Finance commissions ruling – Your questions answered
We recently hosted a webinar with a panel of experts following the recent court of appeal ruling on finance commissions to discuss what it means for the industry. During the webinar, we received hundreds of questions from our audience regarding the news. We put your questions to the panel and have summarised the most asked questions in this blog under the following themes:
Third Party Disclosure
Q: “The disclosure of the existence, calculation of, and the consent to obtain commission is the expected moving forward, however at what point, or points, of the customer journey will that be expected to be achieved? Proposal? Prior to E-Sign? Payout?”
A: The commission disclosure requirements where CONC applies still needs to be followed in that the disclosure requirements under 3.7 and 4.5 must be adhered to and tightened up. 3.7 requires disclosure as early as financial promotions for example. As far as the recent decision is concerned, the amount of the commission must also be disclosed plus obtaining informed consent must be obtained before the agreement is executed/signed.
Jo Davis, Chief Executive Officer, Auxillias
Q: “When you talk about amounts being disclosed, does that include the lender, broker and dealer all having to disclose to the customer in one document or separate documents?”
A: As a result of the decision, disclosure is to be made to the customer of all the remuneration paid across the lender-broker-retailer chain must be disclosed to the customer, including where the is a primary and a secondary broker. So, the lender discloses the remuneration that they pay, and this is disclosed to the customer. The broker should disclose the remuneration they receive. This includes the remuneration the broker receives from the lender and other broker in the chain that they work with. This means both the broker and the lender are responsible to disclose the commission they received. The lender can decide to rely on the broker to obtain the informed consent element of this decision but that is at their own risk as the lender will still be liable if this is not done correctly or in accordance with the requirements hence the reason why many lenders are seeking the informed consent themselves even in addition to the broker or as a whole.
Jo Davis, Chief Executive Officer, Auxillias
Q: “Who will be required to demonstrate they have informed consent? Is it the broker of the lender or both? Is it consistent with consumer duty for a customer to sign the same disclosure three times (with the dealer, broker, and lender)?”
A: In our view, each party will need consent for its own reasons. It is the obligation of the broker, but the lender can be liable as a result of the dealer’s failure to obtain consent and the court set a low bar for when this liability could arise – some commentators have put it that the lender should effectively assume the broker may breach their duty.
As such, each party needs consent for its own reasons and this is why we’re seeing some customer journeys with two or three separate consents. This doesn’t mean that lenders and brokers cannot work together to develop singular forms of consent, smoothing the customer journey, but it is important each party is able to retain records of the same.
Multiple consents may be clunky, but from a balance of risks perspective, ensuring the customer is fully informed and is protected from foreseeable harm is in line with Consumer Duty. Each firm owes its own obligations to customers under Consumer Duty and it is for each individual firm to assure itself they are being met.
Jo Davis, Chief Executive Officer, Auxillias
Q: “If the broker has different commission arrangements with different lenders, how do we cater for such disclosure outside of the customer-specific case i.e., on financial promotions?”
A: Credit brokers need to consider the multiple overlapping disclosure obligations (including under CONC 3.7, CONC 4.5, and those arising as a result of the analysis in this case). In our view you wouldn’t need to disclose all the different types of commission arrangements in financial promotions, but the scope and extent of your independence and any factors that may limit it. As the customer gets closer to a product decision, so your disclosures can become more precise, up to the point where prior to the transaction consent is obtained to the specific remuneration arrangements that are relevant.
Ultimately, we think firms should be guided by the principle of making it absolutely clear to customers what the scope and extent of the broker’s service is. Where there are a range of remuneration structures, it might be helpful to explain this in an FAQ together with how the risk to customers is mitigated.
Jo Davis, Chief Executive Officer, Auxillias
Scope of Ruling
Q: “Does this apply to all regulated finance agreement types - so PCP, personal lease, contract hire?“
A: Yes, it would seem that the case decision stretches to all products and B2C and B2B markets.
Jo Davis, Chief Executive Officer, Auxillias
Q: “Will this ruling apply to price comparison websites?”
A: Yes, it is likely to impact price comparison websites if they are credit broking. The scope of the ruling is potentially very wide and the ruling could be applied to credit broking activities outside of motor finance as well in substantially the same way. As a number of barristers from leading chambers have commented, potentially the analysis in the case could be relevant to any situation where an intermediary sells a product and is remunerated on the basis of a commission paid by the product provider.
Mainstream regulated consumer credit brokers will need to pay close attention to the ruling. The judgment suggested that a disinterested duty could arise simply by virtue of the activities which constitute credit broking, triggering a need to make disclosure and obtain informed consent.
Jo Davis, Chief Executive Officer, Auxillias
DCA Investigation
Q: “How does this tie in with or influence the FCA's current ongoing work?”
A: The FCAs work looking into discretionary commission model harm is still ongoing and the pause period for cases to FOS is still continuing. The Court ruling is separate although the FCA have said that the case does relate to their own work to determine where motor finance customers have been overcharged because of the past use of the discretionary commission models. The FCA’s chief executive made a statement last night calling for the Supreme court to act quickly and that we all need clarity on whether this is the courts’ final word on the issue and for the Supreme court to decide quickly if the appeal proceeds.
Jo Davis, Chief Executive Officer, Auxillias
Complaints Management
Q: “How should we respond to customers who approach us with a complaint post the court ruling?”
A: Complaints about the discretionary commission model itself is still on pause and the FCA made a statement last night that they are considering whether or not to extend the pause wider to include complaints as a result of this decision so at the moment complaints relating to the case or disclosure more widely, can go to FOS but we will wait for the FCA decision on this.
Jo Davis, Chief Executive Officer, Auxillias
Commission Disclosure Best Practise
Q: “Given that the primary responsibility for disclosure and consent sits with the broker, is it fair to say disclosure on actual agreement is good practice rather than a requirement?“
A: The case decision is that it is a joint responsibility, and it is a seriously important requirement now that we have a court of appeal decision that requires both to comply with disclosure, so it goes beyond the regulatory position in CONC where disclosure is the responsibility of the broker.
Jo Davis, Chief Executive Officer, Auxillias
Q: “What are your thoughts on dealers meeting their fiduciary duty requirements and how this should be approached?”
A: A fiduciary duty is essentially an obligation to act in the best interests of another party – essentially a reflection of trust and an obligation of loyalty. The critical thing, from a principles perspective, is that in a motor finance transaction dealers will, as a result of this ruling, be wearing multiple hats. Through their credit broking they will be supporting the customer with arranging finance, they will be selling the vehicle and they may also be performing certain activities on behalf of the lender (or be deemed to be doing so under s.56 of the Consumer Credit Act).
In short, the position is complicated for dealers, and for their customers to understand. We, therefore, think that when considering the fiduciary or disinterested duties that may arise in connection with credit broking, dealers should prioritise putting the customer fully in the picture as to the service being provided to them and its limitations, making sure there is transparency around any conflicts of interest (including remuneration) and informed consent given by the customer to this. Ultimately each firms’ arrangements may be different, so it’s important to take specialist advice as to what is right for your firm and products.
Jo Davis, Chief Executive Officer, Auxillias
Watch the webinar
We discussed this landmark ruling and put your questions to a panel of industry experts on Tuesday 29th October
If you’d prefer to read a summary of the discussion, we’ve condensed it into a blog.