Car loan providers must prioritise clear commission disclosure since court ruling, say experts

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This article first appeared on an October edition of AM Online

Clear, upfront disclosure of commission to ensure informed consent will be critical for providers of motor finance following last week’s shock Court of Appeal decision which saw several major industry names suspend lending in order to take stock of the implications of the ruling.

Speaking at an Auto Trader webinar, industry experts discussed how lenders, brokers and retailers now need to improve disclosure statements to ensure clarity in the wake of the ruling which many view as changing the current regulatory framework under which they operate.

The Financial Conduct Authority (FCA) has not mandated disclosure of commission or remuneration payable to intermediaries in the consumer credit market unlike in other sectors such as mortgages and investment advice – but the Court of Appeal decision in Johnson v FirstRand Bank Ltd, Wrench v FirstRand Bank Ltd and Hopcraft v Close Brothers Ltd now appears to impose that standard through the common law.

The FCA investigation on discretionary commissions is separate from last week’s Court of Appeal ruling and, while the two are related, the FCA investigation focuses on the merits of a Financial Ombudsman Service decision on a discretionary commission arrangement case, while the recent appeal ruling addresses broader issues of fiduciary duty and secret commissions.

The FCA has already delayed a response deadline for motor finance companies facing complaints and plans to announce the next steps in its investigation by May. It said that it was "carefully considering" the Court of Appeal decision.

Martin Ward, a partner at law firm Eversheds Sutherland, noted that courts historically have generally sided with lenders and dealers on partial disclosure and the fiduciary duty by dealers. However, last week’s Court of Appeal decision has created precedents which could potentially lead to greater back-book liabilities.

Ward noted that both lenders involved in the case have announced their intention to appeal, with a deadline of November 22 to do so, adding that the Supreme Court's involvement will be crucial in order to provide clarity.

In the interim he stressed the need for businesses to implement client-compliant measures to prevent future risks.

“The whole picture has really changed and in terms of going forward, lenders and retailers alike need to put steps in place now to be as client compliant as they can be to stop any risk on a go forward basis,” he said, adding that the timeline for the Supreme Court's decision could range from six months to two years, depending on whether the appeal is heard on an expedited basis – or not.

Hear more about the ongoing issues in the motor finance sector at Automotive Management Live on November 13 at Birmingham NEC. Adrian Dally, director of motor finance & strategy, Finance and Leasing Association (FLA) will be joined by Jerry Page, HR Owen’s compliance & risk director, as well as financial compliance experts Andrew Smith, Paxen Group chief executive and Adam Edwards, partner & head of financial services at Freeths to look in detail at how the FCA’s regulation is changing the automotive retail sector.

Jo Davis, chief executive of Auxilias, told the webinar: “There's a lot of people that have decided to stop lending to get their houses in order until they're in a stronger position to get all that together. We've now got a precedent where we're going to see lots of Court of Appeal cases from other county court decisions off the back of it.”

She said the industry would now need to assess how those county courts start to address the issue of fiduciary duty but advised that lenders should continue lending activity especially if they were demonstrably offering a better service than the recent cases demonstrated.

Davis said improve commission disclosure practices were now essential and that simply featuring commission arrangements in the small print would no longer be sufficient.

She added that pre-contractual information and explanation documents needed to clearly outline the commission disclosure in addition to securing informed consent from customers before proceeding with the transaction.

“Take active sets steps for the pre contractual information and explanation documents around commission disclosure, ensuring that you know right at the very outset the suitability and need statements, because that was hugely criticised - particularly the backdrop about your role if you're are going to be looking at first refusal.”

“Really tighten up on your disclosures, looking at good customer outcomes because we've got these three customers in this particular case who were able to demonstrate and show, like many consumers, that they don't understand terminology, so get rid of the legalese.”

Addressing concerns about the impact of the judgment on historical finance contracts where commission has not been disclosed, Adrian Dally, director of motor finance and strategy at the Finance and Leasing Association, said: “We can't sugar coat the reality, which is that the line that came out of the Court of Appeal on Friday is a very different line to the set of policies in the FCA handbook.

“There is a very unusual phenomenon here, where all of us in whatever industry we're in ought to be able to rely on our regulated rules as being the final answer on that issue. This does mean that sector lenders and dealers and brokers are now potentially exposed to more potential claims that could be successful because of that ruling.”

“We're clearly, as you might expect, talking to regulators and the Government about what this might mean, how the risk can be managed. We did that within minutes of the judgement landing. This is a big issue, especially when the Government is very focused on investment and growth.”

He added that the lenders’ decision to appeal to the Supreme Court is very likely to be allowed.

“In my experience as a career civil servant, when these controversial issues reach the highest court in the land, generally speaking, that does drive the issue towards moderation. We have to have hope that's what's going to happen here so every effort will be made to that end.”

Auxilias’ Davis added: “I think we probably need to now make that shift, in light of this appeal decision, that we're going to disclose the amount of commission. If we don't know the amount, at least provide a formula or percentage of what you do know. There's a lot of work there, because we're not geared up to be ready to disclose commission, we're not geared up to look at putting customers in the position of an informed consent.”

She said her business was already supporting its clients to develop robust processes and procedures and added that it was reviewing the examples the court offered where a dealer could frame a disinterested duty.

“It does give some examples of statements, such as, “I may offer you a product which may be chosen because it benefits me directly, even though it may not be the best product for you. Are you happy with that?” However, the court also accepts that in most cases, disclosure would be more subtle than that,” she said.

Speaking after the webinar, Ian Plummer, commercial director at Auto Trader, commented “While the court’s judgement and its impact on past sales of finance will very likely be appealed at the Supreme Court, that will take months.

"What’s urgently needed now by both consumers and the automotive industry is for the regulator to clarify the implications of this ruling to ensure a transparent and functioning market for all. 

“Automotive finance products are the way most consumers in the UK fund the purchase of their next car, so we need swift direction to ensure this doesn’t harm the industry and unnecessarily dent consumer confidence.”