The autumn moratorium imposed by the UK financial watchdog will likely be moved back to sit down behind a Judicial Review of a case that was judged in favour of a customer who claimed to have been unfairly charged for motor finance.
In January, the Financial Conduct Authority (FCA) said it was giving motor finance firms until September to reply to complaints lodged after mid-November 2023 by customers who feared that they had been unfairly overcharged for getting their cars on finance.
Before January 2021, some lenders had allowed dealerships acting as their brokers to regulate the rates of interest they offered customers for automotive finance. Typically, the upper the rate of interest, the more commission the broker received. This was generally known as a discretionary commission arrangement.
The FCA banned this practice in 2021, believing discretionary commission arrangements created an incentive for brokers to extend how much people were charged for his or her automotive finance.
Despite banning the practice, there was a high variety of historic complaints. Indeed, the Financial Ombudsman Service (FOS) has said it has 20,000 open complaints linked to motor finance commission which prompted the FCA to assess the extent of the issue.
In a recent FOS case which is to go before the Court of Appeal, the FOS ordered Barclays PF to pay the client the difference between the payments she made on the flat rate of interest set by the broker and the payments she would have paid if the agreement had been arrange at the bottom, zero discretionary commission paying interest at a rate of two.68%.
Clydesdale Financial Services trading as Barclays Partner Finance last month initiated judicial review proceedings referring to the case involving a automotive bought from Arnold Clark.
Chatting with the Vehicle Remarketing Association (VRA) organised in partnership with motor retail legal specialists Geldards, Jonathan Kirk KC of Gough Square Chambers (pictured) which is engaged within the Judicial Review for the appellant, said the FCA’s evaluation didn’t consider the realities of automotive purchasing.
“The issue with (the Judicial Review case) is apparent. The primary point is that it didn’t keep in mind the undeniable fact that the patron had received a £1,500 discount on the fee price of the automotive. So in the event you have a look at the general picture, even with a rather higher rate, they were doing rather well it was a excellent deal.
“The second point is that the dealer simply would not have offered it at that low rate because it wasn’t business to achieve this and so the concept that they might have gotten it just by negotiating is nonsense.
“After which the third point which is admittedly obvious, the offer was available nowhere else available on the market.”
In March, three county court decisions referring to motor finance commission were also granted permission to proceed to the Court of Appeal. These were all in favour of the lender.
“We’re reasonably confident that in relation to the areas of secret commissions and fiduciary duties they are going to find in favour of the lenders and against the claims management corporations,” said Gough Square Chambers barrister Daniel Brayley, who added that these are scheduled to be heard in early July although the end result will not be known for one more six months.
He also warned dealerships as suppliers to scrutinise their lenders’ indemnity provisions: “I believe that we are going to find as we now have present in other areas, that the problems surrounding indemnities will start coming to the fore because in some unspecified time in the future the lenders are going to say, ‘well, we’re not bearing all of this, we’ll attempt to pursue the suppliers under the terms of the indemnity’.
“There are good arguments where the lender has itself been liable for the (discretionary commission) model that has caused the issues, but in those circumstances, there could also be arguments someway,” he added.
VRA members were also reminded of the importance of maintaining documents, particularly pre-2021 IDD documentation that might prove crucial.
“Going forward, be sure that your documentation clearly shows that the patron is aware that commission will probably be paid and in the event you can do it and you’re feeling it won’t alter the way in which through which the patron approaches the transaction in line with how much you are receiving a commission, that’s the way in which forward,” delegates were told.
The FCA is understood to be considering the choice of a proper redress scheme to compensate consumers found to have been overcharged for motor finance.
“It’s one in every of the choices based on the evidence that we receive,” FCA chief Nikhil Rathi told a parliamentary treasury committee earlier this month.
Rathi confirmed that along with scrutinising motor finance complaints, the FCA was awaiting these court rulings before announcing next steps in September. “We are going to then take a view as to what further motion could also be needed,” he said.
One other element that might come into play is that in contract disputes, the six-year limitation period could apply which could narrow the window of claims significantly so dealerships should check dates related to claims rigorously.
Jon Butler, joint head of the automotive team at law firm Geldards, told AM: “The subtext of all that is the ethos of Consumer Duty so it’s all about what are the outcomes for the patron and there is a perception that the automotive sector is just there to cause consumers harm.
“But I feel that the more likely end result after a number of shenanigans and appeals and stuff, will probably be that, somewhat than find no redress, they are going to find some redress and provides some back to the industry, some to the consumers.
“It must be enough to make consumers go away and claims management corporations to drop their cases but not a lot that the industry gets absolutely destroyed because that’s possible.”
He said typical commission averaged at around £1,100 so he suspected compensation could amount to half of that at around £500.
Jonathan Goulding of Gough Square Chambers said cases were brought normally on two grounds, firstly that there was a discretionary commission model before 2021 and secondly, on the failure to reveal fixed rate commission.
“Our estimate is that overall, by way of success – because we do an awful lot of defence work of those claims – we expect that we’re winning 75% of those cases, which is sort of a high number.
“We’re winning more of the fixed rate commission, fewer of the discretionary commission cases, but overall, we might say that for 3 out of 4 cases, we’re winning, which suggests that it may well’t go on for very for much longer. On that sort of basis, the claims management corporations won’t give you the option to afford to maintain going.”
Some lenders have already begun setting aside money to cover potential costs from claims. Lloyds Banking Group has allocated £450 million to cover potential expenses related to regulatory investigations into historic motor finance commission agreements. Close Brothers also announced that it was scrapping dividends this yr as a precaution against potentially huge compensation payouts.
This Article First Appeared At www.am-online.com
