Are motor finance brokers now providers of financial advice? #IndustryFinance

In this landmark 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.

If so, brokers receiving commission payments from lenders would be obligated to disclose these relationships 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 is clear that motor finance brokers and lenders must 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, it is evident that its implications will also reach well beyond motor finance. 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.”

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