Shockwaves flew through the car finance industry last month when the Court of Appeal ruling on secret commissions being received by credit brokers, expanded the scope of the commission disclosure issues. It now moves beyond discretionary commission into a wider assertion that all credit brokers held a fiduciary and disinterested duty toward their customers. Without getting into the finer details of the impact of this, the ruling which has been granted an appeal by the supreme court has called into question whether the fact that commission arrangements had not been or had only partially been disclosed, makes the acceptance of such commission illegal under legislation where the borrower may not be sophisticated enough to understand that brokers may have a commercial arrangement with the lenders for the introduction of customers to their lending product.
What is clear is that this ruling has uncovered a significant gap between regulations set by the FCA and the court’s view of the underlying legislation. This is a gap that has previously been placed under scrutiny by the FCA. Back in 2018, when the FCA conducted the motor finance review, they specifically addressed whether disclosing the amount and nature of commission should be introduced. The view of the FCA at the time was that research and industry feedback suggested it would not change consumer behaviour and that consumers would struggle to understand the intricacies of the nature of commission structures and how these work in practice. In other words, the disclosure of commission was more likely to confuse consumers and would not make a difference to behaviour; therefore, this was not proposed at the time. (CP19/28 Para 3.30-3.33). Quite rightly, the FCA and industry are keen to expedite any appeal to the Supreme Court to give a final decision.
Any FCA directed redress scheme is bound to meet significant resistance from industry, given that for several firms this could trigger wind-down events and possibly administration resulting in complainants becoming unsecured creditors, which history has shown results in little to no compensation being paid. I wrote previously about the need for a common-sense approach to be taken to addressing the issues, as well as serious consideration as to whether any redress is due at all. My view is that unlike the PPI mis-selling scandal, the lending products taken by consumers have performed exactly as they had been led to believe along with borrowers being given sufficient information regarding the costs of credit. Whilst customers may have felt obliged to accept the finance terms offered by the car dealerships, they always had the right to shop around and consider other finance options. This is layered with the FCA’s previously documented view, that disclosure of commission arrangements would have been very unlikely to have changed customers’ behaviour.
That said, this should not mean that the industry gets away scot-free. The FCA has to take action against clear rule breaches by lenders, as originally highlighted by the Financial Ombudsman Service decisions. Ideally, any money raised through fines relating to this, can go to funding the FCA to resource a thorough review of their provisions and align the consumer credit permissions and exemptions with other sectors such as mortgages, insurance and investments. In the retail consumer world, there is no option to receive advice in relation to consumer credit agreements, nor are there exemptions for retailers to make an arm’s length introduction to lenders where no commission is payable. This will only be complicated further by the imminent regulation of the Buy Now Pay Later sector which, in my view, should be placed on hold until wider reform of the current regulations is completed, to avoid any future misalignments between legislation and regulation.
What is clear is that without significant changes to the current regulatory framework, very little cultural change will be seen and, as a result, both the industry and its consumers will risk being exposed to future conduct issues.
