Following the widely expected ban by the FCA on discretionary motor finance commission models, the market has generally seen an increase in ‘noise’ created by Claims Management Companies (CMCs), many of whom are looking to fill the void left following the demise of Payment Protection Insurance (PPI) complaints.
At the same time as the ban noted above, the FCA also instigated changes to the way in which customers are told about the commission they are paying to ensure that they receive more relevant information. These disclosure changes, which came into force on 28 January 2021, apply to many types of credit brokers and not just those selling motor finance.
Is this the first-time commission has been on the FCA’s radar?
As far back as 2018, the FCA conducted a mystery shopping exercise to understand how commission disclosure occurred within motor finance. They found that only a small number of brokers disclosed to the customer that a commission may be received for arranging finance (this was the case for only 1 out of 37 franchised retailers, 4 of 60 independent retailers, 2 of 14 car supermarkets and 4 of 11 online brokers).
The findings were in breach of CONC 4.5.3R which requires brokers to disclose, in good time before a credit agreement is entered into, the existence of any commission or fee or other remuneration payable to the broker by a lender (or a third party), if knowledge of the existence or amount of the commission could actually or potentially; affect the broker’s impartiality in recommending a particular product; or have a material impact on the customer’s transactional decision. Brokers are also required to disclose the likely or known amount of commission they receive, if the customer requests it (CONC 4.5.4R).
The regulator found that firms were frequently:
uncertain about whether disclosure of commission is triggered when they are promoting a product and during the sales process
interpreting CONC 4.5.3R narrowly, on the basis that they are promoting but not ‘recommending’ a product or that disclosure would be unlikely to affect the customer’s decision
stating that a commission ‘will or may be payable’ without elaborating in any way – for example, by stating the amount may vary by lender or product
On the back of the FCA’s thematic review, a number of modifications were proposed to make the rules and guidance clearer for firms.
Has Wood and Pengelly further raised the bar?
The recent Court of Appeal judgment, Wood v Commercial First Business Ltd and Business Mortgage Finance 4 plc v Pengelly [2021] EWCA Civ 471, handed down on the 31st of March 2021, has made it much more probable that borrowers could receive compensation if the commission paid by the lender to their broker was not fully disclosed to them.
Although this judgment was within the mortgage market, which has separate rules relating to commission disclosure, the read across to the motor finance market is apparent. The Court has stated in its judgment that there is no need for a stringent fiduciary duty for the court to render the loan unenforceable where a ‘fully secret’ commission was paid to a broker by a lender.
Indeed, the definition of ‘secret commission’ in this instance was found to be broad and include where terms and conditions loosely mention, for example, that the broker ‘may’ receive fees from lenders and where these fees are not disclosed.
What does this mean for undisclosed commission claims?
Undisclosed Commission claims are an increasing type of financial services claim which focuses primarily on the commission payments made by lenders to credit brokers who introduce prospective borrowers to them.
The acceptance of a commission by a broker from a lender, without appropriate disclosure of it to the borrower, is likely to result in the broker being in breach of that fiduciary duty and open up a risk exposure for further claims.
In accordance with the Office of Fair-Trading (OFT) Guidance, lenders and brokers must do the following:
The lender must inform the broker that a commission is to be paid and the amount of that commission. They must also confirm the manner in which the commission is calculated and all recipients of the commission
The lender must confirm that by making a commission payment the broker may not be in a position to give unbiased advice
The lender must provide the borrower with a booklet in clear English
The commission disclosure must adhere to the overarching transparency rules and that even where commission is partially or fully disclosed, the prominence of that warning will be relevant
What makes the case compelling in this instance is that the judge confirmed that it is not necessary for a fiduciary relationship to exist between broker and borrower for there to be an obligation to disclose the commission received from the lender.
What can firms do and how can we help?
We are aware that the market is increasingly being inundated with commission related claims. Through discussion with our clients, we believe there are now over 250,000 Data Subject Access Requests (DSARs) which have been received by the motor finance sector, the vast majority relating to unfair commission. Our clients are also seeing other sectors (such as Asset Finance and the wider Consumer Finance sector being targeted).
The Financial Ombudsman Service (FOS) are also believed to have several thousand commission-related complaints still awaiting a decision and there have been more than a thousand cases that have gone to a small claims court (section 140 claims).
With all this activity, we are supporting our clients from both an advisory (preventative and reactive) and resourcing (customer management) perspective. Typical engagements relate to understanding the potential exposure which may exist within firms and outlining proactive strategies to close any potential gaps to minimise the risk of claims management activity or reinforce the existing team's capacity to deal with any claims made.
If you would like any more insight or information, please contact one of the team.
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