Some car makers have paused sales in the wake of a UK court judgement that taking commissions on car financing is unlawful.

The landmark ruling by the Court of Appeal has thrown banks, dealers and car makers into a state of disarray, given that it effectively bans dealers from profiting on finance deals unless the buyer gives their consent.

Such was the worry from car markers in the aftermath of last Friday’s ruling that BMW and Honda dealers were told to hold back vehicles already sold through financing deals while the situation was assessed, The Telegraph reports.

Honda Finance Europe operations director Richard Winter told dealers the firm wouldn't be paying out on already agreed finance contracts “until further notice”, adding that it was a “difficult decision”, Car Dealer reports.

A spokesperson for Honda Finance Europe has since confirmed that deliveries have resumed through interim provisions, adding: “We have now had time to review the situation and have been able to put in place interim measures to allow us to resume the funding of all finance business.”

The ruling by the Court of Appeal – one of the highest courts in the country – was announced as part of a case brought against Close Brothers and Firstrand Bank by three customers who claimed they were mis-sold finance deals. The trio had previously had their cases thrown out by lower courts.

Judges unanimously ruled to uphold their appeals, stating that “a broker could not lawfully receive a commission from a lender without obtaining the customer’s fully informed consent to the payment”.

Moreover, the ruling effectively threatens the long-established agreement that dealers receive commissions from banks or lenders for acting as a middle man in selling finance agreements on vehicles. 

Since the ruling, many car makers have already begun to disclose commission rates to customers in order to continue business as normal.

This has sent shockwaves through the industry as it braces for a barrage of incoming lawsuits, likened to how the payment protection insurance (PPI) scandal exploded at the turn of the 2010s.

Among those gearing up for the worst is Lloyds Bank, as the owner of Black Horse, a leading lender of car finance. In February, it revealed it had set aside £450 million to cover legal expenses and compensation payouts.

It follows an investigation earlier this year by the Financial Conduct Authority (FCA) concerning discretionary commission arrangements (DCAs) sold between 2007 and 2020, after more than 10,000 complaints were made.

DCAs allowed dealers and brokers to adjust lenders’ interest rates to reward themselves with commission payments on hire purchase (HP) and personal contract purchase (PCP) deals.

In one complaint, the FCA stated, Black Horse was found to have allowed a dealer to set an interest rate between 2.49% and 5.5%, with anything over 2.49% being paid to the dealer as commission. The dealer charged the highest rate of 5.5%, amounting to half of the customer’s total interest bill on the loan. In addition, the dealer didn't tell the customer it had set the interest rate or how much commission it had earned.