Motor Finance Commission - What the Court Judgement Means

Supreme Court’s Motor Finance Commission Decision and the next steps

After much baited breath, the Supreme Court has published its Judgement in the motor finance cases that have been holding up the FCA’s Discretionary Commission Complaints deadline.

The cases in question weren’t themselves discretionary commission cases. Discretionary commission arrangements (DCAs) are arrangements between a lender and a broker to set the interest rate of the finance agreement, which can increase the amount of commission the broker gets. This practice was banned in 2021 but is still the subject of complaints. The FCA has held open the gates for customers to complain about this type of arrangement and has paused the timeline for final resolution communications. It did so in case it needed to take into account any of the Courts’ findings in relation to the three motor finance cases.

The claims of the set of three cases were based, not on DCA, but on the failure of traders, brokers, and lenders to declare that there was a commission arrangement.

For the purposes of financial services firms, the judgement is broken down into two parts. The first part considers the claims of the customers that dealers undertake a fiduciary duty to their customers, and they should therefore have placed the interests of the customer first, that they undertake a duty to act in a disinterested manner in obtaining finance, and that the ‘secret’ nature of the commission payment from the lender to the broker was equivalent to a bribe.

What the Court found

The Supreme Court found against the claims.

It noted that “no reasonable onlooker would think that, by offering to find a suitable finance package to enable the customer to obtain the car, the dealer was thereby giving up, rather than continuing to pursue, its own commercial objective of securing a profitable sale of the car.”

In addition, as the judgement noted no fiduciary obligation was owed by the dealer to the customer, the claims of bribery must fail, and the lenders’ appeals be allowed.

The second part of the judgment relates to actions the customer claimed were in breach of Section 140A of the Consumer Credit Act, amounting to unfairness.

The customer wanted to purchase a secondhand car, with an agreed cash price of £6,499. He made a deposit of £100 and needed finance to purchase the car. The dealer told him that they could arrange finance from a panel of lenders. He was given a Suitability Document that listed a panel of 22 lenders and explained that the dealer “will undertake an assessment of your Demands and Needs for Consumer Finance and provide an illustration of the Consumer Finance product that best meets your individual requirements based upon the answers you provide… we do not offer a whole market option for Consumer Credit; we offer products from a select panel of lenders.”

The lender that was chosen for him appeared as the 11^th on the list of 22 lenders. The amount of credit for the hire purchase element was £4803.69 and a separate personal loan was arranged at £1595.31, totaling £6399.

The lender paid the dealer commission of £1650.95 for the introduction of the customer. The amount of the commission was not added directly to the cost of credit or to the cost of the vehicle; the cost was part of the lender’s overheads and “must have been recovered indirectly from borrowers (…) with the charges made for credit.”

The judgement notes that in fact, the relationship between the dealer and lender was a commercial tie; the terms of business between the two stated that the dealer shall introduce applicants to the lender and not to any other party unless the dealer had first submitted a proposal to them and had been declined.

In considering whether the activities and relationship were unfair, the Supreme Court noted that the Suitability Document stated that the dealer “may receive a commission from the product provider” and that the lender’s terms and conditions stated “a commission may be payable by us to the broker who introduced this transaction to us. The amount is available from the Broker on request.”

The Court found that the failure to disclose the existence of the commission was a breach of CONC 4.5.3R. The issues relating to unfairness were:

• The information given to the customer had stated that they would choose a lender based on the customer’s needs; this was untrue, given the commercial tie. The Court found that “this omission of a key fact was a suppression of the truth and breached CONC 3.3.1R, 3.7.3R and 3.7.4AG.

• Although the customer was informed of the existence of commission, the amount of commission paid – although not adding to the cost of the product or credit for the customer – was so high in proportion to the cost of credit that the customer should have been told the amount.

Next Steps for Lenders and Brokers

Motor finance dealers and lenders should act now and review their relationships, information document and disclosure policy and procedures against the judgement, relevant sections of CONC and the Consumer Duty. This is a difficult needle to thread. The main aim should be to understand the point at which a reasonable person would think that the customer’s decision could be affected by the existence and nature of commission and ensure that it is then clearly and prominently disclosed to the customer. Firms that accept and that pay commission should consider when and how to disclose information about the commission payment.

Brokers and lenders of all finance types should note that the Supreme Court stated that the customer was ‘commercially unsophisticated’ and that he claimed that he was handed “an enormous amount of paperwork and asked to sign the agreement. He said the whole process felt very rushed and he did not really feel he could take time to read through the paperwork. It is clear that the commission was not disclosed.” The judgement states that “it must be questionable to what extent a lender could reasonable expect a customer to have read and understood the detail of such documents (…) a customer would not expect that a commission of this size would be payable.”

Best practice in light of the Consumer Duty is to ensure that customers are provided with clear, relevant information that is not overwhelming, that they will be able to understand, with important points made prominent.