Peter Vosper: Billions at risk for dealerships

In 2021 the Financial Conduct Authority banned deals in which the dealer received a commission from the lender, based on the interest rate charged to the customer. It stated this provided an incentive for the buyer to be charged a higher-than-necessary amount of interest.

Most dealers selling new cars were providing the rates offered by the new car manufacturers, which were not subject to alteration, but in the case of used cars, finance providers, including the major banks, arranged financing for customers through the dealers based on individual situations and requirements. In most cases the rate charged and commission received were and continue to be consistent, with the age of the car a possible variant.

Since the beginning of last year, the regulator has been considering whether compensation should be paid to people with these deals before 2021. That created the prospect of banks and other lenders having to make payments totalling millions of pounds.

In October the decision at the Court of Appeal broadened the net of those who could receive compensation, potentially increasing the lenders’ final bill to billions of pounds. The car finance industry is setting aside huge amounts of money for possible future claims. If multi-billion pound fines are imposed on auto lenders, it could lead to some finance companies going bust, thereby undermining the competitiveness of the market. At worst, many satisfied customers could find no one is there to provide competitive finance, and the government wants the motor sector to continue “supporting millions of motorists to own vehicles”. The vast majority of new cars sold in the UK, and many second-hand ones, are bought with finance agreements.

It is apparent there is a lack of understanding of a “blanket solution” resolution and how this could affect dealers, as if the lenders are likely to collapse, they may seek to recover the commission they have paid, although this would be challenged if dealers can prove they are not lenders. The court cases would lead to further costs, and it is likely a number of dealers would also go bust or accept the costs to prove they had acted correctly. The whole industry is waiting to see the outcome.

The new year car market has started slowly, with manufacturers waiting for the government to discuss the way forward to meet the target of 28% electric car registrations in 2025. They will receive the input from their consultative enquiry which closes in the middle of February and hopefully will confirm the date from which petrol and diesel engines will be banned (subject to certain exclusions). This is likely to be 2030, but there is likely to be a period between 2030 and 2035 where plug-in hybrids will be accepted subject to a reasonable range of mileage achievable on pure electric.

There is likely to be further action to encourage more small electric car availability with pricing close to, if not totally comparable to, its petrol equivalent.

In the meantime, the used car market has started well in January, and there continue to be shortages of small, popular cars and SUVs.