Automotive retail and the agency model

With Mercedes Benz informing their network that both Mercedes and Smart retail sales will take place on an agency basis from 1 January 2023, the time has come to see how the UK market stands up to the changes and inevitable disruption that will result.

Over the next couple of weeks, UHY automotive partners, Paul Daly and Ian McMahon, along with Radius Law founder, Iain Larkins, delve into the detail and provide their thoughts about where the agency model may take us. 

What is agency? The legal side

Iain Larkins explains that there are different legal definitions for different laws but generally an agent is defined as:

‘a person [or company] .. with the power to negotiate and/or conclude contracts on behalf of another person [or company] for the sale of goods or services.’

Perhaps the most important part of that definition is that the agent is negotiating on behalf of another person or company. Today, most automotive franchised retailers buy new vehicles from the manufacturer and then re-sell the vehicles to end customers. Under agency the retailers would not buy the new vehicles, they would sell them on behalf of the manufacturer.

It’s also worth distinguishing agency from manufacturer direct sales. Large fleet sales are usually direct sales by the manufacturer, although confusingly are often referred to as agency sales. In large fleet sales, the retailers are not usually involved in negotiating or concluding the sales and their duties are normally limited to PDI and handover services.

What does genuine agency mean?

Manufacturers will only be allowed the benefit of price control if it is a genuine agency model. For the agreement to be qualified as a genuine agency agreement, the agent must not bear any, or bear only insignificant, risks. The risks can be categorised into three categories:

• contract-specific risks – risks directly related to the contracts concluded/negotiated eg. financing of stock
• risks related to market-specific investments - investments specifically required for the type of activity for which the agent has been appointed 
• risks related to other activities undertaken in the same product market (if the manufacturer requires the agent to undertake those activities eg. aftersales services).

However, risks that are related to the activity of providing agency services in general (eg. risk of the agent’s income being dependent upon its success as an agent or general investments in premises or personnel) are not relevant to the assessment of whether an agreement constitutes a genuine agency agreement. 

Whether the agent is taking on a risk will be assessed on a case-by-case basis, taking account of the economic reality of the situation.

Will the planned changes to the block exemption impact the trend to move to agency?

There are two block exemptions that are relevant to the automotive sector, the vertical block exemption, and the motor vehicle block exemption. The former expires in May this year and the latter in May next year although expect a one-year transition period for each.

In short, the block exemptions make some allowances for practices that are considered to be in the best interests of consumers but that otherwise may be contrary to competition law. This includes allowing automotive manufacturers to limit the number of new car franchise partners.

Generally, the regulators consider that the block exemptions have done their job of providing a competitive marketplace for the consumer, so do not expect any significant changes and in any event the block exemptions are mostly irrelevant to an agency model. Nevertheless, there has been a promise of more detailed guidance about agency as part of the review of the block exemptions.

Want to know more?

Download our 2022 Automotive Outlook and turn to page 5 to read the full article, including our take on why the move to agency is taking place and how it will affect your dealership.