Commission disclosure – more questions than answers

In the wake of the shock Court of Appeal decision relating to commission disclosure in the motor finance sector, what the asset finance industry as whole needs now is collaboration, co-operation and communication. That was the message from the 1,600 participants on the Asset Finance Connect (AFC) webinar analysing the many issues raised by the judgment.

There was a broad range of questions put to the expert panel, which included the heads of the two industry bodies – FLA chair John Phillipou and NACFB CEO Jim Higginbotham – alongside Shoosmiths partner Wayne Gibbard.

On the topic of commission disclosure in general, some felt that “Unless a commission/ fee is disclosed on a clear basis, how can any customer, corporate or not, make a decision that they are sure regards it being best, and most suitable, for them? If a broker is not happy to disclose (fully) then is that due to them not being satisfied they can justify it?”.

Others pointed out that “If intermediaries or retailers are confident that they add value, why would they be reluctant to disclose commission and seek informed consent in ANY circumstances?”

Edward Peck, Asset Finance Connect CEO, said: “Several participants described commission disclosure as ‘inevitable’.  But the path is really only clear for consumer auto and less clear for business auto and asset finance. Even beyond understanding the scope, we also need to worry about the commercial effects of the verdict on the industry, what it means for the current industry models and how we can manage the customer journey. Communication is key: between sales and compliance teams; between the NACFB and FLA; and between the industry and its customers.”

One participant, for example, pointed out that “very few industries have to disclose what is effectively the price of the materials and the sales price. If I build a brick wall for a customer, market forces would ensure I was competitive and I would not have to disclose the price I paid for the bricks.

“Disclosing commission is not a level playing field as we all have different service levels, cost bases and skill sets. Should a specialist in photocopier finance be able to compete solely on price with a broker who specialises in agriculture or medical or north sea exploration.”

Methodology

But the majority agreed that “full disclosure needs a lot of work – and simplification.” There were lively exchanges touching on the methodology for commission disclosure, underscoring the need for collaboration in ensuring fair outcomes for the industry as well as for the consumer.

Several participants saw this as letting the genie out of the bottle, with little prospect of it ever being forced back in. For that reason, there were several questions similar to this: “It’s not about disclosure it’s about everybody disclosing. Currently some say we must some are saying don’t bother. There is no consistency, and it IS STILL a competitive issue.”

Discussion centred on three considerations: 

• Should there be a template disclosure letter, rather than each lender issuing their own form?
• How should any commission be described, both in financial terms (perhaps as a percentage of the total deal) and in descriptive terms (could it be classed as a “fee”, or “revenue/income/turnover”)?
• Is the responsibility for disclosure primarily with the lender or the broker?

Currently there are no clear-cut answers to these points, with several questions about how realistic it is to have one standard customer disclosure form, given differing lender requirements, differently structured deals, and different broking models.

Communication

Other questions reflected the complexity of explaining commission arrangements: “I think it is somewhat unfair to the customer to quote the % and or amount of the commission because not all funders offer the same terms. We may be making more commission than another broker but still able to offer an overall better deal / repayments to the customer.”

Another participant pointed out: “Our ToBs are based on NACFB templates – they refer explicitly to the fact that we will receive a commission from the lender and that this sum will be notified in the loan document.  If we now have to have another process that explicitly asks for approval I don;t have an issue with that.  What is not our job is to work out the effect of paying that commission on APRs – that’s the lender.”

There were a lot of questions raised about the timing and the practicalities of disclosure – “In motor finance, is each party in the distribution chain obliged to disclose commission? All of them? Pre-contract and at drawdown?”

Others wanted to know if commission should be disclosed before the funding process was started, and, most particularly, whether an e-signature was valid in such circumstances.

Consent forms wording

There was widespread concern around the wording of some lenders’ consent forms, which had been rushed out in the frantic days post the Court of Appeal decision.  One participant summed up the result as: “The Funder Commission Disclosure Forms are a disgrace. They make the broker look like crooks. Many state you may not be getting the best deal and suggest the client look elsewhere. And we deal with sophisticated non-reg clients.”

Another topic which generated considerable interest was the apparent distinction made in the judgment between “unsophisticated” and “sophisticated” consumers. Many agreed with the view that: “Surely the simple answer is if the borrower is a Ltd Co i.e. non-reg, they are sophisticated. A regulated client is not sophisticated.  How can a Ltd Co be considered to be vulnerable?”

Similar observations were made about agreements signed by finance professionals or business directors, with one participant observing: “I disagree that SMEs are unsophisticated, In respect of understanding contracts, that is a key component of life as an SME, both in issuing and receiving terms and conditions. They must be sophisticated in this regard.”

Gaming

A number of questions related to the impact of the ruling on the lender/broker relationship, with one summing up the issue as “Gaming – there is a broker concern that rather than a customer going to the bank disclosed, the customer approaches another broker, second broker does the deal for less and wins it.”

This was underlined by the question put as “What about a broker just “stealing” another brokers hard work? Will lenders stop dual acceptances or again see it as a way to still get their yield and reduce their cost basis when paying brokers…”

AFC CEO, Edward Peck, said: “These questions, and the many queries about how to explain commission rates or suggestion of a move to fixed rates, or no commission from funders at all, serve to underline the need for the industry to collaborate to find a workable solution.”

Read-across

There were many questions about the activities that fall within the scope of the Court of Appeal judgment, including whether it applies to non-regulated activities, B2B loans, unsecured cashflow lending or indeed all business finance introduced by brokers.

Wayne Gibbard, partner at Shoosmiths, said: “What we can say at this stage is that we will need to apply the judgment in different circumstances, and there will be different conclusions and outcomes. Regulated/non-regulated, commission/no commission, motor/non motor are all on a different customer journey.

“While the court is saying consumers were not given the right level of information to make an informed choice at the right time, the exact requirements are very fact specific.”

Impact on industry

As regards the longer-term impact on the motor and asset finance industry, questions concerned the likelihood of a redress scheme, the possibility of retrospective claims to pay back undisclosed commission, and who would foot the bill.

As one participant put it: “Could compensation have to be paid on every deal, historically, where a commission was paid to an introducer/broker? How far back/how many years could this go?” with another asking: “Is there any lobbying being done with the FCA to ensure we don’t get a flood of CMC complaints from the outcomes of this case? Operationally that will make it so difficult for businesses to deal with.”

Edward Peck said: “Co-operation is key to providing answers to the questions that came through loud and clear on our webinar. That’s why we’ve invited Stephen Haddrill, director general of the FLA, and Jim Higginbotham, CEO of the NACFB to our conference in London on November 26th. And in the light of the verdict, we will be redesigning the agenda to address the big topics that now need to be considered.

“We expect that the implications of the judgment, and the effectiveness of the guidance will be a big focus of discussions between all attendees.”

We look forward to seeing you at this must attend event. You can find ticket information at the conference website or directly from Louise Clavey at louiseclavey@assetfinanceconnect.com.