Since Friday’s bombshell announcement that Close Brothers was pulling support for new finance business, the motor trade has been left in a state of limbo.
To make matters worse, several other lenders are expected to follow suit throughout today and the rest of the week, following a landmark Court of Appeal ruling last week.
Black Horse owner Lloyds is also said to be ‘considering its options’ as a result of the court’s decision, leaving car dealers lacking much-needed clarity ahead of a key Budget for the industry later in the week.
Leading independent dealer, Car Quay boss Jamie Caple, says that an inability to provide finance would affect business ‘massively’ for companies like his own.
He is currently not expecting the impasse to last beyond this week but says the whole situation ‘screams of over-regulation and meddling where it isn’t required’.
He told Car Dealer: ‘Much like anyone in the trade I spoke to Friday we were shocked to hear of Close immediately closing their lending due to the result of the court case and also to then see lots of major lenders follow suit.
‘An inability to finance customers on our cars would affect us massively but I don’t see this embargo lasting long, perhaps a week at most.
‘Fortunately for us we don’t rely on finance commissions to run our business although it clearly helps so if we were to move to a future without it then we’d simply have to adapt and carry on.
‘I fear for some of the garages where finance comms are integral to the ability for them to even exist without it but again I’m confident that this will get resolved and we will continue to earn as we always have done, the customer will simply be more aware of the commission dealers get paid.
‘I can see finance docs moving forward having a section that clearly states the commission to be paid to a dealer.
‘I think this in some cases may cause customers to expect discount – extra on px values or something based on knowing what we’ve earned on finance and also cause some resentment and hostility from a section of customers who already find us making profit offensive.
‘This entire situation screams of over-regulation and meddling where it isn’t required and a policy that has good intentions but ends up having unexpected negative consequences.
‘Will customers be less inclined to finance cars moving forwards, will lenders be less inclined to finance customers on cars, will confidence be further eroded in the car financing process?
‘If any of the above happen then we’ll see less cars sold and a market retract which isn’t good for any of us.’
Dealers should plan for reduced F&I income
Automotive research giant, ICDP, believes that Friday’s court ruling sets out tougher rules for car dealers than the Financial Conduct Authority (FCA).
The FCA is already investigating the use of now-banned discretionary commission arrangements by the motor finance industry and now is ‘carefully considering’ what the Court of Appeal decision means.
For dealers, ICDP believes it would be wise to start planning for a scenario where finance and insurance revenue is ‘significantly reduced’.
One of the firm’s experts also warned that the issue could have ramifications right across the globe – and not just in the UK motor trade.
Steve Young, managing director of ICDP, told Car Dealer: ‘Based on the reports including commentary related to the FCA point of view, it seems that the court has taken a tougher view than the FCA on the role of the dealers to ensure compliance.
‘I am not that surprised given that for financial products like loans and mortgages, commissions need to be fully disclosed to the client before the agreement is finalised, so the court view seems consistent with that to me.
‘In terms of direction of travel, regardless of this specific case, I think that F&I income and the related compliance and transparency obligations on dealers will continue to come under pressure.
‘This is not just a UK issue – there are repeated attempts by regulators in the US to improve the position for customers vs dealers, and in Norway it has been illegal now for a few months for a sales executive to get commission on F&I products.
‘I think that it would be wise for dealers to plan for a scenario where their F&I income was significantly reduced, and consider how the business model has to adapt to support this possibility.
‘This has to include not only the loss of commission income, but also the knock-on effect on the products or services that the F&I product is intended to drive e.g. aftersales volumes.’
Damage relationship between dealer and customer
Also commenting on the case, is Ian McMahon, a partner at UHY Hacker Young Manchester.
He is expecting more banks to follow suit in the coming days and says that car dealers will now start to see a ‘real slow down in their stock turn’.
The expert also warned that the current situation could have a detrimental effect on dealers’ relationships with their customers.
The automotive expert said: ‘We’ve heard over the weekend that other funders have followed suit and are not paying out on newly proposed applications until further notice.
‘Putting to one side the review by the FCA and the cases which have made it through the court system, the retraction of retail finance from a number of providers will be bad news for the day to day business in many dealerships this week.
‘Firstly the impact on a customer will damage the relationship with the dealer, furthermore, the dealers will start to see a real slow down in their stock turn, as vehicles (which may be reserved by deposit) will be unable to be sold to their intended new owner.
‘I have no doubt the decision to stop underwriting has been taken with an abundance of caution, however, as is often the case, there are plenty of dealers who have treated customers fairly who will be impacted by the decision by the finance houses.’
‘Too many regulations’
With the mood among experts so negative, you could forgive dealers for feeling like throwing in the towel, but that’s certainly not the case for Caple.
He has hailed the trade’s ‘resilience’ and backed retailers to find a way through.
He added: ‘There’s never a dull day in this trade. The timing of this isn’t great and coupled with a budget on Wednesday which is already giving consumers some pause on spending until after.
‘We honestly could do without this but again we’re a resilient trade and we dust ourselves down and we go again.’
Meanwhile, IMDA chairman Umesh Samani, told Car Dealer that the latest developments are a ‘real blow to the industry’.
He said: ‘This is a real blow to the industry. There are too many regulations! Luckily my business has never relied on finance commission to make the profits for the business.
‘Finance companies and dealers will navigate round this , it will mean more paperwork, more headaches for us and customers will sadly suffer with delays.
‘I’m sure going forward there will be a section to show how much commission dealers have earned, which may cause a stumbling situation, but customers also need to understand the FCA fees we pay too!
‘The IMDA have great finance partners and they are very quickly communicating with dealers of what’s happening from their perspective.’