FCA needs to answer serious questions over car finance Court of Appeal decision

The Financial Conduct Authority needs to answer some serious questions following last week’s shock Court of Appeal judgement, the industry’s leading finance trade body has said.

The Court of Appeal ruled in favour of three consumers on October 25, concluding finance brokers, such as car dealers, could not take commission without disclosing the amount and how it would be calculated to the consumer

It sparked chaos with many finance firms stopping business immediately, and customers turning up at dealerships unable to drive away in their new cars.

The ruling led many in the motor trade to question the role of the sector’s regulator, the Financial Conduct Authority (FCA).

Now, in conversation with Car Dealer, industry trade body, the Finance Leasing Association (FLA), has said its members have a right to know from the FCA why the Court of Appeal ruling occurred.

‘There is absolutely a regulatory question here,’ director of motor finance and strategy at the FLA, Adrian Dally, told Car Dealer.

‘It is very, very unusual to have a situation where very specific rules are enacted by the regulator – in this case, enacted in 2021 – on what should be disclosed, and then three years after those rules were enacted, one of the highest courts of the land says the law is, in fact, much higher than those rules.’

Dally added: ‘It’s not a situation that our members should have been put in. Our members should be able to rely on the regulator’s rules – I think there are questions for the FCA about why this has happened.’

Car Dealer has approached the FCA for a right of reply.

The FLA has also called for a halt on regulatory action on all complaints and a stay on court cases that involve commissions.

The Finance Commission Story So Far

• Car finance slowly starting up again as lenders change systems and some freeze commission payments
• Chaos: Car finance grinds to a halt in wake of Court of Appeal decision
• Close Brothers stops underwriting new dealer finance after court ruling
• FCA chief executive calls for clarity over motor finance judgement
• Car finance pauses as banks figure out legal implications – who has stopped lending?
• Honda ‘pulls car finance and delays customer handovers’
• FLA: Court of Appeal ruling was ‘very unexpected’ but ‘welcome’

Earlier, the FLA told Car Dealer that the court’s decision was ‘very unexpected’, but welcomed the move to full provision disclosure as it makes the selling of finance products more transparent and builds ‘consumer trust’.

During the week, the FCA called for more clarity over the motor finance judgement.

In a speech at the Investment Association Annual Dinner on Tuesday (Oct 29), FCA chief executive Nikhil Rathi said: ‘First and foremost, we need clarity on whether this is the courts’ final word on the issue.’

He added: ‘In the meantime, our focus is on ensuring that customers receive fair treatment in line with the law and that the market for motor finance continues to function well, recognising that over two million people rely on it each year to buy a car.’

Car Dealer put a series of questions to the FLA on behalf of readers, and some of these are listed below. In all cases, the FLA pointed car dealers to its briefing document that goes into detail about the Court of Appeal ruling and what dealers need to be doing. You can read this document here.

How should disclosures about commissions be made?

We asked Dally where dealers should be putting the new wording about commissions on documents. Should it be on page one, in the middle of the document, the last page or even on a separate document, for example? He replied:

‘There isn’t one single way. The principles generally on these new disclosures and the consents are the customer should be informed and in good time. So, it’s not just consent that’s required but informed consent. So the customer is genuinely aware of the nature of the commission arrangement and the amount, and they then freely say, “Yes, I’m happy with that”, and they say, “Yes, I consent”. That’s what come out of the Court of Appeal.

‘There are various ways in which that can be done. So there’s the proposition stage, the pre-contractual information stage, and potentially closer to the signature stage – as long as what’s disclosed of the other commissions is prominent and clear, and the customer has sufficient time to think about it and make a genuinely informed decision.

Giving customers ‘sufficient time’ to make an ‘informed decision’ is a grey area, though, isn’t it?

We said to Dally that giving customers ‘sufficient time’ to make ‘an informed’ decision is a grey area because it implies that a customer turns up at a dealership, takes their desired car for a test drive, and then goes away to think about the car and the disclosure of the commission. However, plenty of customers arrive at a dealership and they want to buy the car immediately – there might not be ‘sufficient time’ in this scenario.

Dally said: ‘In both those scenarios, the regulator requirements are exactly the same. So us, as consumers, are entitled to explanations of the finance and to have prominent information presented neutral to us about what’s being offered, and that’s always been the case about the type of finance agreement. So, even if the customer comes in on the day and says they want that car, they’ve still got to go through the process of being told which types of finance are right for them. There are already processes in place for this, but in the longer term, [our] members need to change their systems and build in extra information about the amount of commission that goes in – but getting the consent is important. It has to be clear and the customer has to be given neutral time to decide.

What should dealers be doing now and in the weeks ahead?

Dally said: ‘Don’t panic. The solutions are there, there is industry guidance and our briefing on what this means. And ultimately, it’s a partnership approach between lenders and dealers, but also brokers as well. Ultimately, the network has to work together so that the disclosures are made by the different parties in the chain, and that’s all communicated. So, just work with your partners. I think especially if you’re a dealer or a broker, work with your lender partners in line with the new rules.

You say some providers have fixed it. How long do you think it will take for resilience to return?

He said: ‘I think it’s beginning to return. Last weekend was very, very difficult. Some lenders that paused on Friday were back lending by Sunday. Every lender and every dealer has its own systems and software and processes. They do things their own way, in line with their own brand. There isn’t just one size fits all here. You can’t just flick a switch, and for some it’ll be easier to make changes than others.

‘But I think a fairly typical scenario is a two stage thing. Immediately you put in a compliant patch – so you might say we’ve put in a manual process where the information is given verbally, for example, and recorded, and then there’s a physical sheet of paper to sign. But the better way is to hardwire into your systems through your software and your processes, and that takes time to build.

‘What situation each business found itself in at 11:30 on Friday was different. Everybody faced immense disruption immediately, and there’s progressively less disruption as the days have gone on. But there’s been disruption to customers as well – and that’s really sad.

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