2 weeks Ago By David Connett
The financial watchdog and car finance lenders last night held urgent talks with the Treasury in a bid to contain any damaging consequences from a landmark Appeal Court judgment which could create a credit crunch making it harder for people to buy a car, Nikhil Rathi, FCA chief executive, last night said the regulator was moving rapidly to understand the impact of a landmark legal case which has resulted in several car finance groups suspending finance deals while they work out the what it means for customers and their businesses. Car dealers warned that without credit to help customers buy car sales would rapidly dry up and called for the FCA to show ‘leadership’ in the resolving the issue. Experts said the legal ruling could have serious implications for the wider credit lending industry.
He said the FCA was working closely with the financial services sector, the Financial Ombudsman Service and the Government to understand any wider fall-out from the judgment. The Financial Conduct Authority (FCA), which regulates the car finance industry, also appeared to have been wrong-footed by an Appeal Court decision which ruled that car buyers have a right to know about commission arrangements agreed between lenders and car dealers. In a decision last week, judges ruled in favour of motorists against companies providing car finance deals.
Their ruling backed three car buyers who claimed that hidden dealer commissions had added thousands to the cost of their vehicles. The court said consumers were “very poorly served by the brokers and the lenders alike,” adding that buyers have the right to know about the commission arrangements between the lender and car dealer to ensure fairness. The ruling shocked and alarmed car dealers and finance companies by stating that hidden commission rates paid to dealers must now be disclosed.
Official FCA guidance to lenders has until recently allowed partial disclosure of the existence of commissions. If a customer asked for details it was deemed permissible to explain that commission would be payable, without numbers being revealed. The Finance and Leasing Association (FLA) said firms providing motor finance should have been able to rely on the regulations.
Stephen Haddrill, Director General of the FLA, said: “This is a significant and unexpected judgment, the implications of which stretch far beyond the motor finance sector, making it an issue that demands the immediate attention of the Financial Conduct Authority.” Several motor finance providers temporarily suspended their activities while they assessed the impact of the ruling and dealers said some customers who are buying their vehicles on finance have been told they cannot have the new cars until lawyers have approved the deals. Lenders including Close Brothers, Honda Financial Services and Zopa are among those who temporarily closed their books to new business.
Santander UK suspended publication of its financial results in order to assess the impact of the ruling which some analysts warned could cost it more than £1bn. The West-Midlands based S&U car finance group that the judgment and its implications for the whole of the financial services industry, had resulted in urgent urgent discussions between the FLA, the FCA and the Government. Honda told its car dealers that it will pause paying out on car finance and customers who were due to collect their vehicles over the weekend, using Honda finance were told they would have to wait to get their vehicles.
Honda Finance Europe operations director Richard Winter told its dealer partners that it would not be paying out on finance agreements currently set up ‘until further notice’, according to Car Dealer magazine. Dealers and motor finance businesses across the country are now examining 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,” Mr Winter said.
“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 asked for dealer support in “managing customer expectations” after cancelling new car handovers scheduled for the weekend until further notice.
Nikhil Rathi, chief executive of the Financial Conduct Authority, admitted to the Investment Association last night that “greater clarity” on the ruling was needed. He said the lenders in the case intend to appeal and it remains to be seen if the Supreme Court decides it will take the appeal and, if it does, whether it agrees with the ruling. The FCA’s focus remained on “ensuring customers receive fair treatment in line with the law and that the market for motor finance continues to function well, recognising that over two million people rely on it each year to buy a car.
“We are encouraging firms to engage with us as they consider the impact the court judgment has on their products and services.” He said the Court of Appeal had made the law clear and, if that is not challenged further, then firms need to handle any complaints in line with that. The FCA has been reviewing historical car finance cases since January and has warned lenders to prepare for additional costs as part of a possible compensation scheme.
It is carrying out its own inquiry into the motor finance sector and looks likely to make lenders pay back commissions..
