Tuesday, 29th October 2024
On Friday, 25 October 2024, the Court of Appeal of England and Wales handed down an important decision addressing discretionary commission arrangements (DCAs) in motor finance. This decision is the latest in a series of regulatory and legal developments around commissions in motor finance.
The UK Financial Conduct Authority (FCA) had banned discretionary commission arrangements in 2021 and in January 2024 announced a review into whether customers have been overcharged because of past use of DCAs. That review included a pause to a deadline for a final response to relevant customer complaints and this was subsequently extended to obtain data from firms and await the outcome of a judicial review in the UK and a number of cases before the UK Court of Appeal. The pause was also stated to allow the FCA to consider the introduction of an “alternative way of dealing with DCA complaints, such as a consumer redress scheme”.
In Ireland, in June 2024, the Central Bank of Ireland issued a Dear CEO letter to firms providing motor finance to consumers through hire-purchase agreements via credit intermediaries. This followed a review by the Central Bank of the commission models in place in relation to those arrangements.
The regulatory position in Ireland is different to the UK in some important respects. Hire purchase and PCP finance arrangements became fully regulated activities in Ireland in May 2022 and certain aspects of the Consumer Protection Code (CPC) only applied from August 2022. While the CPC is currently under review, the Central Bank indicated its view that DCAs would not comply in the future with the proposed updated requirement in the CPC reforms to ‘safeguard customers’ interests’ and requested that such practices cease by 31 July 2024. Firms were also expected to review their approach to the disclosure of commission arrangements to consumers in accordance with both current and proposed CPC requirements. Following the review, if necessary, firms would need to ensure that there is appropriate disclosure of any remaining commission arrangements to consumers and amend relevant customer documentation in light of applicable CPC requirements.
The recent judgment of the Court of Appeal of England and Wales addressed a number of issues, across the three linked appeals:
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That the car dealers/brokers in all three UK cases owed the borrowers a “disinterested duty”, being a duty to provide information, advice or recommendation on an impartial or disinterested basis. Concurrently, all three borrowers were owed fiduciary duties by the car dealers/brokers because the latter were in a position to take advantage of their vulnerable customers in circumstances where there was a reasonable expectation that they would act in the borrowers’ best interests.
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That the commissions paid by the finance provider, to the car dealer/broker, constituted a ‘secret’ commission in two of the cases, the consequence of which was that the lenders in those cases were liable as primary wrongdoers, rather than being accessories to any breach by the brokers’ breach of their fiduciary duties. In one case (Hopcraft), there was no disclosure of the commission payment made to the borrower at all, and in the second the ‘disclosure’ was of a very general nature (“a commission may be payable”).
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In the case of the third claimant (Johnson), he had conceded that there was a partial disclosure of the commission arrangement on the basis he had received a “suitability statement” which expressly stated that the broker may receive a commission from the product provider, but the court found in any event that the disclosure was insufficiently detailed to provide his fully informed consent to the payment. The lenders were therefore held to be accessories to the broker’s breach of its fiduciary duty.
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The court held that the failure to disclose, or partial disclosure of, a commission in these circumstances does not by itself make the relationship with borrowers ‘unfair’ for the purposes of the UK Consumer Credit Act 1974. Under the particular circumstances of the Johnson claim the Court nonetheless found it was in fact unfair (Johnson was the only claimant of the three to have pursued a statutory remedy under that consumer legislation, and so was the only claim in which the Court considered it).
The Financial Conduct Authority has only commented to note that it is carefully considering the Court of Appeal’s decision.
The Irish Central Bank is currently focused on consumer issues and is carrying out reviews of consumer protection risk management frameworks as well as the ongoing review of the Consumer Protection Code which includes requirements around treatment of vulnerable customers and securing customers’ interests. We expect that going forward, any increased scrutiny on DCAs by the FCA, combined with this Court of Appeal decision, is likely to result in an increased focus by the Central Bank on this sector more generally, notwithstanding some key differences between the scope of regulatory protection that has applied historically to these type of arrangements in the motor finance sector in Ireland.
Should you have any questions, please do not hesitate to reach out to our Financial Regulation Advisory or Regulatory Investigations teams for assistance.
