The recent UK Court of Appeal ruling on undisclosed commissions in motor finance marks a significant moment for consumer protection and any industry dealing with finance. The judgement, delivered on October 25th, declared that it is unlawful for car dealers to receive commissions from lenders on motor finance agreements unless disclosed to and consented to by the customer. This decision impacts various aspects of consumer finance and will likely start a shift to transparency in a number of financial service sectors, leading to profound implications for both customers and industry players.
The Court of Appeal's October 25th decision has put a spotlight on how commissions in motor finance agreements are handled, but it didn’t emerge in a vacuum. Earlier this year, the Financial Conduct Authority (FCA) conducted a Motor Finance Review that scrutinised specific cases after the ban of discretionary commission arrangements (DCAs). DCAs allowed car dealers to set interest rates for customers within a certain range. With increased consumer complaints and growing pressure on finance providers, the FCA’s review highlighted the need for transparency and fairness in how motor finance products are structured.
This closer regulatory examination is part of a broader movement toward consumer protection, as highlighted by the FCA’s Consumer Duty, which holds firms accountable for providing positive customer outcomes and transparency in services. While this duty primarily concerns broader financial services, it also provides a framework through which consumer finance providers, including motor finance firms, should better support their customers for improved outcomes.
The ruling mandates that car dealers must explicitly disclose any commission arrangements with lenders, rooted in common law fiduciary principles. This legal foundation places a fiduciary duty on finance providers to act transparently and in the best interests of the consumer. By requiring consumer consent for commissions, the ruling helps ensure that financial advice remains unbiased and that consumers are aware of any potential conflicts of interest in finance arrangements.
The Court of Appeal's ruling marks a significant moment for consumer finance. By requiring transparency and informed consent around commission payments, the ruling compels finance providers to reevaluate their approach to customer relationships and regulatory compliance. This shift towards openness signals a broader industry change, urging firms to align more closely with consumer protection standards.
For consumer finance providers, the ruling introduces heightened compliance requirements. Firms can expect more intense scrutiny from the FCA and other regulatory bodies, especially regarding the transparency of their financing processes. This scrutiny may mean revisiting and updating commission disclosure policies, training staff on new compliance practices, and establishing systematic ways to ensure that commission disclosures are clear and accessible to consumers. Meeting these standards avoids potential penalties and strengthens consumer relationships.
The ruling opens up the possibility for consumers to seek compensation if commissions were undisclosed in past transactions. Consumer finance providers could face a wave of claims, possibly even class-action lawsuits, with significant financial repercussions. In motor finance, where high commission rates have been a norm, this could lead to large compensatory claims. Providers in other consumer finance sectors should also take note, as undisclosed commission practices may come under similar scrutiny in other lending arrangements.
This ruling aligns with a shift toward customer-centric practices and the push for more transparency in the financial services industry. By requiring informed consent, the ruling may push firms to act more like advisors, guiding consumers through financing choices rather than merely selling a product. This new openness regarding information on product options, rates and associated costs could benefit firms as well as consumers by improving trust in the long run.
The Court of Appeal’s ruling represents a pivotal change in the motor finance industry, reinforcing the demand for transparency, fairness and consumer trust. By mandating commission disclosures, the ruling aligns with the FCA’s regulatory direction and sets a precedent that could reshape the wider consumer finance landscape.
Finance providers must adapt to this new reality by enhancing transparency, proactively managing consumer expectations and focusing on compliance to avoid potential liabilities. As the industry shifts toward these consumer-centric standards, finance providers who embrace transparency may find themselves better positioned in a market that increasingly values ethical practices and customer trust.