FLA highlights need for commission disclosure and consent

The FLA has told members they must now disclose both the existence and the amount of any commission payable on a motor finance arrangement in a briefing note issued to members in light of the recent Court of Appeal decision in three motor finance cases. The judgment found dealers, brokers and lenders had not disclosed conflicts of interest, or the existence of commission payments, and had failed to obtain informed consent in their dealings with customers.

The briefing points out the judgment in Johnson, Wrench and Hopcraft goes beyond the principles for regulated agreements, the FCA rules at CONC 4.5.3R. These require the intermediary to disclose to the customer, in good time before a typical intermediated credit agreement is concluded, the existence and nature of the commission arrangements.

However, the judges’ ruling places responsibilities on the lender (not just the intermediary) in relation to disclosure of and consent by the customer to the commission arrangements. Lenders can choose to make the disclosures and obtain the consents themselves, or rely on the intermediary to do so.

The FLA makes the point that if the lender requires or relies on the intermediary to effect disclosure and consent but if the intermediary does not do this, the liability is on the lender.

Disclosure

The briefing says that the lender should disclose any remuneration paid by the lender directly to the intermediary. Additionally and importantly, disclosure of remuneration paid by the intermediary (such as a broker) to another business (such as a retailer) should be made by the intermediary. These disclosures should relate to any commission, fee or other remuneration given to an intermediary in connection with the agreement.

It points out that Consumer Duty principles must also be satisfied with regard to any disclosure, so that the customer is clear about what is on offer and they have the information they need to make an informed decision.

The aim is to ensure an outcome whereby the customer receives, in good time before the agreement (as soon as reasonably practicable in the customer journey in fact) is signed, prominent information about the amount and the nature of any commission, fee or other remuneration given to an intermediary in connection with the agreement.

Quantum

Although this point was not addressed by the Court of Appeal, the FLA says it appears that any remuneration connected to the agreement, directly or indirectly, should now be disclosed, in order to demonstrate that these arrangements do not create harmful incentives from a customer’s point of view.

This includes not only commission but also other forms of remuneration such as administration fees, panel fees or any other remuneration that passes from a lender to an intermediary. This would typically not include, for example, separate funding streams from an OEM to a retailer to support asset sales, but it would include payments made by a lender to an intermediary as a consequence or reward for the volume of finance business referred.

The FLA briefing suggests that all the remuneration paid across the lender-broker-retailer chain should be disclosed to the customer, including where there is both a primary broker and a secondary broker.

Method of calculation

This disclosure should be shown as a single monetary figure with details of how it was calculated, including a breakdown of the elements involved. If the precise amount is not known at the time, the disclosure should show the method of calculation and the likely amount, and it should be made clear to the customer that this is an estimate, potentially showing a maximum and a minimum figure for this.

Disclosures need to be made in in good time before any agreement is signed, and must prominent. The FLA says this gives lenders considerable discretion, including to make these disclosures as part of their existing business processes, including e-signature processes where appropriate.

The need to ensure disclosure requirements are monitored for compliance means it is likely that they will need to made at the pre-contractual explanation or earlier quotation stage or, at the later document signature stage provided they are sufficiently prominent.

The FLA also says that lenders and intermediaries should be careful about how they express  their relationships in customer communications, perhaps by explaining the aim to  obtain a ‘suitable’ deal rather than the ‘best’ deal.

In this light, intermediaries’ and lenders’ terms of business need to be clear and accurate, and not misleading. The FLA says, for example, it would not be acceptable to state that commission ‘may’ be payable when in the majority of cases it is in fact payable.

Operational changes

Any consent form needs to be short and clear rather than long or onerous to encourage authentic, informed consent.

Likely elements include acknowledgement of the role of the intermediary and that the commission arrangements have been explained; a description of the role of the intermediary and whether they are impartial, on whose behalf they are working, how their panel works, whether independent advice is being given;  a description of the nature of the commission arrangement and a statement of the amount (or likely amount) of commission; an explanation as to whether the fee payable does or does not impact the amount to be paid by the customer; a statement whether a fee is payable by the customer; and signatures by both parties.

What does this mean for the industry?

“And critically for the auto finance sector, the dealer now has a fiduciary duty which was not recognised before this case. Moreover, lenders need to be mindful that any changes in processes should be taken with the principles of Consumer Duty also in mind.”

“Many in the industry will have questions about how to manage the disclosure of both the existence and the quantum of any commission, and how to reshape internal processes to demonstrate customers are being treated fairly.

“At our November conference we have brought together expertise from both the FLA and the NACFB to debate the issues and, crucially, provide guidance on the way ahead.”

Find out more about the AFC UK Autumn Conference on 26^th November via this link.