Consumer finance providers face a new landscape of regulatory scrutiny after a recent Court of Appeal ruling. The decision, which found it unlawful for car dealers to receive undisclosed commissions from lenders, has sent shockwaves across the entire industry.
As transparency and informed consent become non-negotiable, firms will need to prepare for heightened expectations from regulators. This article suggests considerations firms might make today, offers insights into what to expect from regulatory bodies and steps to protect against compliance risks and potential liabilities.
The regulatory ripple effect of the court of appeal ruling
The Court of Appeal’s recent decision mandates that commissions in motor finance agreements must be disclosed and consented to by customers. This ruling has resonated far beyond the motor finance sector, affecting all financial service providers that work with commission structures or broker-intermediary relationships.
The case highlights an industry-wide shift toward greater transparency and consumer protection, with regulators like the Financial Conduct Authority (FCA) taking note. As standards tighten, this decision signals a broader regulatory transformation that will redefine how financial service providers interact with consumers, making this ruling a critical turning point for firms that want to stay compliant and competitive.
What to expect from regulators post-ruling
Increased scrutiny of commission structures
Regulators, particularly the FCA, are expected to focus on commission structures across the financial services industry. Undisclosed commissions could potentially lead to consumer misunderstandings, placing pressure on firms to examine and possibly revise their product offerings. Moving forward, financial service providers should expect an in-depth look at broker-intermediary relationships, with regulators investigating how commission structures impact consumers and whether they align with fair treatment standards.
Higher standards for transparency and consumer consent
One of the primary messages from the Court of Appeal’s ruling is the necessity for transparent, clear communication with consumers. Regulators will likely set higher standards for how fees, commissions and product terms are disclosed, pushing firms to ensure that these details are accessible and understood by consumers. This expectation aligns with the FCA’s focus on fostering consumer understanding as part of Consumer Duty.
Broader application of fiduciary duty principles
The ruling reinforces the concept of fiduciary duty, emphasising that financial service providers must act in the best interests of their customers. This principle, though traditionally associated with financial advisors, may soon become a baseline expectation across all financial services. Providers should anticipate standards that require transparency and commitment to ethical practices that align with customer-centric values.
Risks of non-compliance and potential liabilities
The consequences for firms that fail to meet the emerging regulatory standards are likely to be severe. Non-compliance with transparency requirements or fiduciary principles can expose firms to a range of risks.
- Financial penalties and legal liabilities: Firms that don’t meet regulatory expectations may face fines and penalties, as well as potential consumer claims and class-action lawsuits if transparency breaches are found.
- Reputational damage: In an era where consumers are increasingly aware of their rights, failure to align with transparency standards can result in substantial reputational harm, eroding trust and loyalty.
- Operational costs of remediation: Once a compliance breach is identified, the costs of remediation through updating processes, training staff, and restructuring commission models can be significant and disruptive.
Steps to safeguard against regulatory and compliance risks
For firms looking to prepare for increased scrutiny, implementing proactive strategies is key.
1. Conduct a compliance audit
A comprehensive audit of existing policies, commission structures, and consumer disclosures is an essential first step. Firms should review current practices to ensure they align with the heightened transparency and informed consent expectations from regulators. By identifying gaps early, firms can address areas of non-compliance before they become regulatory issues. This audit process should include input from compliance, legal, and operational teams to create a holistic view of the firm’s regulatory standing.
2. Enhance consumer education and transparency
Clear and accessible communication is critical to meeting today’s regulatory standards. Firms should focus on revising consumer-facing materials—such as product terms, fee explanations, and commission disclosures—making them easy for customers to understand. Transparent, consumer-friendly information supports informed decision-making and reduces the risk of consumer claims. Firms may consider workshops or training sessions to equip customer-facing staff with the knowledge and tools to communicate these updates effectively.
3. Strengthen informed consent practices
To meet the fiduciary duty of acting in consumers’ best interests, firms need robust informed consent practices. This involves ensuring that customers fully understand the financial products they’re purchasing and the terms involved, including any associated commissions. Consider implementing consent verification systems that track and document consumer understanding, such as digital acknowledgments or interactive disclosures. This record of informed consent can serve as essential compliance evidence in regulatory reviews or disputes.
4. Implement a proactive monitoring system
In a constantly evolving regulatory environment, it’s critical to stay updated on changes in compliance requirements. Firms should consider adopting compliance monitoring tools or platforms that provide regular updates on regulatory changes, allowing firms to adapt quickly and avoid non-compliance risks. Automated compliance tools can also be used to continuously review consumer disclosures, document customer interactions, and verify adherence to fiduciary duty principles. By monitoring regulatory updates and adapting processes in real-time, firms can stay one step ahead of compliance challenges.
Embracing transparency and proactive compliance in consumer finance
The Court of Appeal ruling on commission disclosure is a clear signal to all finance providers; transparency and customer-centric practices are now fundamental to be legal and compliant. Whilst we may not learn the impacts of the final ruling for many months by proactively adopting these principles and preparing for regulatory scrutiny, firms can protect themselves against potential liabilities and align with the industry’s shift toward trust and transparency. In this evolving regulatory environment, financial service providers that prioritise informed consent, ethical practices, and continuous compliance monitoring will be better positioned to foster consumer trust and build a resilient, future-ready business.
