In recent years, the motor finance industry has faced increased scrutiny over its commission practices, particularly concerning how brokers and lenders interact with consumers.
The Financial Conduct Authority (FCA) investigated historical commission practices in the motor finance sector, uncovering that many consumers were often unaware of how discretionary commission arrangements (DCAs) worked. Under these arrangements, brokers could earn commissions that varied based on the loan terms they offered, frequently without transparent disclosure to consumers. This lack of clarity led to an information imbalance and raised concerns about consumer protection.
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Explainer: What is Discretionary Commission and why has the FCA launched a probe?
In response, the FCA banned DCAs in January 2021, eliminating incentives for brokers to increase customer interest rates on motor finance products. The regulator directed firms to review their practices and address any identified consumer harm. This ban reinforced the principles of transparency and fairness in motor finance, aiming to ensure consumers are better informed about their options and to build trust across the industry.
Close Brothers and FirstRand to appeal UK court ruling on motor finance disclosure duties
Amid these regulatory developments, law firms and claims management companies continued to actively pursue clients with court cases awaiting to outcome of the appeals process.
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By GlobalDataThe Court of Appeal recently reviewed three consolidated appeals in which claimants had obtained finance from motor dealers to purchase second-hand cars valued under £10,000. Acting as credit brokers, the dealers either failed to disclose the commission from the lender or only included partial disclosure within the credit agreement’s small print.
The judgment noted, “There is no hint in the evidence in any of these cases that the consumers concerned were aware of this.” In a unanimous ruling, the three Court of Appeal judges ruled in favour of the consumers, concluding that the dealers owed them “a duty to provide information, advice or recommendation on an impartial or disinterested basis,” a so-called “disinterested duty.”
The Court of Appeal decision in Johnson v FirstRand (trading as MotoNovo Finance) on 25 October has further clarified the responsibilities of brokers and lenders concerning fiduciary duty and financial advice.
In this case, the Court ruled in favour of Mr Johnson, who argued that the dealership and finance broker had failed to disclose the commission they received from FirstRand Bank.
According to Park Square Barristers, the lack of transparency was deemed unfair and influenced the terms of the finance agreement. Johnson Law Group highlighted that the ruling underscores the need for consumers to be fully informed of any commissions that might affect the impartiality of brokers or dealers in arranging finance.
Agent of the consumer?
At the core of this ruling is the concept of fiduciary duty, which asserts that brokers must act in the best interests of their clients. According to one interpretation of the judgement, the court stated that the broker acts as the agent of the consumer and bears a responsibility to avoid conflicts of interest unless these are disclosed and consented to by the consumer. This suggests that brokers are not just intermediaries but have a duty to ensure consumers are fully informed about any commission arrangements that could impact their financial decisions.
Broker-adviser?
This interpretation raises key questions about whether brokers should be classified as providers of financial advice. By affirming a fiduciary duty, the court may be signalling that brokers are expected to prioritise consumers’ financial well-being, moving beyond mere guidance to a standard akin to financial advice.
In the case of Mr Johnson, the judgement said, “even if the lender did
not pay a secret commission, the brokers never obtained the claimants’ fully informed consent to the payment. Although the credit agreement indicated that commission might be paid, the claimants were not told that it would be, nor the amount nor any other material facts about the commission (e.g. how it was to be calculated).”
Given this new standard, brokers receiving commission payments from lenders might be obligated to disclose their relationships with lenders and clarify how they might affect consumers’ choices. In guiding consumers through such financing options, brokers would effectively take on the role of advisers, requiring a higher level of informed consent and transparency commensurate with this duty, albeit one that is not currently observed in practice and for which motor finance brokers are not trained to carry out.
Lenders and funders
Lenders also share in this fiduciary responsibility. According to 25 Canada Square Chambers, the judgment suggests a simple statement in the T&Cs is insufficient to cover disclosure and consumers must be explicitly informed about commissions and how they could affect the terms of the finance agreement. Indeed, any financial incentives that might compromise the impartiality of brokers or dealers should be transparently communicated. Critically, if a lender fails to adequately disclose commissions, resulting in an unfair relationship under the Consumer Credit Act 1974, they may be held liable, 25 Canada Square Chambers said.
Expanding fiduciary duties to brokers and lenders introduces two-layered accountability, further blurring the distinction between mere facilitation and advisory roles. If lenders are aware of a broker’s failure to disclose critical information, could they also be seen as complicit in a breach of duty, potentially implicating lenders in the advisory process as well?
Raising professional standards
The ramifications of this ruling lead to an important conclusion: if brokers and lenders are to be regarded as providers of financial advice, they must adhere to the same ethical and professional standards required of traditional financial advisers. This would include full transparency about commissions, conflicts of interest, and ensuring that consumers receive clear and accurate information to make informed decisions.
This evolving landscape presents a notable opportunity for the motor finance industry, whose car dealers are trying to find their way in an increasingly digital world. By acknowledging their role as de facto financial advisers, brokers and lenders could cultivate a more transparent environment focused on consumer protection. With the right approach and pricing, they could help consumers more confidently steer through the complexities of financing some wheels.
Such a shift would not only help restore consumer trust but also promote stronger practices throughout the sector, ensuring that consumers are well-informed when navigating complex financial products. However, raising these professional standards would likely entail adjustments in recruitment, investments in training and accreditation, with associated costs potentially passed onto consumers.
In light of the Johnson v FirstRand ruling, it appears motor finance brokers and lenders will need to embrace their responsibilities as providers of financial advice. The trust placed in them by consumers necessitates a commitment to ethical conduct and transparency.
While the full extent of this ruling’s impact remains unclear, the industry trade body, the Finance & Leasing Association believes its implications will reach well beyond motor finance and into other areas of credit and lending. Commenting on the Court of Appeal decision, Stephen Haddrill, Director General of the FLA, said: “This is a significant and unexpected judgment, the implications of which stretch far beyond the motor finance sector, making it an issue that demands the immediate attention of the FCA.”
