Summary
AFC’s flagship November conference, held shortly after October’s ground-breaking Court of Appeal judgment on motor finance commission claims, saw a packed audience for a session chaired by Finativ CEO Christian Roelofs, looking at the implications of the ruling for non-regulated motor finance and the asset finance sector as a whole.
A panel of experts drawn from lenders, brokers and trade associations looked at the issues raised by the ruling, which will be tested further in an appeal to be heard by the Supreme Court in April.
Disclosure is here to stay
As Shoosmiths partner Jonathan Mills pointed out, distilling and understanding a 47-page legal document is no small challenge, quoting a barrister who described it as “a bit like a farmer’s field with no boundaries”, with brokers, lenders and others scrambling to understand what the ruling means in a business context.
But Roelofs emphasised the key issue is the fact pattern, as Mills underlined:
Mills cautioned that against this background, brokers and lenders need to be aware of the potential wide impact of the ruling, if commission has been undisclosed which, as Roelofs pointed out, has led to “a kneejerk reaction from lenders for disclosure across the board.”
Asked if it was likely there would be roll-back on this Nathan Mollett, head of asset finance at United Trust Bank, argued that this was unlikely. He pointed out that non-regulated SME asset finance has long been viewed as an outlier for not disclosing commission, adding that after a period of disclosure it would be very hard to then stop doing so.
Fellow panellist Mark Nelson, director Compass Business Finance, agreed but argued that there could be some “competitive friction” whereby smaller entities took a different decision on disclosure from the banks.
“My view is there will be a change, once we have some clarity on what full disclosure actually means, and I think it will be interesting to see how this plays out over the next 12 to 18 months,” he said.
The panel agreed that with the genie out of the bottle, disclosure was an inevitability, which meant the focus now is on whether there are different levels of disclosure, and how to get the right level of disclosure for the right fact pattern.
Value added services
“The vast majority – I would say 100% – of the broker market, would say they are offering a value-add service, in various different means. That can be in various different means – debt advisory is very different to a high volume, low ticket environment.
“The question is how do we articulate that value-add and how do we put a number to it, “ explained NACFB CEO Jim Higginbotham.
Lee Simms, managing director Asset Finance Solutions (UK), highlighted a post-Covid difference, citing the divide between customers who build long term relationships with brokers and those who only buy an asset infrequently and are more interested in a “compare the market” style approach, a point emphasised by Nelson who said customers saw brokers as “trusted partners” but are increasingly testing both brokers and lenders to ensure they have the best deal.
One unresolved issue thrown up by the Court of Appeal judgment is the apparent distinction made between the “sophisticated” and “unsophisticated” customer. Simon Goldie, the FLA’s director of business finance and advocacy, said the speed at which action had to be taken and the ongoing uncertainty meant the FLA, among others, had erred on the side of caution.
Disclosure timing
There is further uncertainty, pointed out by Rob Dermody, director of PMD Business Finance, around at what point any disclosure should be made. “There needs to be some consistency about this in order to manage the process better,” he said.
While in some examples, particularly with big corporates, disclosure “in good time” means at the same time as signing the deal, others have suggested there needs to be a separate disclosure made much earlier, perhaps particularly for sole traders or micro entities with different levels of sophisticated. However, as Roelofs argued, early disclosure “adds costs, gives the customer a reason to flinch, and is disruptive.”
“Deal by deal every disclosure is slightly different which removes the ability to create a single document. At the moment it’s not possible to have a universal document, but looking ahead we need to get the threshold for disclosure determined in a way which creates a smooth customer journey, but without compromising on transparency,” is how Higginbotham summed up the current situation.
Role of regulators
Given the uncertainty generated by the Court of Appeal ruling, the panel considered the role of the regulators, most notably the Financial Conduct Authority (FCA), in setting the direction of travel.
“The FCA could have acted earlier on commission disclosure in the regulated market and given clarity – that would have headed off the need for going to court – but all those agreements under discussion were regulated,” Goldie pointed out.
Higginbottom cautioned that “the danger is the worst outcome is that the regulatory perimeter grows because of the court case. We’re in a tricky position right now. The answer isn’t to regulate everything, because the law of unintended consequences means that creates other problems. But as an industry, we have to be careful that we don’t grow the perimeter because there’s always a place for grown-up business.”
What next?
A critical question, raised by a number of conference participants, is the impact of the Court of Appeal decision on the back book, the potential liability for any redress, and how to the assess the liabilities facing brokers and lenders.
“We are not going to have clarity on this for six to twelve months. I’d like to think commonsense will prevail, but people have been using phrases like ‘existential threat’ and suggesting this could potentially be an extinction level event,” UTB’s Nathan Mollett declared.
Higginbotham pointed out that for any organisation working within regulatory confines and then finding the unexpected consequences of a legal ruling had create a “massive back book issue” might well feel “this doesn’t hang together and logic and fairness mean it just doesn’t add up.”
For his part, Goldie noted that the FLA had been in urgent talks with the Treasury ever since the judgment was handed down, and suggested that if the Supreme Court appeal does not produce the necessary clarity, then the next step would be legislation.
Regardless of this issue, from the brokers’ perspective, Dermody described the commercial challenges as “quite worrying”, given the disparity in overheads between those brokers with a substantial back office function, and those who are individuals. “If, for example, lenders move to a fixed commission, then is it reasonable that everyone has the same pricing and rewards, regardless of whether they are working at scale?,” he pointed out.
Looking at the issues facing lenders, Mollett said: “In asset finance over the last couple of years there’s been a race to the bottom on price. The return on equity for banks is very tight at the moment, and if you layer on top of that back book risk and the aggravations of commission disclosure, then it’s not impossible for stakeholders in some banks to decided not to do asset and divert capital elsewhere. There’s a possibility we will see some lenders exit where the margins are so thin, and that would stabilise pricing.”
But as panel members agreed, there is no “one size fits all” approach, and the shifts and changes currently underway signal a competitive, healthy market.
As to how that will play out in the longer term, the experts said the current aim is for one customer journey, but with different disclosure journeys within that, but for the playing field to be made as level as possible. The duty falls to the broker to disclose, and for the funder to make sure this happens.
In conclusion, challenged by Roelofs for action to pursue in order to create a universally beneficial model, panel members agreed that the aim for the asset finance industry had to be “a harmonious solution, even if the path to that is a little bit rocky” in Goldie’s words.
The key message was the need for collaboration between brokers, lenders, trade associations, with the intention of all parties remaining aligned in order, in Higginbotham’s words, “to properly understand and represent members and create a customer journey which is efficient and sensible.”
Commission disclosure: The October court judgment makes commission disclosure inevitable and unavoidable, and there will be no rowing back on this. The key questions are how and when disclosures should be make during the customer journey.
Lack of clarity: The turmoil created by the unexpected outcome of the Court of Appeal hearing will not settle down until there is greater certainty about what the ruling means for brokers and lenders, most likely following the April’s Supreme Court appeal. In the meantime, while no “one size fits all” approach is possible, brokers, lenders and trade associations need to collaborate to ensure they – and their documentation and processes – are all aligned.
Regulatory creep: The court judgment opens the way for wider scrutiny and greater control over parts of the asset finance market which are currently unregulated. Trade associations have a critical role in ensuring government understands the nuances of the asset finance industry, while lenders and brokers must demonstrate best practice and transparency.
