Conference Reviews

Commission disclosure: what’s happening, and what lessons can be learned?

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Plenary session on commission disclosure at the Asset Finance Connect Autumn 2024 Conference with Stephen Haddrill, director general of the Finance & Leasing Association (FLA), Jim Higginbotham, CEO of the NACFB, and Wayne Gibbard, partner at Shoosmiths.

Summary

The packed audience for the opening plenary session of AFC’s autumn conference underscored the significance of October’s Court of Appeal judgment on three motor finance cases. Unpicking how the industry should respond to a wholly unexpected ruling saw more than 400 delegates fill the room to capacity, with more in an overflow space, all keen to hear from a panel of legal, regulatory and auto finance experts.

Moderator David Betteley, AFC head of content, pointed out that the previous month had been filled with activity as lenders and intermediaries struggled to understand three key elements from the appeal’s findings: the apparent expansion of fiduciary duty; the potential scope of the new requirements spreading beyond auto finance; and the nature of the remedy.

“We know there are inherent conflicts within the industry – you’ve got the consumer who wants the best deal; the dealer who is looking for a good outcome for them; and then the lender who needs to ensure everyone complies with the regulations but who is also wanting to incentivise dealers and brokers to win more business. That’s three interested parties and four moving parts,” Betteley said.

Shoosmiths partner Wayne Gibbard began by outlining the characteristics of fiduciary duty, which requires brokers and lenders to demonstrate they are acting in the best interests of the consumer. He emphasised that this set a high standard to meet, as the complexity of auto finance activities, including the reliance on intermediaries, placed the sector in “stark contrast” to other professions such as law or medicine.

Listen to Wayne Gibbard’s explanation of fiduciary duty:

Gibbard also underlined how each Court of Appeal case had separate characteristics, depending on whether the commission had been kept completely secret (in which case it might be seen as a “bribe”), or whether there had been partial disclosure, with additional information and consent needed, where the lender is seen as an accessory because the dealer has breached their obligations under fiduciary duty.

Hear more about the lender’s involvement:

As well as understanding the immediate impact on operations, there is the wider issue of the impact of the ruling on lenders’ and brokers’ back books, with Goddard observing “this is clearly a critical issue but unfortunately all sorts of numbers are being thrown around which is unhelpful. This is a very fact-specific issue. What we can see in the ruling is the distinction between the sophisticated versus the unsophisticated buyer, but we will have to wait for the Supreme Court decision before we have clarity.”

In his commentary FLA director Stephen Haddrill pinpointed fiduciary duty as the “most contentious” element of the judgment, but also highlighted the critical nature of the problem, which is that the regulator and the legal ruling were now in conflict. “Our criticism of the FCA is that we have been following the regulatory regime, and it’s a reasonable assumption to make that the regulation is consistent with the law, but at the moment it isn’t and I can’t understand how that can happen,” he pointed out.

Does “one size fit all”?

The FLA was quick to issue guidance for its members in the wake of the Court of Appeal decision, which lenders have used to develop new documentation for intermediaries. However Haddrill was sceptical about suggestions that there should be a single, standard industry template, pointing out that competition law forbid mandating any part of a commercial contract which bears on pricing.

Hear Haddrill’s views on “one size fits all”:

Fellow panellist Jim Higginbotham, NACFB CEO, agreed stating: “While it’s a lovely aspirational goal to have a single disclosure document the important thing is that they align, so the broker disclosure and the lender disclosure actually describe the same contractual scenario and fact back.”

This call for consistency of messaging was endorsed by all panel members, who also called for more action from government to ensure that red tape complications do not strangle the push for growth.

Haddrill noted: “Fifty percent of the litigation funding in Europe comes into the UK, and we are very vulnerable because of the overlapping regimes of the Consumer Credit Act, regulatory requirements and common law.

“They don’t necessarily fit together and so that creates avenues for complaint. Government has got to create greater certainty.”

In contrast to the Court of Appeal rulings, which were focused on individual consumers, Higginbotham pointed large companies use a range of commercial finance models, and as sophisticated uses of intermediaries to source funding, it is up to those businesses to apply their own risk appetite.

Hear Higginbotham explain the challenges in the commercial lending sector:

However, in the absence of a definition of a “sophisticated” or “unsophisticated” customer, many lenders are opting to treat all cases the same as regards commission disclosure in order to ensure they achieve the sort of transparency the Court of Appeal ruling requires. Panel members emphasised the need for further clarity on requirements, which will only happen when the Supreme Court hears the appeal.

“Ultimately brokers are not just concerned with price – there are other issues like timings, flexibility, risk appetite that are taken into account before placing a deal. The big difference with motor is that in some circumstances it’s a single, tied funder. But most brokers are going to a panel of ten or twenty lenders, all of whom have different solutions so the process of finding the right solution is very much front and centre,” Higginbotham argued.

Making changes at pace

The second part of the session looked at how lenders are tackling the practicalities of the new world they have found themselves thrown into. The immediate result of the confusion created by the Court of Appeal decision has been the need to make “dramatic changes at pace”, according to Mike Pierce, MD of Synter Finance.

“For example, we’ve looked at whether fiduciary duty can be disclaimed. Well it can, but the advice is that it would be prudent between now and the Supreme Court appeal to still be disclosing fully and getting consent to cover that uncertain period while we wait.

“No one is pushing back on the common-sense approach of disclosing the full amount and getting informed consent each and every time,” Pierce said.

But navigating the different advice, particularly in situations where there are both primary and secondary lenders, is making the customer journey more complex, with additional requests for consent. As Gibbard pointed out, this the result of the court’s frustration and concern around apparent conflicts of interest and the need for greater transparency.

Mike Randall, CEO of Simply, characterised the lender’s approach as “trying to keep it simple. It’s not about trying buy business; it’s about supporting the broker community and supporting customers to make process easy as possible.

“The ruling is about disclosure, and we are fine with that. It’s not about being competitive as to what and when you disclose,” he said.

Graham Wheeler, non executive director at Hodge Bank, agreed that lenders, far from seeking to make commercial gain, had been scrabbling to get new IT systems in place to cope with disclosure requirements, given the very little notice of the Court of Appeal changes.

“Longer term lenders will adapt and change and might come closer to one process, but the immediate push is becoming compliant. Then the real concern is the back book.

“The focus will be on how to develop a legal strategy for claims coming that way, the resources to manage that, and how they might be able to defend some cases and situations they’ve got in comparison to the three cases the court heard,” Wheeler predicted.

Both agreed the template concept is flawed, but saw an opportunity for more commonality of approach as the rush to produce documentation in the immediate aftermath of the ruling subsides. Currently multiple requests for consent risk making the customer journey more complex and confusing and Randall pinpointed what he called “an opportunity to tidy ourselves up and be consistent with each other.”

Of course, with greater consistency comes a focus on comparisons, and the panel agreed there could be customer push back on commission, although speakers were divided on whether this would become common or whether the industry should consider the options if that does happen. A much bigger concern is the likely rise of activity by claims management companies, with signs already that consumers are turning to this route to seek compensation.

EU comparisons

Nor are these challenges unique to the UK. Conference delegates heard from Isak Bengtzboe, chief policy advisor with Eurofinas, the umbrella body for consumer credit providers in Europe, who advised that across the continent there are a growing number of stakeholders, regulators and supervisory bodies at both the international and national level.

“All of them have their own various interests and there is a complete lack of synchronicity and so a lack of consistency and coherence,” Bengtzboe reported. “We have feisty ombudsmen trying to push in a certain direction and they do not agree there is enough protection for consumers.”

Digital solutions

The most likely response to this according to panellist Murag Baig, head of auto and asset finance from headline sponsor FIS, is to move towards more digitisation. Pointing out that Covid had been the first development to encourage increasing digitisation, by giving the customer the ability to do an omni-channel journey in the dealership, or online or offline, Baig predicted that regulatory pressures would accelerate this trend.

“For example, under Consumer Duty you need to look at how the role of the dealer will change with the arrival of lots of mobility solutions.

“Lenders have lots of different business models but these need to work together to provide the consumer with the right price and the right offer. If the right option for that consumer is a subscription service, why would you push finance?”

Baig expects lenders to adopt centralised commission reporting and disclosure surveillance systems which look at compliance and disclosure requirements in any given circumstance and use AI to detect whether or not these are being met. “Digital is the best way of doing that,” he said.

By moving finance offline, vendors gain a better understanding of how assets are priced and collect information about how to make products more competitive and sustainable. But not all panellists saw this approach – which is close to the agency concept – would receive universal approval.

Both Wheeler and Randall argued that “the customer will decide the journey”, with the risk that if digital seems too complex and too prescriptive, the consumer may opt out. “It’s not going to change overnight. With SMEs, they want that arm round them and that support, and digital is not likely to appeal,” Randall said.

Bengtzboe highlighted a common view in Europe where “lots of lenders want to go digital, and consumers are happy, but the regulator says this is too easy and there’s not enough friction so it’s a bit too dangerous, because it could make it easier for people to get credit.”

But as Pierce pointed out, customers so far have proved to be less concerned about commission disclosures than the Court of Appeal judges might have assumed, with many expressing surprise that this had been identified as an issue, and most accepting that dealers are businesses and, as such, are looking to make a profit.

Gibbard explained that: “The court has taken a very binary view to say there are two separate things happening: negotiating the sale of the vehicle, including the part exchange value and so on, and then wearing a different hat to say I now have a fiduciary duty to go and source the best finance deal.

“I think that analysis is strained and in most scenarios there are some tensions. In that sense it’s a take it or leave it approach – if you don’t like the commission, then there is no deal.”

Digitization makes it possible to introduce a two-stage process, where after signing up to buy a car, consumers are shown a range of finance offers with associated details of commission payments as a separate process. However, as Gibbard pointed out this creates a “horrible” customer experience, and feeds into the concern that the dealer is not acting in the customer’s best interests. Haddrill agreed, cautioning that it was very important to avoid “regulation driving mistrust”.

Future trends

In conclusion Higginbotham said “we need to swallow a dose of reality. There are lots of competing regulatory, legal and other forces.

“We need to work back from the customer’s point of view to make sure their journey is the most efficient and appropriate it can be. There will be things we can work together on, certainly from a lobbying perspective, but we mustn’t lose sight of the common-sense outcome. We need to pare back complication.”

That approach for current operations was widely endorsed by the panel, but as Haddrill flagged up, the elephant in the room is the back book, and the question of how lenders and brokers resolve historic commission disclosure challenges will not be addressed for around a year, pending the Supreme Court appeal.

“What we as an industry need to do is hold our nerve and show we are a strong industry which should and can be trusted, so we create an environment such that when the Supreme Court deliberates, they – justifiably – feel they can be on our side,” Haddrill said.

Watch the AFC plenary conference session on commission disclosure in full here.