Motor finance agreements under the microscope

MotoNovo has joined Close Brothers in pausing the writing of new UK motor finance business, as the fallout from the recent Court of Appeal decision in three mis-selling cases gathers momentum, and all eyes are now on the paper trail generated between lenders and intermediaries, including brokers and dealers.

In a statement on its website, MotoNovo said: “following a recent Court of Appeal decision which considered the payment of commission from lenders to motor dealers, we’ve temporarily paused accepting new finance proposals while we make important updates to our processes.”

Earlier, Close Brothers had said it would not write new motor finance business “while we review and implement any relevant changes to our documentation and processes to ensure compliance with these new requirements”.

Both the lenders were directly involved in the cases subject to the Court of Appeal ruling but maintained that they had acted in accordance with requirements at the time, and are now taking action to change processes in the absence of any new regulatory guidance.

FirstRand, the South African-based parent company of MotoNovo, pointed out that it had already successfully defended what it called “the large majority” of mis-selling claims in the lower courts, as “the courts consistently found that commission payment disclosures met regulatory and legal requirements and finance arrangements with customers were fair.”

FirstRand’s statement continued: “The group continues to believe that its historical practices were compliant with the law and regulations in place at the time. However, the group has also acknowledged that uncertainty persists whilst the FCA process runs its course and legal risk remains as individual cases continue to be tested and taken on appeal. This uncertainty was a contributing factor to the group’s decision to raise a pre-tax accounting provision of R3 billion for the for the year to 30 June 2024.”

There are growing signs that the push to examine and update internal procedures has also gained momentum amongst lenders who have not, so far, seen any of their disputed cases taken to the Court of Appeal.

Honda Finance Europe is believed to have taken similar action, while Lloyds Banking Group has issued a statement saying it is assessing the potential impact of the decisions, as well as any broader implications, pending the outcome of the appeal applications to the Supreme Court which both FirstRand and Close Brothers have indicated they will make.

In its Q3 2024 Interim Management Statement put out on 23 October, Lloyds stated it had recognised remediation costs of £124 million in the first nine months of this year, down on the £134 million allocated over the period to 30 September 2023, which it described as “largely in relation to pre-existing programmes, with no further charges in respect of the FCA review of historical motor finance commission arrangements”.

In its latest statement, Lloyds said: “The Court of Appeal has determined that motor dealers acting as credit brokers owe certain duties to disclose to their customers commission payable to them by lenders, and that lenders will be liable for dealers’ non-disclosures.

“This sets a higher bar for the disclosure of and consent to the existence, nature, and quantum of any commission paid than had been understood to be required or applied across the motor finance industry prior to the decision.

“Our understanding of compliant disclosure was built on FCA / regulatory guidance and previous legal authorities. These decisions relate to commission disclosure and consent obligations which go beyond the scope of the current FCA motor commissions review.”

Edward Peck, AFC CEO, said: “It is clear that the motor finance market is in turmoil, and is facing retrospective challenges to commission payment regimes which were accepted at the time they were made.

“The FLA have also provided guidance requiring lenders to disclose commission, how it has been calculated and to get informed consent from customers, but the challenges facing dealers, brokers and lenders are only just beginning.

“On Friday AFC is hosting a webinar designed to address these and other critical issues. We will give an update on what lenders and intermediaries need to know, showcase the latest advice from the FLA and others, and provide our summary of likely next steps for the industry as it seeks to respond.”

To join the AFC webcast at 2pm on Friday 1st November, register here.