Getting ready for Supreme Court outcome

More than half of lenders in the motor finance market are only “partially” prepared for the outcome of the current Supreme Court appeal while a quarter have yet to determine their approach and just a handful believe they are ready, according to research from an Asset Finance Connect (AFC) workshop, in association with Shoosmiths, which focused on the next steps to tackle the legal challenges which have overshadowed operations for months.

The workshop – Commissions & Redress: What Auto Lenders Must Do Now to Stay Ahead – brought together legal, regulatory, and market experts to equip auto lenders with the knowledge and strategy needed to respond to an as yet uncertain outcome.

The Supreme Court is currently considering the surprise ruling handed down by the Court of Appeal, which suggested lenders and brokers have a fiduciary duty to customers, and called for clear commission disclosure and informed customer consent to be evidenced in any finance agreement. Its view on these issues will inform the Financial Conduct Authority’s (FCA’s) more limited review of discretionary commission arrangements (DCAs) which is currently paused.

“We also know that claims management companies (CMCs) are very active in this area and are focused on the Supreme Court outcome – that’s when they plan on filling the hopper, when there’s lots of media attention and scrutiny.

“Organisations need to be using the time they have now to be thinking about how they respond to whatever the outcome is,” Gibbard stressed.

At the start of the workshop, participants were asked if they believed their organisation was prepared for the outcome of the Supreme Court ruling. The chart below shows that most responded they were either unprepared or only partially prepared.

Five issues

Barrister Thomas Samuels, from Henderson Chambers, outlined the five broad issues under consideration at the Supreme Court:

• Do dealers acting as brokers owe a fiduciary duty to customers?
• If undisclosed (“secret”) commission payments are made, could lenders be viewed as the primary wrong-doers (by offering “bribes”)?
• If commission is partially disclosed, what counts as informed consent?
• Are lenders liable as an accessory to failure to gain consent?
• Is there evidence of an unfair relationship?

Samuels’ analysis of the discussions in court suggested demonstrating fiduciary duty existed to the point of single-minded loyalty to the customer as proposed at the Court of Appeal would be onerous, and that any such approach would result in many other kinds of commercial role being drawn into the definition, while removing the tort of bribery would risk overturning important consumer protections.

“My sense is what will be left as the key issue is that of an unfair relationship. For a lender or broker to demonstrate value for money, they must show the customer has all the information they need to make an informed decision,” Samuels said.

Making preparations

The period before the Supreme Court delivers it ruling – likely to be mid-summer – marks “a moment of reflection” according to Gibbard, and gives auto finance lenders a chance to work on initial preparations for any redress scheme.  

Remediation specialists Peter Richards-Gaskin, partner in Shoosmiths Financial Services Disputes and Investigations (FSDI) team, and Legal Disputes Advisor Brendon Vipond offered a blueprint for developing possible large-scale remediation programmes, based on their experience with previous significant financial services projects.

Understand the organisation’s data sources

Lenders will need to identify any gaps in data integrity so they have customer contact details, interest rate information and drawdown dates readily to hand for the relevant period(s).

This may mean going back through legacy systems, archived data and information held as hard copy or on microfiche. If a lender says they cannot trace an agreement, but a customer can provide evidence they did sign a contract, then there is no way of rebutting that claim.

“Companies don’t want to be trying to work on this once the FCA has fired the starting gun, so start with the core which is likely to be the focus and build out from that,” Richards-Gaskin suggested.

“Ask the difficult questions now. Once you are in the timeline for a scheme, costs of checking the data go up exponentially and conversation with the regulator become strained,” he added.

Regulators will be looking for assurance that data is complete and will also require evidence that lenders have taken steps to track “untraceable” customers.  For example, this could be a clearly documented process that ensures every customer is subject to three attempts at contact, using an original address, phone number or email.

Think about redress scheme design

The FCA provides high level prompts for any scheme, but each organisation needs to map out what that means for their set of circumstances, so designing an appropriate approach is an iterative and dynamic process.

The first step is to take a small sample of cases for a pilot to test out the approach and map developing trends – if every case is passed, then clearly the process is flawed. A series of pilots building on early results will allow lenders to calibrate an accurate process.

“The very first framework will be nothing like the one ultimately agreed with the FCA, as it will evolve over iterations. And be warned – at the beginning of any redress scheme, CMCs will overwhelm lenders with unparticularised claims with no details or facts from the client, and every head of claim, which can risk bringing processes to a halt because of the volume,” Richards-Gaskin cautioned.

Develop a contingency plan for different criteria

Lenders need to classify claims according to eligibility and scope. Is the claim from someone who is confirmed as eligible for assessment, has the claimant got authorisation to make that claim, what is the status of their particulars, does the complaint relate to the relevant commission payment type and the relevant time period?

The basic parameters of the scheme could change, depending on different scenarios. Potentially the level of customer sophistication might be a factor, so does that apply purely to large corporates, or include SMEs, and how should it be reflected in processes? What about claims involving early termination of the contract, or novation? Are there checks to ascertain whether the claimant has already been included in a previous redress scheme, to avoid cases of double recovery? What if the redress scheme is widened to include the larger distribution chain, which would require details of dealership documentation?

Design a process map to accommodate any split in how claims are to be treated

Robustly query and challenge the FCA or “skilled person”

Decision findings and review outcomes are a learning curve for everyone involved. By building a challenge process, lenders put themselves in a position to influence the approach to any issues which are uncovered, by providing detailed evidence of the approach they have taken.

Futureproof scheme design to mitigate risk

Lenders may face high volumes of consequential loss claims, as Richards-Gaskin explains: “Once compensation is upheld, many claimants come for a second bite saying, for instance, but for buying the product they could have reinvested that money in their business.”

To counter the need for additional resource to address this, and potential future costs, one option is to set a higher interest rate on any award, typically 8% on the direct loss. This effectively buys off any subsequent loss claims, eliminating the need for a costly and resource-heavy second redress scheme.

Develop strong programme governance

Good governance is key to keeping any redress scheme on track.  Lenders should create a project support team, including a project board which has oversight challenge. Complex cases should be escalated to a specialist committee charged with difficult claims, which will help in identifying issues before the FCA becomes involved.

“Lenders need a narrative to give to the FCA, and to demonstrate an assurance process,” Richards-Gaskin explained.

What’s next?

Gibbard emphasised that the FCA will expect to see a pro-active approach to redress from lenders, rather than one which is claims-led. Moreover, any scheme will be delivered in the context of the introduction of Consumer Duty, meaning lenders will need to take these requirements on board.

“The auto finance environment looks very different now compared to 2014 when the FCA first started looking at the sector. We’ve seen big changes in other consumer finance markets, like mortgages and investment advice, but consumer credit including motor has been slow to move.

“However, with reform to the Consumer Credit Act promised, it is likely this will change. Regulators may well be looking at lenders’ relationships with dealers, at agency models, and the whole way in which the distribution and communications model has changed. The sector needs to think about what comes next – before the CMCs get onto it,” Gibbard argued.

“Volumes of complaints are rising, while lenders are working out how best to respond, how to manage customer expectations, what to do if they have purchased a portfolio, and a host of other issues. They need to develop cost effective and watertight ways to handle any redress scheme, while at the same time ensuring current operations remain compliant.

“The AFC Summer Conference will offer a further opportunity to hear more from expert speakers about remediation, and I welcome questions from anyone in the motor finance sector who would like to contribute to the discussion.”

To put forward a question for consideration at AFC’s conference, contact Edward Peck at edwardpeck@assetfinanceconnect

To find out more about AFC’s UK Summer Conference on 3rd June, visit the conference website.