It's no secret that the UK motor finance industry is in hot water. The impending Supreme Court commissions rulings coupled with the potential for the FCA to introduce a redress scheme, are creating uncertainty for all players, both captive and non-captive, large and small.
In this article, we step back from the specifics of the Supreme Court ruling and the FCA's review to offer our perspective on navigating these challenges and building a resilient future for UK motor finance.
The need for motor finance
Despite the current climate, it's essential to remember the importance of motor finance to the UK economy and its consumers. Specialist motor finance products like Personal Contract Purchase (PCP) and Hire Purchase (HP) agreements remain vital, offering flexibility and affordability that traditional personal loans simply can't match. PCPs and HP enable consumers to access vehicles they might otherwise be unable to afford, opening up opportunities for personal mobility and economic participation.
Furthermore, motor finance plays a critical role in supporting economic activity, driving innovation in the automotive industry, and enabling access to transportation for a wide range of consumers. It empowers individuals to commute to work, run businesses, and access essential services. Further, for the broader motor industry, motor finance supports in refreshing the motor parc to more eco-friendly vehicles fitted with the latest technology by enabling both consumers and businesses to upgrade to these models. While ensuring well-maintained used vehicles with lower price points remain available and accessible.
Treasury backing
Although ultimately rejected by the Supreme Court, the UK Treasury's attempt to intervene in the motor finance commissions case further underscores the significant role motor finance plays in the UK economy and reinforces our view that the sector has a future, albeit one that requires adaptation.
The government's aim was to ensure a "fair and proportionate judgment" that would mitigate the risk of large-scale compensation pay-outs allowing consumers to seek a redress payment while also enabling the motor finance sector to continue operating effectively. Aligning with broader efforts to maintain the UK's attractiveness as a business environment.
The government is also mindful of the ripple effects these events can have on future car affordability and the wider automotive sector. Further highlighting the complex interplay between consumer rights, industry stability, and economic considerations that will shape the future of motor finance in the UK.
Recent market performance
Despite the ongoing uncertainty that began in the first weeks of 2024, according to the Finance & Leasing Association (FLA), the UK motor finance market experienced mixed performance throughout last year. However, fluctuations broadly followed seasonal trends of previous years.
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For personal new car finance sales, the value of advances in the 12 months to December 2024 increased by 5% compared to 2023. While overall new car sales increased during 2024, there was a 2% decline in the number of cars sold on finance. Suggesting that fewer new cars were financed but at higher average values per vehicle; possibly reflecting higher pricing or a shift toward premium models.
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Conversely, the used car finance sector faced declines in both volume and value. The value of advances for used cars dropped by 4%, while the number of vehicles financed fell by 1% in the 12 months to December 2024.
The decline in the volume of both new and used car finance sales is thought to coincide with the ongoing scrutiny of commission practices. However, it is likely that increased costs of financing in higher interest rate environments coupled with higher costs of living, and lifestyle changes post-COVID have further contributed to households delaying car purchases, opting for longer finance terms, or re-evaluating their vehicle needs. Not to mention that auto manufacturers’ shift toward EV models is not currently matched by consumer demand, appropriate financing options, or broader charging infrastructures, which continues to be sluggish particularly for new vehicle purchases.
In light of the ongoing commissions review, several major lenders temporarily suspended new credit approvals following the Court of Appeal ruling in October 2024. While pausing underwriting mitigates legal exposure for the lender, for consumers it creates a broader consequence by reducing access to finance. If the decisions from the Supreme Court hearing in April are protracted or a redress scheme is introduced, this issue could worsen and could be reflected in market performance during 2025.
Current expectations across the market are that the Supreme Court will uphold stricter fiduciary duties and disclosure requirements as a result of the hearing. This will likely leave established lenders grappling with increased operational and financial pressures - including heightened compliance costs and potential redress liabilities.
While this presents significant market challenges, it also opens doors for new market entrants to address gaps by meeting consumer demands through the provision of transparent processes, accessible finance, and seamless digital experiences that enhance the overall customer journey. A trend that we’re already seeing start to play out.
As we look ahead, while uncertainty remains for lenders, we anticipate 2025 to be a year of growth for the industry. Backed by recent interest rate declines, stabilised used car prices, and growth in EV infrastructure and finance options, there is significant potential for increased demand across the market.
Ultimately, the sector's ability to capitalise on this growth will hinge on the adaptability of both incumbent lenders and new entrants.
Learn more about how Lenvi's lending technology supports motor finance lenders to shift gear effortlessly in changing conditions
Reaffirming trust through transparency and compliance
Most lenders have always followed practices that complied with the rules at the time, therefore the fallout from the Court of Appeal ruling feels akin to enforcing a newly lowered speed limit and then penalising drivers retrospectively for exceeding it before the change. Nevertheless, the influx of complaints, media scrutiny and expected regulatory shifts means that assuring trust with consumers will be of paramount importance to the long-term success of the motor finance industry.
While regulatory changes are inevitable, they also present an opportunity for both existing and new entrant lenders to demonstrate their continued commitment to ethical practices and customer welfare.
Enhanced transparency in commission structures
Naturally, this is already a foregone conclusion. Lenders will need to ensure they are clearly disclosing to customers how commissions are calculated and how they might affect the overall cost of finance.
Lenders should consider implementing standardised disclosure formats that are easy for consumers to understand, possibly including visual aids or comparison tools. This transparency should extend to all stages of the customer journey, from initial inquiries through to the final agreement with clear communication about finance terms, and potential redress options included.
By being open about commission structures, the industry can reaffirm its long-established trustworthiness with consumers and demonstrate ongoing commitment to ethical practices.
Strengthening fiduciary duties towards customers
This involves going beyond mere compliance with regulations that actively promote customer welfare in financial decision-making. While most motor lenders have followed the rules of the time, it’s crucial to remember the human behaviour element in all of this. Many consumers are struggling – whether due to media messaging leading them to believe they have been ‘mis-sold’ a finance product, not knowing if they have, or now feeling there is greater risk of overpaying on a financed vehicle purchase. They need supportive lenders that they feel they can trust – and this comes from a deeper understanding of your customer profiles and behaviours, and identifying the points along the buying journey where you can reinforce your trust and transparency.
Practical steps could include:
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amending product messaging,
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enhanced training for staff on ethical sales practices,
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implementing rigorous needs-assessment processes to ensure product suitability,
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full transparency and customer education on how the agreement works
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implementing tech-enabled vulnerable customer support management, and
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establishing clear guidelines for managing conflicts of interest.
Lenders should also consider strengthening internal oversight mechanisms, to ensure that customer interests remain at the forefront of business practices.
Strengthen ESG credentials
Recent events, combined with the continued sophistication of Consumer Duty practices, and market shifts toward improving the supply of, access to, and financing for EV options presents a timely opportunity for lenders to strengthen their ESG credentials.
ESG factors are now pivotal in consumer decision-making, with environmental, social, and governance considerations significantly influencing financial choices. This trend extends to asset-backed securities (ABS) investors as funders increasingly prioritise ESG credentials and responsible lending practices in their investment decisions.
ESG is rapidly transitioning from a competitive advantage to a fundamental expectation. Lenders who fail to adapt risk falling behind in an increasingly ESG-conscious market.
- The introduction of the UK’s Sustainability Reporting Standards (SRS) in 2025, adopting the International Sustainability Standards Board’s (ISSB) S1 and S2 standards, marks a watershed moment in standardising sustainability reporting. This development, coupled with UK’s existing Sustainability Disclosure Requirements (SDR) will significantly enhance transparency and accountability expectations of financial markets and corporate activities.
- To capitalise on the opportunity at a time when business strategies and lending practices are likely already being revised, lenders can go a step further by ensuring that changes integrate relevant ESG principles. For instance, reporting frameworks that align with current SDR, and upcoming SRS requirements will make life easier and put lenders on the front foot of regulatory shifts.
- As the market moves further away from diesel and petrol vehicles, innovations in improving access to sustainable financial products will support car manufacturers’ operational strategies, improve their attractiveness to an expanded pool of ABS funders, and meet growing consumer demand.
By embracing transparency, fairness, and robust compliance, the motor finance industry can create a more sustainable and trustworthy ecosystem, attracting a wider range of consumers and fostering long-term relationships.
As the only FCA-regulated provider of motor finance loan management software, we have first-hand expertise in the regulatory requirements facing lenders and are uniquely positioned to support in implementing the necessary changes to stay resilient and compliant.
Concluding thoughts
The industry currently faces significant challenges – regulatory scrutiny, CMC pressures, and the need to reinforce consumer trust – but these are not insurmountable obstacles.
Unfortunately, current conditions have meant that some companies have left the market, either via strategic choice or through financial necessity. The hope held by everyone within the industry, and amongst the Treasury, is that these losses are minimalised by concluding on these matters swiftly and efficiently. This will help to keep things stable and make sure there's a good, competitive playing field for the future.
Nevertheless, motor finance remains an essential component of the UK economy, enabling access to transportation for millions and supporting the broader automotive sector.
The key to its future relevance and success lies in adaptation, innovation, and a steadfast commitment to ethical practices. By embracing these principles, the UK motor finance industry can emerge stronger and more resilient, fuelling the growth of the UK’s consumer lending market.
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