The motor finance industry is currently navigating a complex landscape of regulatory changes and legal challenges, particularly concerning commission payments. Recent developments have significant implications for lenders, brokers, and consumers alike. This article provides an overview of the latest updates and their potential impact on the industry.
Background
The Financial Conduct Authority (FCA) has been scrutinising the motor finance sector for some time now, focusing on the transparency and fairness of commission payments. This scrutiny intensified following the FCA's investigation into Discretionary Commission Agreements (DCAs), which were banned in 2021 due to concerns about overcharging customers.
Key legal developments
In October 2024, the Court of Appeal issued a landmark ruling in three pivotal cases: Johnson v FirstRand Bank, Wrench v FirstRand Bank, and Hopcraft v Close Brothers Limited. The Court mandated that brokers must disclose both the existence and size of commissions, provide impartial advice, and owe a fiduciary duty to borrowers. This ruling has broadened the legal principles that apply to the relationship between a motor dealer and a consumer, such that all commission payments and structures would fall under scrutiny, not just those under DCAs.
Indeed, given the existence of commission payments in mortgage broking, insurance and various other forms of lending, the decision could be read across various other sectors outside of motor finance.
Following the ruling, permission was granted for an appeal to the Supreme Court. The Supreme Court is due to hear these cases in April and ahead of the hearing, we have seen the Treasury, as well as a number of other interested parties seeking permission to ‘intervene’ and make submissions. As noted further below, not all parties were successful in these applications.
In addition to the Johnson proceedings, in December 2024, the High Court published its judgment in the Clydesdale Financial Services Ltd (trading as Barclays Partner Finance) Judicial Review of an important Financial Ombudsman Service (FOS) decision that found against it in a motor finance commission complaint concerning a DCA commission, brought to the FOS by a customer (Ms Jenna Lewis). The Court dismissed all three grounds for judicial review. The decision is perhaps most important because the Court affirmed that the FOS’ findings in relation to redress were appropriate (more on the implications of this below). Permission to appeal this decision has been granted.
Regulatory response
Just over a year ago, in January, the FCA had already announced that it was going to implement a Skilled Person Review to identify if there were widespread failures within the industry which had led to financial losses for consumers. This was also the first time it introduced a pause for firms and FOS for handling of complaints regarding this matter – see our article from the time for more information.
The FCA remains in the process of concluding the Skilled Person Review, having announced in later in 2024 that more time was needed to complete the work. It is also reviewing its rules on commission disclosure to understand the implications of the Court’s findings, albeit that remains subject to the Supreme Court hearing once it takes place. Nonetheless, the FCA's relatively ongoing proactive stance underscores the importance of compliance and the need for firms to adapt to evolving regulatory standards, as much as can be done with the information available.
Financial implications
Since the FCA’s initial announcement that it was carrying out the Skilled Person Review, the expectation from the industry has been that some form of redress scheme is what lies ahead. The FCA has not been explicit that this is the case, but it seems reasonable to assume that the Review is intended to work through the potential scope of any such scheme, and importantly to determine the methodology for any redress payments.
Presently there appears to be a difference in approach to quantum between the Courts and the Financial Ombudsman Service. The Courts appear to favour an approach where the appropriate redress to a customer is the payment of the commission paid to the broker, which in many cases is relatively modest. Conversely, the Financial Ombudsman Service have sought to apply a counterfactual approach to quantum, considering that full disclosure of the commission model and payment, would have allowed the customer to negotiate down the interest rate. Where a DCA commission was paid, such an approach would open the door to redress in the form of difference in charges between the interest charge and lowest possible rate. This counterfactual approach appears flawed, given it assumes that the motor dealer and lender would have been prepared to lower the interest rate to the very bottom in all cases.
Several major financial institutions have responded to recent developments by either setting aside substantial reserves to cover potential claims or increasing the sum of any existing provision, something the FCA itself said all firms potentially affected should be doing. Barclays has allocated £90 million for motor finance claims, while Close Brothers has set aside £165 million in anticipation of the appeal in April 2025 and Lloyds Banking Group has allocated approximately £1.15bn for the same purpose. These provisions highlight the financial risks and uncertainties facing the industry.
Recent Developments (January - February 2025)
- Extension of Complaint Deadlines: On December 19, 2024, the FCA extended the deadline for motor finance firms to respond to complaints about hidden commission payments to December 4, 2025. This extension aims to manage the high volume of complaints expected following the Court of Appeal's ruling and any subsequent Supreme Court hearing.
- Supreme Court Appeal: Close Brothers was granted permission by the Supreme Court to appeal the October 2024 ruling. The FCA plans to formally intervene in the case to share its expertise and ensure a swift resolution.
- Inclusion of Car Leasing: The FCA's extension of the complaint deadline also includes car leasing agreements, despite these not being covered in the Court of Appeal's judgment. This move significantly broadens the scope of potential complaints and redress.
- Treasury's Intervention Rejected: On February 18, 2025, the Supreme Court rejected the Treasury's request to intervene in the motor finance case, as were the Finance and Leasing Association and a group known as Consumer Voice. Chancellor Rachel Reeves had sought to make representations, citing concerns that a victory for claimants could damage the motor finance industry. However, the court allowed the Financial Conduct Authority and the National Franchised Dealers Association to intervene.
- High Court Decision on FOS case: Clydesdale Financial Services Ltd (trading as Barclays Partner Finance) brought a Judicial Review against a FOS decision that had found in the consumer’s favour, in respect of in a motor finance commission complaint concerning a DCA commission. The High Court upheld the FOS’ decision but, permission to appeal has been granted. This is a case that has potential implication for how the FOS and FCA may determine any redress methodology for DCA commission arrangements moving forward.
- Industry Reactions: Industry experts, including Martin Lewis, have highlighted the potential for a large number of complaints and the significant financial impact on lenders. Some industry leaders, however, believe the impact of commission redress payments may be minimal due to recent regulatory adjustments. Key to whether that bullishness from some becomes reality is likely to be the FCA’s ability to limit the scope of any redress scheme and in particular whether it reigns in the rather generous methodology used by the FOS when the findings from two cases were published last year – effectively refunding the full amount of interest paid over and above the lender’s set rate regardless of how that actually reflects what the customer would have paid in interest given other considerations around commission.
Consideration for lenders and brokers
- Increased Financial Exposure for Lenders: Given the Treasury's own stated reasons for seeking intervention, lenders arguably face the full brunt of potential compensation claims, which could amount to billions of pounds. Analysts estimate that the total compensation could reach up to £44 billion. This financial burden could severely impact the profitability and stability of major motor finance providers.
- Operational and Compliance Challenges: Lenders and brokers must now face up to a greater likelihood of having to navigate a more stringent regulatory environment and litigation. Lenders will need to consider their systems and processes to respond to the legal and regulatory landscape, as it provides ample ammunition for consumer champions and claims management companies. As commission payments and structures have been brought into the light, lenders will also need to reassess their commission structures, enhance transparency, and ensure compliance with the new legal standards. This could involve significant operational changes and increased compliance costs.
- Potential for Broader Industry Impact: The risk of the Johnson ruling being applied across other sectors remains. Lenders and brokers will be following the Supreme Court proceedings closely as they review their procedures and practices and potential risk of scrutiny. This broader impact could reshape commission-based sales models across various industries.
The motor finance industry is at a critical juncture, with recent legal and regulatory changes reshaping the landscape. The Supreme Court's rejection of the Treasury's intervention highlights the growing emphasis on consumer protection and the significant financial risks facing lenders. A redress scheme in motor finance appears inevitable however, the costs of delivering redress and the methodology for any redress scheme remains unclear.
Our integrated legal and regulatory consulting practices can help navigate the evolving legal and regulatory requirements, offering the knowledge and resources necessary to respond. We can offer support with ongoing or potential litigation, as well as with firms’ responses to complaints surges or updates to policies and procedures.
Feel free to contact our teams with any questions or to discuss how we can assist you in meeting your regulatory obligations.
