What will commission transparency mean for the asset finance industry?

Since our last blog on discretionary commissions (DCAs), significant developments have unfolded, notably the recent court rulings in October mandating full commission disclosure, reinforcing the 2021 FCA ban on DCAs. Impacting all lenders, dealers and brokers, the implications of total transparency are already reshaping practices in the motor finance industry and could be far-reaching and potentially require the transformation of business models.

Implications of recent court findings

The recent case rulings in Johnson v. FirstRand Bank, Wrench v. FirstRand Bank, and Hopcraft v. Close Brothers clarified expectations for commission transparency in finance agreements, especially in the motor finance sector. Key findings included:

1. Enhanced commission disclosures are required: 

• Vague clauses stating that commission “may” or “will” be paid, which is common in many finance agreements, are insufficient for effective disclosure. There was concern about relevant statements being hidden within the small print of the finance contract. 
• Borrowers must receive clear and accessible details on commission types, amounts, and calculations. Estimates are required if exact figures are unavailable.

2. Broker duties:

• Brokers must act without bias and disclose commission details fully, especially when transitioning from the role of vehicle seller to financial advisor. Clear communication is essential to ensure borrowers understand the roles and terms. The court specifically clarified that the role of a dealer changes from vehicle seller to financial advisor once finance discussions begin, highlighting the importance of transparent commission disclosure. 
• A further issue was referenced where the customer in one case did not realise the term broker referred to the dealer, showing the need for clearer communications for consumers, and recognition that some may not have a high degree of financial literacy.

3. Lender liability for commission disclosure:

• Lenders can be held liable for undisclosed or partially disclosed commissions if aware of broker non-compliance.

Industry reactions

These rulings have triggered immediate changes by some companies:

• Lender activity paused: It was reported that as many as 23 automotive lenders suspended operations to assess compliance and implement new processes. 
• Process delay: Many dealerships delayed vehicle deliveries due to finance processing changes, causing severe disruption in the sector. 
• Fee structure revisions: To comply with the ruling, several lenders have moved to fixed finance fees, irrespective of the amount borrowed or term of the facility. Some have even moved to a no-commission model. 

The FCA’s position

While the FCA has yet to formally respond, this ruling suggests that current FCA guidelines on commission disclosure fall short of these court rulings and are insufficient under the new common law. Both FirstRand Bank and Close Brothers have expressed their intention to appeal to the Supreme Court, but this could take as long as a year before any real clarity is seen. It is also speculated the FCA investigations into DCA may now be further delayed beyond the current May 2025 deadline to align with any new legal precedents that come from the Supreme Court.

Ultimately this ruling could allow consumers to seek either rescission of finance agreements or compensation equalling the undisclosed commission amounts plus interest if rescission is not feasible. Although these specific cases concern car finance these rulings could apply to any type of asset finance.

Preparing for compliance with new transparency standards

Although dealers, brokers, and lenders have changed their current processes to fall within the scope of the law, they must continue to adopt proactive practices to ensure transparency. The consumer must be aware at all times of the role of the dealer or broker and the nature of advice and recommendations that are being provided. Any potential commission amounts need to be fully disclosed by the dealer and accepted by the borrower. Decisions need to be made around the point at which disclosure is made to satisfy the legal requirements. A full audit trail recording the time and date of all actions will ultimately be required. 

Adapting to regulatory changes with advanced IT solutions

With evolving disclosure requirements and the potential outcomes of court rulings and FCA decisions, organisations will need robust IT systems to stay compliant and meet customer expectations effectively. Enhanced data retrieval and analysis capabilities will be critical to manage customer information, from loan agreements to communication records, and to respond promptly to regulatory inquiries or customer complaints.

Integrating IT systems with effective CRM and accounting tools provides a seamless way to identify and access relevant data, while customer communication platforms can automate and personalise responses to potentially affected customers. This reduces the operational workload and ensures accurate, timely communication, helping to build trust with customers.

As associate members of the BVRLA, we work closely with leading stakeholders across the fleet, rental, leasing and automotive industries to drive innovation and support adaptation to regulatory changes. 

If your organisation will be affected by these court rulings, or you have already started to build a response and you need advice on the best approach, feel free to get in touch. We can help ensure you are equipped to respond swiftly and effectively to both customer needs and regulatory expectations.