The motor industry been spared having to make root-and-branch changes to vehicle finance arrangements in a major Supreme Court ruling – although going forward, all commissions paid by lenders to vehicle dealers will have to be disclosed to customers.
The UK’s highest court delivered its much-anticipated ruling on the legality of commissions paid by finance providers to dealerships on Friday, 1 August. Having deliberated on the long-running case following a three-day hearing in April, the five sitting judges overturned two out of three earlier rulings by the Court of Appeal.
Crucially, the Supreme Court disagreed that dealers had a fiduciary duty to prioritise the needs of customers over their own commercial interests when recommending finance arrangements for vehicles. This had led to speculation that relationships between banks and dealerships where lenders in effect pay vehicle vendors to sell their finance products to customers would have to be scrapped completely.
In ruling that a fiduciary duty to customers did not override dealer’s commercial interests, the Supreme Court justices also rejected the notion that commissions paid by lenders amounted to bribery. That earlier ruling had led to expectations that banks could be in line for multi-billion pound compensation payouts for misselling on a scale equivalent to the PPI scandal.
However, the Supreme Court did agree that it was illegal for lenders and vehicle dealers to hide the payment of commissions from the end customer. That leaves the door open to compensation claims in cases where it can be proven that commissions were deliberately obscured. The Financial Conduct Authority (FCA) has now opened a consultation on how such a compensation scheme should be run and estimates it could be worth £18bn.
Ruling protects dealerships’ commercial interests
Motor dealers themselves have never been in any direct financial danger from the legal wrangle that stretches back to three test cases brought by vehicle owners in 2021. It was always the finance providers – in these cases, Close Brothers Motor Finance and FirstRand Bank – who were in the dock for the legality of commissions which the appellants said they had no idea existed when they bought their vehicle. If the dealership was being paid to push a particular finance product onto them to pay for their vehicle, they argued, was it the best finance arrangement for them?
The danger for dealers had the Court of Appeal’s rulings been upheld was that an important revenue stream would have been broken up entirely. Particularly in the second-hand vehicle trade, the commissions paid by banks and other lenders to sell their finance products is often more lucrative than the margins they make on selling the vehicles themselves.
The Supreme Court ruling has recognised that the commercial interests of dealers matter, and that they have a right to enter into commission-based arrangements for selling finance products as they wish. What will change is the amount of disclosure provided to vehicle buyers. Dealers won’t be forced to offer a range of finance products, or to in effect act as finance brokers putting time and effort into finding the best arrangement for the customers’ needs. They can continue to offer finance from a single lender and take commission for it. But customers must be made aware of the relationship. Is your dealership due a financial health check? Get in touch with Xeinadin to speak to an experienced automotive sector accountant.
