Following the FCA's recent further intervention into commission arrangements in motor finance, it is difficult to escape the sense of "déjà vu". Retail banks have faced 12 years (and counting) of PPI claims. So is the motor finance commissions claim wave going to go the same way? Certainly, many within the FS industry anticipate that the FCA will look for a change in DISP to provide for redress, as they did with PPI. However, it is not a foregone conclusion and there is uncertainty that any such redress would be accepted by Claims Management Companies prosecuting these claims or the FS industry. Others also remain unconvinced that motor finance commissions can be treated the same as PPI.
The statement did nothing to resolve the thousands of court cases that are already in the system and which continue to be issued. The approach adopted by the Courts has, to date, been in stark contrast to that of the FOS. Anecdotally, it would appear that the FS Industry has been more successful in defending court actions than it has in successfully resisting complaints referred to the FOS. That difference is perhaps due to a more objective judicial approach being applied. It also presents the FCA with a fascinating dichotomy, how can there be such a difference in the material findings in a court of law –vs- a FOS adjudication on materially similar facts?
With the pause in complaints implemented, the Court actions are likely to take on an increased importance like PPI, until there is a settled Court decision, which addresses the substantive legal arguments of both sides. We anticipate this wave will continue to affect the FS industry well into 2025.
For what it is worth, the FCA has indicated that it is in "listening mode" and we anticipate that when Firms make their s. 166 submissions. A large part of the submissions will be similar to the legal arguments that have been put before the Courts.
Most of the legal claims we have dealt with (and we have experience of dealing with this wave since its inception in 2019), involve allegations that regulated motor finance agreements are "unfair" for the purposes of s 140B of the CCA 1974. This is largely because the motor dealer received a commission from the Firm and the nature of that commission resulted in the customer being charged a higher rate of interest.
However, that approach concentrates on just two elements of a vehicle finance purchase; interest and commission. In reality, the decision to purchase a vehicle on finance involves a multitude of separate elements, including car price, part exchange value, amount of deposit, optional extras, warranty, manufacturer subsidy/promotion, amount of instalments; term; APR. Some of these are elements known to a customer, some are not known – but they all go to the overall makeup of a deal and must considered when looking to answer the fundamental question of whether the customer obtained a "good deal".
The point is that the transaction is the result of a negotiation, which appears to have been lost amongst much of the commentary by consumer champions recently. You can't remove one element (commission), but leave the other elements untouched. A dealer who receives a commission can make adjustments to other elements of the transaction in favour of the customer. One who doesn't, can't. The totality of the final bargain reached has to be analysed.
It is impossible to assess what if any, loss has been suffered by the customer without consideration of these other elements in each case. In many cases, the customer could have suffered no loss (regardless of commission model), as they obtained a "good deal" – both on the finance and the purchase price and this goes directly to the question of any redress scheme the FCA have in mind.
As to unfair relationships, when a Court considers whether an agreement is unfair, it must consider all the circumstances of the particular transaction in question. There is no "one size fits all" approach. Interest rate and commission are just two factors amongst the myriad of others that go into making up the final deal. All of the elements in the transaction must be considered. FOS have failed to properly address and give appropriate weight to this "waterbed" of factors in their decisions. By contrast, the Courts have.
In coming to decisions, both the Courts and FOS have referred to the seminal PPI case in the Supreme Court - Plevin v Paragon Personal Finance Ltd [2014] 1 WLR 4222 ("Plevin"); and more recently the Court of Appeal case - Wood v Commercial First Business Ltd & ors and Business Mortgage Finance 4 PLC v Pengelly [2021] EWCA Civ 471 ("Wood").
However, neither case reallysits on all fours with the present wave, as both can be distinguished in relation to a motor finance commission claim. In the context of PPI, the Supreme Court concluded in Plevin that a lender’s failure to disclose the commissions payable to it from the sale of PPI rendered the credit relationship unfair within the meaning of s.140A. However, there are important differences in the facts of Plevin and a claim for motor finance commissions.
In Plevin, a borrower who purchased a single premium PPI did so for a premium that, unknown to them, included a very substantial commission element, both for any introducing broker and for the lender itself. No disclosure was made about that aspect of the transaction and the Supreme Court considered that the lender was obliged, in the interest of fairness, and given the size of the commission; and the fact that it (lender) was going to receive it, to disclose that commission to the borrower. The factual situation in motor finance is very different – the lender receives no commission. The lender is under no direct regulatory requirement to make any disclosure about commission; that being the obligation of the receiving party, namely the broker or dealer.
Plevin can be further distinguished from a motor finance agreement, in that had the amount of commission been disclosed, it was found that Mrs Plevin would have questioned her decision to take PPI. However, in the case of motor finance, the customer is not faced with the decision of whether or not to take finance. The sale is not dependent on the finance. The decision is which finance to take. In a finance agreement, the customer is given specific information about the cost of borrowing by virtue of the interest rate and the APR, both of which need to be disclosed. The customer is therefore able to fully compare finance products.
It should be noted that the unfair relationship in Plevin did not arise simply because there had been an undisclosed commission. Rather, it was "a question of degree". There must be an extreme inequality of knowledge. The key fact was that 71.8% of the sum paid by Mrs Plevin went to commission and Ms Plevin was required to pay contractual interest on the commission payment. By contrast, the motor finance commissions paid are normally a small fraction of the amount financed and well below the "tipping point" of unfairness found by the FCA (50%+)(see DISP App 3.3A.4 E).
In our experience in handling claims and knowledge of the industry generally, in the vast majority of cases, the pre-contractual documentation alerts customers to the fact of commission. If commission was a concern to a customer, they could ask for more information and the dealer would have been required to provide it. Indeed, that is how the regulatory obligations on the dealer operate (pursuant to CONC 4.5.3 R and 4.5.4 R).
As to Wood, again the facts are materially different. In Wood, the parties were involved in unregulated commercial lending secured over property. The broker was contractually engaged by the customers for the express purpose of finding loan finance and for that service, was paid a stipulated fee by the customers. The terms of the retainer with the customer stated that if the commission paid was more than £250, the customers would be told the exact amount. More than £250 was paid in commission and the broker did not disclose the commission.
In the negotiation of a car purchase on regulated finance terms between customer and dealer, there are three parties to the transaction, customer, dealer, and lender, each of which act as principal in their own right. Each of the commercial parties involved are plainly carrying out that transaction intending to make a profit. On proper constructions, there is no relationship of agency between customer and dealer. The dealer is not engaged by the customer to find the "best" finance deal. The dealer receives no remuneration from the customer for that aspect, as the customer is well aware. The dealer wants to sell a car and the customer wants to buy one. It would be odd if the dealer was acting as an agent (let alone fiduciary) in the circumstances involving a "buyer and seller".
In our view, in a typical dealer-introduced case, there cannot properly be said to be a duty on the dealer to be impartial and to give disinterested advice, information, or recommendations to the customer. There is plainly a considerable difference between a dealer, whose principal motivation is to sell the customer a car and a mortgage broker who is engaged solely to obtain finance.
However, and notwithstanding what some consumer champions might say, the position is fluid and uncertain. It is all still to play for.
