You may have seen in the media recently some information regarding the court of appeal on car finance. At BRI Business Recovery and Insolvency, we monitor what decisions are made by the court so we are able use this knowledge when advising for you and your business.
When did the investigation into motor finance products start?
In January 2024, the Financial Conduct Authority (“FCA”) launched an investigation into discretion commission arrangements (“DCA”) issued on car loans between 2007 and 2021. In essence, car dealers and brokers allegedly benefitted from increased commission on higher rates of interest on car finance agreements.
This investigation was due to complete in September this year, but this date of completion has subsequently been extended to May 2025.
Martin Lewis also took up this issue and within a matter of hours of providing details on a website, thousands of individuals had logged on to learn how it might affect them and whether they might be due compensation.
What was the Court of Appeal’s ruling on car finance on 25 October 2024?
The Court of Appeal found in favour of the claimants who signed car finance agreements with Close Brothers, FirstRand Bank and Motonovo. They claimed that they were mis-sold motor finance products.
In a ruling with much wider consequences than anticipated, a broker (including car dealers) could not receive commissions from a finance provider without their customer’s specific agreement. The customer must formally agree to the amount received (by the car dealer from the lender) together with how this commission would be calculated.
Why is this ruling of interest to potential BRI clients?
BRI were asked earlier in the year whether a members’ voluntary liquidation (“MVL”) was possible for a motor vehicle dealership. The owner was looking to retire after an orderly wind down of the business.
BRI’s advice was that this was not possible at that point in time due to the ongoing FCA review and the concerns surrounding the potential repayment of commissions. The dealer had already received letters from lawyers acting on behalf of former customers seeking redress. The total value of these potential claims represented a contingent liability.
The potential MVL (where all creditors must be paid in full) was placed on hold pending a ruling from the Court of Appeal. It was hoped that this would clarify the position and would ensure that the potential liability could be calculated with comparative certainty.
Does the court of appeal on care finance affect car financing companies from going ahead with a members’ voluntary liquidation?
The short answer is yes it does. A member’s voluntary liquidation is not possible for a company in the car financing sector at this time, who previously participated in these commission arrangements. This is because the directors and members still do not have a final ruling which enables them to reasonably calculate the quantum of this contingent liability. Following the most recent Budget, the rate of tax that members will pay on their capital distribution will now be higher if this case is referred to the Supreme Court as this will likely take place after April 2025.
What was the effect of the court of appeal ruling on car finance?
Based on a review of articles, around 90% of all car sales in the UK are funded using some form of finance. Two of the most common types of finance are personal contract purchase plans and hire purchase.
This ruling on car finance led to a number of providers immediately halting lending (which included a number of household names). Some of these lenders were owned by car manufacturers. On receipt of this judgment, some lenders raised particular concerns that compliance with the Financial Conduct Authority’s (“FCA”) requirements regarding commissions and disclosure did not mean adherence to the law.
It is understood that many car dealers did not receive commission payments on existing sales which had been halted. For any dealer (or dealer group) reliant on this source of income, this would have resulted in serious and totally unexpected cash flow issues. As a result, some car dealers had to urgently find alternative lenders who already had the requisite procedures in place to adhere to the Court of Appeal’s ruling.
Many car finance firms looked to incorporate these further requirements into revised systems and procedures. In the main, this was to enable car dealers to disclose receipt of their commission income and to obtain specific approval from the customer on this basis.
In the longer term, car finance paperwork may be more akin to that provided by mortgage brokers.
On the flip side, a number of stakeholders welcomed the ruling which, in their view, would result in making the selling of finance products more transparent.
What’s next?
It is understood that the FCA is giving careful consideration to this ruling whilst two of the defendants, Close Brothers and FirstRand Bank plan to challenge this ruling in the Supreme Court.
Who might receive compensation?
If this ruling on car finance is not overturned, millions of people could be entitled to compensation. In theory, some may be able to claim more than once if they purchased more than one vehicle.
How are claims on car finance being made?
Some are using claims management firms and law firms to assist with their claim. Many law firms are offering these services on a no win no fee basis. Furthermore, some claimants have already received monies following rulings in their favour by the Financial Ombudsman Service. Other claimants have taken their case to Court and won.
Who will pay the compensation based on the court of appeal ruling on car finance?
A review of articles available suggests that the compensation will be mainly concentrated on the larger car finance lenders within this marketplace. However, it is not clear whether lenders will seek any redress (or contribution) from the car dealers themselves.
Many lenders will be hoping that the Supreme Court hears this case and overturns the Court of Appeal’s ruling on car finance.
Will this court ruling on car finance potentially have wider consequences?
Some experts have advised that this ruling may extend to brokers and intermediaries receiving commission from other forms of finance.
Advice from BRI
If you’re business is affected by the court of appeal ruling on car finance and you would like some legal advice on liquidation and insolvency, contact the team at BRI today. We can discuss to find out more about your specific situation and advise the best way forward.