October saw new car sales at risk in wake of court ruling on commission disclosure and consent

Manufacturers struggled to hit October new car sales as they scrambled to comply with the recent Court of Appeal ruling forcing car loan providers to disclose detailed commission arrangements and secure clear consent from the buyer, according to industry insiders.

In an unexpected ruling on October 25, the Court of Appeal delivered a judgment that shocked those involved in lending to fund car purchases including finance houses, brokers and car dealerships.

The Court of Appeal's decision established that brokers have a fiduciary duty to their clients, meaning they are required to act in the customer’s best interest and to avoid conflicts of interest.

The ruling set a significantly higher standard for disclosure than current regulatory regulations require and effectively prohibits intermediaries such as dealerships from accepting commissions from lenders without the customer’s fully informed consent.

The lenders involved in the shock ruling - Close Brothers and FirstRand - are now seeking leave to appeal to the Supreme Court. The motor finance industry is also calling for a pause on regulatory action on all complaints and a stay on court cases involving commission payments until there is more clarity over compliance requirements.

The more stringent requirements has led to extensive efforts not only by franchise partners but also by the OEMs to update their processes and documents.

Speaking at an Auto Trader webinar update on the impact of the Court of Appeal ruling, Ian Plummer, the marketplace’s commercial director and former manufacturing executive, said the stakes had been as equally high for manufacturers who need to protect profitability and support their dealer networks.

Plummer pointed out that OEMs are heavily reliant on financing as an ancillary revenue stream because, in many cases, the profit derived from selling a vehicle alone is minimal once production costs are factored in.

Beyond a direct revenue source, Plummer pointed out that financing also plays a crucial role in driving car sales for OEMs. “Financing isn’t just about what you earn in itself. It’s about the fact that it enables you to sell the car”.

This dependency on manufacturer-backed financing solutions makes franchised dealerships exposed by the ruling and under greater pressure to update their compliance framework than independent dealerships.

Plummer remarked that this has led to considerable “anxiety, effort, probably sleepless nights in their world,” as they work closely with their captive lenders - finance arms owned by manufacturers - as well as other financing partners to ensure they comply.

These adjustments have not only been costly but have also required substantial operational changes, and Plummer noted their likely impact of October new car registrations, saying that “there was some difficulty getting registration numbers to hit for October.”

In October, the UK new car market saw a decline of 6.0% at 144,288 new registrations with private buyer demand continuing its two-year slide, decreasing by 11.8%, although all major buyer categories suffered appreciable declines.

Plummer also explained that the OEMs and their franchise partners are working hard to ensure that they can continue to offer financing options for used vehicles too, which represent a stable and often more profitable segment.

Plummer said manufacturers are focused on ensuring that these compliance issues are managed effectively to prevent any disruptions to their business model, Given that, “they’ll be working very hard to try and see a future path through to enabling their retailers to continue to sell finance.”

Marc Thornborough, Auto Trader’s partnerships director, reported that an Auto Trader survey of dealerships post-ruling revealed that nearly two-thirds of dealerships had been impacted by their lenders or brokers pausing and updating commission disclosure processes with independent dealerships appearing less affected by the need for immediate change to processes.

When asked about the support required to manage the changes, a significant number of retailers expressed the need for greater assistance bth from the Financial Conduct Authority (FCA) and lenders to help them adapt although franchise dealerships signalled that they had greater access to resources and direct support.

The survey also found that, contrary to some expectations, there had been minimal change in consumer interest regarding finance commission disclosures. Four out of five dealerships reported little additional interest by car buyers over commission arrangements when discussing finance options as a result of the ruling.

While most dealerships have now implemented the necessary adjustments in disclosure practices and are reporting a return to normal operations, 60% of those surveyed by Auto Trader said they believed the ruling would ultimately impact the revenue that they generate through finance.

Ian Plummer said lenders have adopted varied approaches. "Some of these lenders are obviously operating in different ways," he clarified, with differences in paperwork requirements, the types of financing terms offered, and the methods - digital or otherwise - used to process them.”

For its part, recognising that consumers don’t always understand finance fully, Auto Trader has updated and clarified as much as possible its own consumer-facing online tools to make finance options more understandable by avoiding dense legal language in favour of simple terms.

To further enhance transparency, Auto Trader has updated its finance commission disclosures across various tools, including its Deal Builder tool.

Auto Trader’s Richard Walker, sharing insights on consumer and retailer responses to a recent ruling on finance commissions, highlighted several key metrics: consumer engagement remained strong, with over 1.5 million of its users active every day and website visits reaching over 81 million in October, marking a 10% year-over-year increase. Walker added that market health was up 15% year-over-year, bolstered by rising demand and reduced supply.

Examining retail pricing trends, he noted stability in price behaviours both for fresh stock and for pricing adjustments on existing inventory.

“The majority of retailers are not really reacting to the current conditions by pushing prices above market valuations,” he said, pointing out only a small reduction in price cuts for franchise and independent retailers with no real change in administration fees or the introduction of new fees - another sign of stability. He did, however, note that it’s “still early days,” and the situation will be monitored for any emerging trends.