to in effect become brokers working on behalf of one lender.
Should the Supreme Court uphold the Court of Appeal’s ruling, these relationships would have to be disclosed. It would likely end the practice of one dealer, one set of finance arrangements. Consumers would have the right to shop around. This could mean buyers finding their own finance deal for which the dealer gets no commission. Lenders would likely be more reluctant to pay commissions full stop without the guarantee of buyers signing up.
There’s also the potential for the case to lead to regulatory reforms of the entire car finance market, creating new obligations on dealers in terms of how they sell finance to customers and demonstrate good governance.
Whichever way it falls, the ruling will have a major impact on the future of the motor trade. It’s advisable to start putting in place contingency plans now should the ruling go against the current commission regime. Xeinadin’s motor industry accounting team is equipped to provide tailored guidance to individual dealerships. We can help you assess the potential financial impact, advise on compliance strategies, and assist in adjusting your business model and financial strategy as required.
Get in touch with our experts today to start preparing your business for the outcome of this landmark case.
