
Motor dealers, and lenders whose finance they broke, have had a turbulent time of late as decisions from the FOS and the Courts relating to the payment and disclosure of commission have placed in the spotlight practices that were both common and believed to be acceptable. Although the broker is often the face the customer sees, it's clear that lenders cannot rely on or hide behind brokers when it comes to liability.
How did we get here?
The FCA ban on DCAs
A wave of complaints about commissions on motor finance followed the FCA's decision in 2021 to ban Discretionary Commission Arrangements (DCAs) in the motor finance industry. Before the ban, brokers with DCAs with their lenders had been able to charge greater levels of commission, by offering finance at higher interest rates than the lender would have been prepared to lend for, but were not required by regulation to tell the borrower they had done this.
The FOS decisions
In late 2023 the FOS found in favour of two claimants who had taken out finance before DCAs were banned, and complained that they had been left out of pocket as a result of DCAs entered into between lenders and motor dealers. In brief, the FOS ruled that borrowers were due compensation equating to the amount of interest they had paid attributable to the relevant DCA – in other words, any interest exceeding the minimum interest rate that the lender would have accepted under its terms with the relevant motor dealer. The FOS said:
- The DCA created an "inherent conflict" between the interests of the borrower and the lender
- The lender had breached the FCA CONC rule that commission rates could vary only to reflect additional work done by the broker
- A Court would likely find the relationship between borrower and lender unfair under the CCA.
See our previous article for more detail on the decisions.
The FCA reaction
As an immediate reaction to these decisions, and the announced intention of one of the lenders to apply for judicial review of the FOS decision, the FCA introduced a "pause" in the normal timescales for complaints handling – and subsequently extended it - so that currently firms receiving complaints involving DCAs do not have to provide a final response until 4 December 2025.
The court cases
At the end of October 2024 the Court of Appeal reached its decision on appeals brought by three borrowers, all of whom alleged that, when they took out the finance they needed to buy their cars through their motor dealer, they were not told – either fully or at all – about the commission the dealer would be getting from the lender. In these cases, it wasn't relevant whether there was a discretionary commission arrangement or not, or whether there was a breach of CONC rules. Instead, they focus on the duties owed by the lenders to the borrowers. For varying reasons, the County Courts had dismissed the borrowers' claims, and all three appeals were heard together in the Court of Appeal.
In a judgment that sent shock-waves through the markets, the Court of Appeal said the lenders were liable to repay the commission paid to the motor dealers. It said:
- The motor dealers were acting as credit brokers. This would give rise to a "disinterested duty" owed by the dealer to the customer unless the dealer made it clear to the customer that they were not acting impartially
- In each of these cases, there was also a fiduciary duty. The Court concluded this for several reasons, and noted particularly that this was not like PPI, which was an "unnecessary adjunct" to a customer purchase. Here, the brokers knew the customers could not afford the car without taking finance, and they owed the customers a fiduciary duty in relation to the specific tasks they undertook for the customers
- Even in the one case where the commission was not wholly "secret" in that the customer had been provided with a document that said commission "may" be paid, this did not negate the secrecy element – the Court said that even if the customer had read the document that included this phrase, he would not have known that commission had been paid in his case, the amount of commission nor what the dealer's relationship with the lender was and so he clearly did not give his informed consent to the commission
- Since the brokers owed fiduciary duties to the customers, the lenders would have accessory liability if they knew of the agency relationship that gives rise to the fiduciary duty. The Court said the lenders clearly knew the commission was being paid, so in order to have a defence against accessory liability would need to show the customer consented to payment. Turning a blind eye to whether the broker disclosed the commission to the customer or got consent to receive it was not good enough. So it seems it is not at all hard to establish accessory liability.
See also our FIN post here.
What the FCA did next
The FCA promptly consulted on, and then introduced before Christmas an extension to the pause on complaints, so it now covers all complaints about commissions related to motor finance. It also asked that the Supreme Court hears appeals against the Court of Appeal judgments as soon as possible (and these are now to be heard in early April) and offered to help or provide views if useful. It noted that these cases were not about the FCA rules, and that firms would be bound by the eventual Court decisions. It also provided guidance for firms on what they should be doing to make sure their customer communications and dealings comply with FCA requirements not least the omni-present Consumer Duty.
Judicial review application rejected
Going back then to the DCA issue, just before Christmas the High Court also dismissed the three grounds of appeal brought by one of the lenders in relation to the FOS DCA decisions. It found the FOS had correctly interpreted both the FCA Rules in force at the time and the Consumer Credit Act 1974 (the CCA) and that therefore it was entitled to make the findings it did. Among other things it noted that it is for the FOS and not a court to decide whether a Rule or a Principle has been breached and that the FOS is free to award compensation for breach of a Principle alone. See further details of the judgment here in FIN.
What next?
On the issue of wider commission disclosure, we of course await the Supreme Court's determination. In the meantime, the Court of Appeal's view is concerning not just for lenders and credit brokers but also to others who operate in industries which rely on sales intermediaries whose primary business is not financially regulated business (such as the mortgage and insurance markets) as the principles established are not unique to the motor finance industry.
The Court of Appeal put itself very firmly on the side of consumers in deciding what the unsophisticated consumer would be likely to have thought – and indeed read - and firms should of course now be used to wearing their Consumer Duty hats to do this, regardless of whether they are manufacturers or distributors of a financial product.
In the specific credit broking context, the judgment significantly expands the pre-existing CONC rules, which could prompt a need for the FCA to review its rules around commission disclosures throughout its rulebook.
Firms will also need to consider whether, in situations where the existence and amount of a commission are known by the firm at the outset they should just tell customers up-front. It also follows that lenders (and potentially other product providers) will feel the need to become more involved, whether directly or in an oversight role, in how commissions are disclosed to consumers and their consent obtained by any distributor.
On DCAs, the FOS decision that the Court considered had involved two separate types of commission – a fixed, non-discretionary "head office fee" (which was 2% of the amount advanced), , and the discretionary amount. The FOS had noted that the borrower would have been unlikely to have taken issue with the fixed commission payment and, even though it had not been properly disclosed, the FOS had not ordered the lender to repay that amount. If these similar facts had been addressed not by the FOS but by the courts, and had followed the stance of the Court of Appeal, one would have expected the non-disclosure of that modest fixed fee to have led to the Court taking the view that it should be repaid. So this element of the FOS decision seems at odds with the Court of Appeal. This may in part be due to the FOS (and therefore the Court at the judicial review application) considering only breaches of CONC and the CCA, while the Court of Appeal focussed almost exclusively on the impact of the disinterested and fiduciary duty obligations of the broker and lender. But one further early FOS decision in which the FOS concluded there had been adequate disclosure of a non-DCA had briefly discussed the fiduciary duty point and reached a different conclusion to the Court of Appeal.
All in all, there are many pieces of this tangled web that may need further unravelling once we have the final legal determinations.
We're also hearing on the grapevine that the judicial review outcome itself may not be final as the lender has been granted permission to appeal to the Court of Appeal.
The FCA has now submitted its application notice with its summary grounds for intervention in the Supreme Court hearing. It wants to submit written and oral evidence based on helping the Court understand the regulatory background and drivers behind treatment and disclosure of commission. Stressing the (at least) thousands of County Court proceedings that are pending and the hundreds of FOS complaints it notes that any guidance the Supreme Court gives will be of significant relevance to the FCA when it is considering whether it is appropriate to put in place a redress scheme.
But, for the time being, lenders – even those that have now exited the motor finance markets – should be working on their responses to complaints on the basis of the current situation and making provision for any compensation they may ultimately need to pay.
This article is for general information only and reflects the position at the date of publication. It does not constitute legal advice.