What next for motor finance following the Court of Appeal ruling and proposed extension of FCA complaint pause?

Martin Hislop, Sajedah Karim and I consider the key questions posed by the Court of Appeal’s judgement on motor finance commission for the market, regulator, courts and government.

What implications does the broker commission ruling have for businesses and consumers?

The recent Court of Appeal ruling on motor finance commission disclosures in the so-called ‘Hopcraft’ case raises the standard for disclosure. It requires that customers are informed of the amount of commission paid to brokers and how it is calculated, such that customers can provide their informed consent. In response, some lenders temporarily withdrew from the market to adjust their commission models, sales processes and documentation. However, there remains key questions about the longer-term implications of the judgement:

• How will greater transparency influence the behaviours of customers buying cars?
• How will business models of vehicle manufacturers, lenders, dealerships and credit brokers change?
• How does the judgement impact other consumer credit sectors?

How are lenders' preparations for potential remediation evolving?

Some lenders have already set aside resources for potential remediation, administration and advisory costs arising in relation to the Financial Conduct Authority’s (FCA) review of discretionary commission arrangements (DCAs).

The judgement implies that all lenders offering commission that is not fully disclosed need to do this because the issue is broader than DCAs. It also does not distinguish between regulated and unregulated agreements. Last week, the FCA announced its intention to consult on extending the pause to include motor finance complaints about non-DCAs.

In addition to reviewing historical arrangements, we expect that firms would now be considering agreements written after January 2021, non-DCA models and other forms of credit where commission may be paid to a broker (e.g. contract hire, personal loans, asset finance, insurance premium finance and finance for furniture, dental, season tickets etc.). This is to understand the wide range of potential scenarios and the operational and financial implications of them. Listed clients and clients with wholesale market funding will consider the adequacy of their previous disclosures to investors and market.

How difficult is it to embed changes?

Some clients have asked about the difficulty and cost of enhancing disclosures, consent and oversight arrangements. Doing this consistently is complicated by the diverse nature of the market: distribution channels are plentiful and the differences between them can be complex. Furthermore, sales and commission arrangements vary over time based on business models, product type, cost of funding, target customer, market conditions etc.

To enable changes firms will need to consider the systems, controls and monitoring required to make sure evidence is complete, accurate and that disclosure takes place.

What does this mean for potential remediation amid broader reform?

The judgment raises even broader questions. In its policy statement PS20/8 the FCA observed that more extensive changes to commission disclosure rules would unlikely influence consumers’ behaviours sufficiently to reduce harm. Conversely in the Court of Appeal’s judgement, it was explained that the claimant Johnson would have gone to a different dealership had they been aware of how much of the cost of the agreement equated to commission. Reconciling these views leads to questions which need to be considered to determine the basis of potential harm and remediation:

• If the customer shopped around, would they have behaved differently and received a better outcome? If not, was the market functioning adequately or does it need to change?
• What drives customer behaviour? The cost of credit; transparency about the relationship between lender, broker and customer; affordably acquiring a vehicle; or other aspects of the overall deal such as vehicle price, service plans, accessories etc.?
• The judgement implies borrowers may be “vulnerable and unsophisticated”; what role does this play in identifying harm?
• What would be the parameters of remediation: lookback, type of lender, commission model, disclosure, calculation methodology etc.??

Both lenders involved in the court ruling have signposted their intention to appeal. The FCA’s recent announcement that it intends to support expediting the court processes will be welcomed during this uncertain period.

These questions are posed against a backdrop of potential broader reform to the UK framework for consumer redress in financial services by the FCA and Government, in light of the UK’s growth priorities. This includes the recent announcement from the Financial Ombudsman Service (FOS) that it intends to charge case fees to Claims Management Companies. The judgment raises challenging questions about the complex interaction between the role of the regulator, the courts and the FOS. Resolving these as quickly as possible is in the interests of both consumers and firms.