UK court battle that could change South African car deals for good

A landmark court ruling in the United Kingdom (UK) could lead to sweeping changes in the way vehicle transactions are handled, both there and right here in South Africa.

As per an AutoTrader UK report, the UK Court of Appeal recently ruled in favour of three complainants who claimed they were mis-sold car finance by vehicle brokers.

These brokers benefit from a Discretionary Commission Agreement (DCA), which is when a lender grants a credit broker authority to determine the interest rate offered to a prospective customer.

The commission payable to the broker – in this case, vehicle dealers – by the lender (bank) is linked to the interest rate charged, meaning a higher interest rate translates to increased commission for the seller.

The practice essentially gives brokers the discretion to influence the cost of motor finance for customers.

The UK Court of Appeal reviewed the three cases set before it, and determined that the vehicle dealer “could not lawfully receive a commission from a lender without obtaining the customer’s fully informed consent to the payment”.

The ruling highlighted that car dealers acting as credit brokers have a “fiduciary duty” equal to that of banks – meaning that they must act in the best interest of another party, i.e. the buyer.

In layman terms, the UK Court of Appeal decided that dealers must henceforth disclose any commissions they earn on car sales to their customers in a bid to increase transparency in the notoriously murky industry.

It’s estimated that this long-established agreement between lenders and brokers has cost the UK populace around £16 billion (R378 billion).

What this means for South Africa

WesBank CEO Ghana Msibi said the UK court case is a “fundamentally important consideration” for the local vehicle retail industry as “anything that starts in the UK normally lands at OR Tambo.”

Local bank FirstRand is also one of the lenders involved in the UK court case which fuels the possibility that whatever is decided there, could be implemented here.

At the moment, dealers are seen as agents in South Africa, but independent of the bank.

“If this ruling stands, effectively it says that dealers assume the same fiduciary duty as that of a bank, and now it starts to play fundamentally into remuneration,” said Msibi at the annual #NADAConnect conference in March.

Msibi thus warned dealers that if their remuneration model is built purely on commission, they should keep a clean house from now on as local regulators will be increasingly focused on predatory pricing practices within the industry.

The UK ruling is set to go back to court this April and Msibi is confident that it could be overturned.

“We’re waiting to see how this plays out; we’re quite positive that the ruling was far-reached… and it’s not correct, because dealers are not credit brokers, we remain adamant on that,” said Msibi.