Commission disclosure: top ten questions

The Asset Finance Connect (AFC) webcast analysing the impact of the Court of Appeal’s shock decision regarding commission disclosure and fiduciary duty attracted a record attendance, with participants submitting dozens of questions about what the ruling means for the asset and motor finance sector, how it will change the lender/broker relationship, and the potential read-across to other areas of finance.

There were also large numbers of questions about the operational requirements, both in the immediate aftermath of the judgment and longer term. Given the unexpected nature of the ruling, which appears to go beyond the regulatory requirements at the time, there is considerable uncertainty about how to proceed.

Q: When should the commission be disclosed? At quote, acceptance or document signing?

A:  The principle is that a customer should be providing their informed consent to the payment of the commission. This is what must direct the timing and nature of the disclosure.

Given the potential for the Court of Appeal decision to apply in a wide number of circumstances, with different products and distribution strategies (potentially with multiple intermediaries), it is necessary to look holistically at the different interactions in the customer journey with the customer and assess the best time for disclosure.

This should be at the earliest point possible so the customer can consider this alongside other important aspects of the transaction(s). This will be before signature of the finance agreement. We are likely to see this evolve as firms deal with the pipeline of existing business and review their distribution strategies, customer types and particularly with Consumer Duty in mind (for regulated firms).

Q: What distinguishes an “unsophisticated” consumer from a “sophisticated’”consumer?  For example, if the borrower is a Ltd Co, aren’t they automatically seen as “sophisticated”?

A:  We can see the Court making reference to the customers in the decisions as being “unsophisticated”, noting that they were in relatively low paid jobs, financially unsophisticated and therefore potentially vulnerable. Whilst the Court have used these implied characteristics to form the basis of some of their decision making, the findings of the court (or certainly parts of it) could be applied to a broad cohort of customers, such as business customers.

The reference to “unsophisticated” customers certainly calls into question the circumstances in which the facts may be applied and may distinguish a number of instances; however caution should be exercised in assuming it doesn’t apply to a wider set of customer such as limited companies.

Again, it is necessary to assess the individual relationships and circumstances of each customer. This is obviously difficult to implement on an operational basis, which is why we have seen a prudent approach to disclosure and consent being applied.

Q: If you have full disclosure, does the challenge of sophisticated v unsophisticated go away?

A:  In short, yes. The issue arises due to the fiduciary duty which is found to exist between the intermediary and the customer. Assuming commission and other relevant matters are disclosed in a manner which draws it to the attention of the customer (not “buried in the terms”) at the appropriate time in, to which the customer consents, there cannot be a suggestion that the commission was “secret”. 

Q: Must it be wet sign or is e-signature confirmation enough?

A:  The customer is required to provide informed consent. As such it doesn’t need to be “wet”, provided the customer can consider the information and provide such consent. This is in line with standard contracting principles and the usual controls around e-signature. This is again dependent on individual customer journeys and how documents are delivered and handled.

Q: What if the consent is not given?

A:  The effect of the decision is to extend the duty owed by the intermediary (and lender) to a wider set of circumstances than previously understood (or indeed required by FCA rules). Lenders and intermediaries are therefore required to consider how the decision may apply to their particular circumstances.

Amongst other matters, obtaining consent is a way of reducing the risk of a challenge of “secret commissions” being brought, and otherwise it is necessary to be clear about why consent is not required.  The absence of consent obviously raises the question of what should be done, which may be not to pay the commission or enter the transaction. This will all depend on how the arrangements are structured, and in general the customer should be made aware of the payment of commission early in the transaction to avoid this situation.

Q: How are AR/ IAR’s affected here? The lead business has the relationship with the lender, but the AR’s often “face” the customer in their own business name.

A:  The Principal is responsible for the conduct of the AR from a regulatory perspective. The Court of Appeal decision may apply beyond the regulated space however, so intermediaries (acting as ARs) need to review their contracts with Principals and lenders and assess how their practices may need to be adapted to meet these requirements. This is potentially a different commercial risk to that covered by a Principal and AR relationship.

Q: Should brokers also be disclosing commissions through own paperwork (e.g. suitability letters) as well as having the customer sign the lenders’ documents?

A:  According to the Court of Appeal decision, intermediaries (car dealers in those circumstances) may owe a duty to their customers, which is wider than previously understood. As such, intermediaries are required to consider the type of disclosures they make to customers (including the amount of commission) to obtain their informed consent to the payment.

In the decision, the Court went further and found that lenders could also be held liable for the non disclosure as an accessory; they also said that lenders may not be able to rely solely on terms of business and practices in relation to disclosure and should effectively ensure these are provided.

This has resulted in some lenders also communicating the nature and amount of commission to customers to comply with this. We will see individual lenders and intermediaries continue to review this approach, particularly in respect of the overall customer journey, but it is likely that both these disclosures will be made pending any Supreme Court decision or other prescription in rules.  In circumstances where both brokers and lenders are providing disclosures it is critical that these align and are not contradictory.

Q: If a broker gets a terms of business signed with the client that sets out a fee will be charged and how much that will be at the start of a relationship do you still need a deal by deal disclosure?

A:  The case doesn’t expressly refer to fees payable by customers to intermediaries, but intermediaries need to ensure that their services and charges (including lender commissions, where applicable) are clearly described to customers.

Customers should be able to easily understand what the role of intermediary is and anything that may be influencing their advice, recommendations or proposals. 

According to the Court of Appeal decision, brokers or lenders including disclosure in terms and conditions may not be sufficient to disclose a commission if a broker or lender is aware that a customer is unlikely to read it. Brokers will need to consider whether disclosure in terms is sufficient based on the circumstances of the customer and their own model. 

Q: Will funders put the disclosure as a clause in the agreement in due course ?

A:  This will be for each lender to consider accordingly to their own particular distribution channels, processes and documentation. We would expect to see the market to adapt over coming months, particularly if there are changes to regulatory requirements or other court decisions

Q: If it turns out that brokers have owed a fiduciary duty of care all along for both regulated and unregulated cases what is the risk of future claims from past cases written – who will be on the hook the funder or the broker?

A:   All matters are fact specific, as they are in the Court of Appeal decision. The market has a range of distribution strategies and, contractual arrangements. The key thing is to assess individual cases and circumstances and assess whether the decision could apply or whether there are distinguishing features and then look at those individual facts. This is one of the key issues for lenders and intermediaries to consider in their own unique circumstances and perhaps even on a case-by-case basis. 

Wayne Gibbard will be considering these and other issues in more depth as a speaker at the keynote opening session in the AFC conference on November 26^th, examining the legal issues around commission disclosure.  

The conference will also include interviews with Stephen Haddrill, FLA director general, and NACFB CEO, Jim Higginbotham, discussing the critical issues the industry faces, and in-depth sessions examining the implications of the Court of Appeal decision for business, consumer, and auto finance.

To register for the AFC UK Autumn conference visit the conference website or contact Louise Clavey for ticket information at louiseclavey@assetfinanceconnect.com

We would like to express our gratitude to Wayne Gibbard, partner at Shoosmiths, for taking the time to answer our members’ questions. Wayne’s expertise and commitment has been instrumental in helping us navigate the complexities of this topic. We are deeply appreciative and delighted to be working with Shoosmiths who have been our legal advisors since 2021.