Last week, the Court of Appeal made a ruling mandating that brokers must fully disclose and obtain explicit consent from customers regarding any commissions received from lenders. This decision has significant implications not only for firms operating in the motor finance market, but also for those in other areas of asset finance. Discretionary commission arrangements are common, and the ruling suggests that firms offering a mix of lending products could face broader impacts, potentially affecting profitability across multiple business lines. 

Top 3 Highlights: 

• Informed consent: Central to the legal ruling is the idea of informed consent, meaning it’s not sufficient to bury commission structures in small print. 

• Financial exposure: The ruling opens the door for potential compensation claims from customers who were previously unaware of such commissions. Estimates suggest the total compensation across the sector could reach up to £16 billion, making it one of the most significant financial redress issues since the Payment Protection Insurance (PPI) scandal, which cost impacted lenders over £50 billion. 

• Regulatory scrutiny: The Financial Conduct Authority (FCA) is intensifying its examination of historical commission practices. Firms should anticipate more stringent oversight and be prepared for potential enforcement actions, with the FCA expected to conclude its review by May 2025. 

Areas to Focus On: 

• Transparency: Firms will likely need to revise their processes to ensure they can evidence explicit consent from customers. This might involve updating consent forms, communication policies, and training to ensure transparent disclosure. Firms may also need to consider system changes for managing consent. 

• Customer communication: Transparent and proactive communication with customers regarding the steps firms are taking to address this can help rebuild trust and mitigate potential reputational damage. 

• Financial planning: It’s prudent for companies to start provisioning for potential compensation liabilities arising from this ruling, as a redress scheme is almost guaranteed to be announced next year. 

With a growing emphasis on treating customers fairly, this ruling reinforces the need for firms to prioritise transparency, particularly as it aligns with the rollout of the Consumer Duty regulations. Firms that adapt swiftly and responsibly will be better positioned to navigate the challenges ahead. 

What’s Next?

Given the impact of this ruling, firms will face tighter margins and must find ways to increase profitability to remain resilient. This will be especially challenging as they prepare to allocate funds for potential redress schemes and overhaul their consent and communication processes, which will incur additional costs. 

At Woodhurst, we recognise the challenges that specialist lenders face in adapting to such regulatory changes. Our upcoming report, in collaboration with our partner Finativ, on technology solutions in the specialist lending market provides an independent guide to technology vendors catering to this sector. By leveraging the right technological solutions, firms can weather the market upheaval and emerge more agile, leaner, and better prepared for future regulatory shifts. 

We believe that embracing modern technology is essential for specialist lenders to navigate the complexities of today’s financial landscape effectively. 

Update: Recent FCA Consultation Following Court of Appeal Ruling 

Following the Court of Appeal’s recent judgment in Hopcraft v Close Brothers Ltd, Johnson v Firstrand Bank Ltd, and Wrench v Firstrand Bank Ltd, the FCA has announced a two-week consultation on extending the time for firms to respond to consumer complaints in motor finance cases involving non-discretionary commissions. This extension, likely effective by mid-December 2024, would give motor finance firms additional time to manage what is expected to be a high volume of complaints. 

The ruling mandates full transparency, requiring firms to disclose commission amounts and structures for all motor finance agreements, with an understanding from market experts that this expands the scope for complaints to now include fixed commission agreements, which may significantly increase financial exposure across the sector. 

As the FCA continues its review of historical commission practices, firms should anticipate stringent regulatory scrutiny and begin provisioning for potential liabilities. Our upcoming report with Finativ on technology solutions in specialist lending will guide firms in navigating these regulatory shifts effectively. 

Look out for future blog posts that explore the current lending market.