Following the news that the FCA (Financial Conduct Authority) will be investigating Car Finance for not paying out compensation to customers, the IMDA received the below response from its legal partner Lawdata.
FCA to undertake work in the motor finance market
On Thursday the FCA announced that it was pausing the 8-week deadline for motor finance firms to respond to customer complaints about discretionary commission arrangements. FCA to undertake work in the motor finance market | FCA
What does this mean for dealers?
If a dealer receives a complaint about discretionary commission arrangements, then it will not have to provide a final response within the usual 8 weeks, but will now have up to 37 weeks extra (45 weeks total) to do so. This applies to complaints received on or after 17th November 2023.
Why has the FCA taken this action?
Many dealers will already have received complaints from claims management companies demanding compensation due to what they claim are “secret”, or at least undisclosed commissions.
A lot of these complaints have been escalated to the Financial Ombudsman Service (FOS) for a decision. By pausing such complaints the FCA has given itself time to assess the issues and determine the best way forward.
Has the FOS made a decision on any similar complaints?
On the 10th January, the FOS released three relevant decisions. Decision Reference DRN-4326581, Decision Reference DRN-4188284 and Decision Reference DRN-4218349
Barclays Partner Finance and Black Horse cases
The FOS decided that both Barclays Partner Finance and Black Horse Limited did not act fairly in their dealings with the customers. Both cases involved Difference in Charges (DiC) models, where the commission earned by the broker was linked to the interest rate that the broker was able to set.
In reaching this decision the FOS also found that whilst the Initial Disclosure Document (IDD) stated “Lenders typically pay Us a fee for those introductions,” this was inadequate, in particular because not only was the broker receiving a commission, but it was also controlling the interest rate.
As a result of these decisions the finance companies were ordered to pay the customer the difference between the amount paid at the rate charged and the lowest rate that the broker could have charged, as well as 8% interest on each overpayment.
BMW Financial Services
In contrast, the FOS decided that BMW Financial Services did not act unfairly or unreasonably and therefore made no award to the customer.
In this case “The amount of commission that it paid to the Broker was fixed at £500. The APR was also a predetermined fixed interest rate. The Broker had no discretion to vary the amount of commission or the interest rate”.
This is not however the full story. The FOS was again unhappy with the wording of the Initial Disclosure Document which stated “We provide credit broking services and can introduce you to a limited number of finance providers to assist with your finance. Those finance providers may reward us for introducing you to them. We have permission to carry out the regulated activity of credit brokerage.”
The FOS did not consider that this, in itself, was sufficient to amount to a meaningful disclosure of the existence of commission.
The dealer’s Terms of Business however provided further information stating “We receive commission from your finance provider for introducing your consumer credit business to them. You are entitled, at any time, to request information regarding any commission which we may have received as a result of placing your business with a finance provider. If we do not know the exact amount of commission, we will provide you with the likely amount.”
Since the commission was a fixed sum payment not linked to the amount or interest, and the document clearly stated that further details could be requested, the FOS felt that this was sufficient.
On the basis of these decisions, it does seem that the FOS is likely to conclude that lenders acted unfairly if the commission was based on a Difference in Charges (DiC) model, and even if the commission was fixed, the Dealer would still have needed to do more than say that commission “may” be received.
How do these decision affect dealers?
These decisions were made against lenders not brokers/dealers. It remains to be seen whether or how the finance companies may look to recover such expenditure from dealers.
Is this the final position?
The FSA press release stated it was reviewing matters, and would “if necessary, resolve any contested legal issues of general importance”. In its submissions Black Horse made the point that, according to the Finance and Leasing Association, 55 of 86 motor finance commission claims that have been tried to August 2023 have been dismissed.
In the Court of Appeal’s reasoning at §44 of Hurstanger v Wilson [2007] 1 WLR 2351, the Court held that a document which disclosed that commission may be paid negated secrecy: “If you tell someone that something may happen, and it does, I do not think that the person you told can claim that what happened was a secret.”
It will therefore remain to be seen whether there are further challenges to these decisions.
It is also important to note that the facts of each complaint will be different, particularly as initial disclosure documents and other paperwork are not standardised, either across lenders or the industry.
What should dealers do now?
Although the requirement to issue a final response within 8 weeks has currently been paused, dealers will eventually need to issue one.
For now we would suggest that as dealers inevitably receive complaints they gather together the relevant deal file, initial disclosure documents etc. so that when the position has been clarified, all of the necessary information will be to hand.
Further Information
Please contact the Lawdata Legal Helpline on 01767 310000 if you have any specific queries or requests for further information.