Court decision on car finance commission threatens huge compensation bills

Car makers and finance companies are reeling from an appeal court decision in favour of consumers, who claimed ‘secret’ commission rates paid to dealers are incompatible with UK consumer law.

The ruling states that in order to be compliant, all finance agreements involving commissions must be fully disclosed to customers, and their consent must be obtained before a contract can be entered into. In other words, unless a credit broker or car dealer tells customers how much commission they’re earning from a finance agreement, the deal can’t proceed.

According to a letter to dealers from Honda Europe’s finance director Richard Winter, and reported first by the Car Dealer website, the judgement means dealers and motor finance businesses across the country are looking at existing deals to see whether they can be completed. “Motor finance lenders across the industry will now be considering whether they can execute finance business before they have changed their systems in line with the judgement,” says Winter.

“As a result of this judgement, Honda Finance will pause paying out business until further notice as we continue to assess the judgement and its impact. There will be no exceptions to this.”

Honda has asked for dealer support in “managing customer expectations” after cancelling new car handovers scheduled for the weekend until further notice. However, the implications spread far wider than dealership forecourts, because the latest ruling raises the spectre of potentially billions of pounds in compensation for customers with existing car finance agreements. Some analysts have put the figure on potential payouts at £16 billion, although one of the finance companies named in the appeal court ruling, Close Brothers, has indicated it will challenge the ruling. Meanwhile, Close Brothers’ share price has taken a hammering, as has that of Lloyds Bank, which owns Black Horse Finance - itself said to be “assessing the potential impact” of the ruling. 

Companies are also looking to the Financial Conduct Authority for advice, but the UK’s finance watchdog appears to have been caught on the back foot, too. “We note the Court of Appeal judgement on 25 October 2024, in Johnson v Firstrand Bank Ltd, Wrench v Firstrand Bank Ltd, and Hopcraft v Close Brothers Ltd, and are carefully considering its decision,” is the current official statement.