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Regulators, industry bodies and lenders are holding urgent talks with the government in a bid to stabilise the motor finance market, which has been thrown into turmoil following last week’s Court of Appeal ruling on commission disclosure. A number of lenders have paused writing business, while others have seen share prices hit as they make provision for potential consumer compensation claims.
The Court of Appeal ruled that it was unlawful for car dealers to receive a commission from a lender providing motor finance to a customer unless it was disclosed to the customer and they gave informed consent to the payment.
The judgment was labelled “highly unexpected” by Adrian Dally, the Finance & Leasing Association’s (FLA) director of motor finance & strategy, as it ran contrary to the majority of decisions made in similar cases in the lower courts, which Dally said lenders were winning by a ratio of at least 10:1.
Critically, the Court of Appeal decision – which was considering agreements made some years ago – significantly extends the requirements for lenders, brokers and dealers beyond the regulatory regime of the time.
“The usual view is that our regulator’s rules are the final rules, in other words that following the FCA regulations on commission is doing what’s safe to do. Unfortunately this is not what’s happened in this case,” Dally pointed out.
The tension between the regulatory requirements and the latest legal ruling are so serious as to be highlighted by FCA chief executive Nikhil Rathi in a late addition to a speech delivered at the Investment Association Annual Dinner last night.
“The judges’ ruling was rooted, not in the FCA’s rules, but the longstanding common law principle of fiduciary duty which meant that the broker – the car dealer here – must act in the best interests of the customer and not put themselves in a position of conflict.
“Since the judgment was issued, we have been in close contact with the firms involved, the wider sector and the Government to monitor the market, analyse the impact on industry and consumers, and identify what action is required.
“First and foremost, we need clarity on whether this is the courts’ final word on the issue,” Rathi said.
The lenders in the Court of Appeal case – FirstRand (trading as MotoNovo) and Close Brothers – have both indicated that they intend to take an appeal to the Supreme Court. They have until 22 November to do so.
Progress after that point will depend on whether or not the Supreme Court decides to expedite an appeal hearing, which might then be heard with six months; otherwise it could take between 18 months and two years.
Rathi noted: “The two lenders in the case intend to appeal and it is in everyone’s interest that when they do, the Supreme Court decides quickly whether it will take the appeal and, if it does, whether it agrees with the Court of Appeal.”
Lenders pull out
The urgency of the situation is underlined by the growing number of lenders pausing the writing of new business. Close Brothers and MotoNovo’s decision, announced in the wake of the judgement, has been followed by Honda FS, Mann Island, V12 and Zopa, while some reports suggest BMW, Secure Trust Bank, Blue Motor Finance, Northridge Finance and Investec have also called a temporary halt. The uncertainty over who is still lending is adding to the confusion within the auto finance market.
Shares in Lloyds Banking Group, the parent company of motor finance lender Black Horse, have dipped 2.7% since the announcement, while Close Brother’s share price fell by 27% when the news first broke.
Meanwhile Santander has delayed the release of its full UK results because it was seeking to quantify the impact of the Court of Appeal’s decision. While the bank said it did “not expect any material impact” for the group as a whole, the consequences could be material at the national UK level.
FCA review
The situation is further complicated by the ongoing FCA review on discretionary commission arrangements (DCA), which was announced at the beginning of the year. While it was due to deliver an outcome in September, that deadline has since been extended to next May, when the regulator is expected to consult on the details of a proposed consumer redress scheme.
In anticipation of this, Close Brothers has already reported £6.9 million of costs from dealing with the FCA inquiry and customer complaints, and has said it expects another £10 million-£15 million of associated expenses next year.
First Rand announced a R3 billion (£129 million) accounting provision September while Lloyds Banking Group, which isthe biggest car finance firm through its Black Horse division, was the first to announce a contingency, setting aside £450 million in February.
Analysts’ predictions of the likely compensation bill for DCA-related claims range from £16 billion up to £21 billion, with commentors noting that the latest Court of Appeal decision opens the way for a flood of cases from claims management companies, who are already highly active in the sector.
Rathi has acknowledged the overlap between the FCA’s review and the legal ruling, saying: “While the case itself was not focused specifically on discretionary commission, it clearly relates to our work to determine whether motor finance customers have been overcharged because of the past use of discretionary commission agreements.
“For such cases, we have paused until December 2025 the 8-week deadline that firms have to respond to complaints.
“Some in the industry are asking us to expand that pause to cover complaints relating to other types of commission in motor finance. We are considering this carefully and working at pace through the potential benefits and risks of doing so.
“We understand industry’s desire for time to take stock.”
Some commentators have suggested that the FCA may extend the deadline for delivering its consultation following its DCA review still further, if the Supreme Court appeal is still outstanding.
Future actions
Whatever happens in relation to any appeal, lenders, brokers and dealers need to act now to mitigate the risks created by the Court of Appeal’s decision. This means updating systems and processes so as to ensure that the existence, nature and amount of any commission payable at any point is fully disclosed, and also ensuring there is clear evidence that the consumer has give informed consent to the payment of any such commission.
Edward Peck, Asset Finance Connect CEO, said: “The implications of last Friday’s judgment are wide-ranging, with the FLA suggesting that there will be implications for all intermediated business regardless of whether they are regulated or not.
“Lenders and brokers need clarity – and the record number of sign ups for our webcast on Friday shows a genuinely unprecedented level of concern in the industry. Its the largest digital event we have ever run!
“AFC will be seeking to get clear answers to lenders, dealers and brokers questions (and they have been flooding into our email inboxes since we first asked for them yesterday morning). We are working hard to make sure attendees get a clear picture of what this means for them and for their businesses”
Register for the AFC webcast Johnson v Firstrand et al: what the auto finance ruling means for ALL broker-introduced business here.
AFC’s Autumn Conference on 26th November opens with a keynote on how the industry can better manage increasing intervention from regulators and policy-makers, featuring interviews with Isak Bengtzboe, chief policy adviser and legal adviser at Eurofinas; and Stephen Haddrill, director general of the FLA. To register, go to the AFC Autumn Conference website.