Motor finance advisory firm Auxillias has issued a set of practical recommendations to help motor finance firms mitigate risk following recent Court of Appeal rulings on commission disclosure standards.
The rulings, which address cases involving Close Brothers and FirstRand, set new requirements for brokers to disclose commissions more transparently, imposing a standard that Joanne Davis, co-founder and director/partner at Auxillias, notes “took a lot of people in the industry, including us, by surprise.”
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On its website, in an entry entitled Court ruling: key actions for firms following Johnson v FirstRand decision, Davis outlined several steps firms could take to address the “far-reaching ramifications” of these decisions. The guidance highlights key areas of focus, including disclosure practices, customer relations, and operational preparedness.
Davis stated that while an appeal may be mounted, firms should not “sit on their hands” but instead act promptly to assess and mitigate current risks.
Key actions proposed:
- Review customer journey and commission disclosures: Auxillias advises that motor finance firms examine customer interactions, particularly around commission disclosures in documentation, to “enhance how you are explaining and disclosing commission arrangements.” While Auxillias acknowledges that updating documentation could bring past practices under scrutiny, it cautions against dismissing changes, emphasising that documentation and process improvements can demonstrate good-faith efforts to meet evolving standards.
- Evaluate independence and suitability disclosures: The advisory firm urges companies to re-evaluate how brokers present their obligations to customers, specifically in terms of independence and suitability. In cases where brokers operate under lender rights of first refusal, Auxillias stresses that firms need to “look at disclosures around independence” to avoid any confusion in customer understanding.
- Prepare for a surge in claims: Auxillias predicts an influx of complaints and claims from customers via claims management companies (CMCs). It suggests that companies assess the resources required to handle potential case volumes and consider measures to streamline complaint processes. A gap analysis of records, resource allocation, and streamlined complaint forwarding agreements are among the actions that can help manage increased activity.
- Consider revisiting product approvals: In line with the FCA’s Consumer Duty, Auxillias suggests that firms review product approval processes, particularly around distribution arrangements. Auxillias emphasises the importance of senior management taking the lead on these reviews, with decisions documented to comply with Consumer Duty expectations.
- Update conflict of interest policies: Firms should enhance conflict of interest policies to “recognise how risks are managed” in commission-based arrangements. Updates to documentation and registers can ensure compliance with new standards and mitigate risk from potential conflicts.
- Collaborate with trade associations and industry peers: Recognising that managing these risks will require a collaborative effort, Auxillias recommends liaising with trade associations, monitoring FCA and Financial Ombudsman Service (FOS) responses, and engaging with other industry players. “Parties cannot work alone or be fully effective operating in isolation,” Auxillias stated, adding that proactive industry collaboration will be essential in adapting to these regulatory shifts.
Broader concerns
Auxillias acknowledged that the rulings have raised significant regulatory concerns within the motor finance sector, with Davis stating that “the FCA has not in the last ten years taken the decision to mandate disclosure of the specific commission/remuneration payable to intermediaries in the consumer credit market.”
According to Davis, the Court of Appeal’s ruling “appears to essentially impose that standard through the common law,” creating new expectations for transparency around commissions in the motor finance industry.
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