If consumers are paying a greater price now than they did before, what harm is the FCA’s intervention actually stopping, and what protection to consumers is it actually promoting, asks litigation expert Jonathan Butler?
PPI has spawned many children.
In 2021, The Financial Conduct Authority (“FCA”) banned discretionary commission arrangements (“DCAs”), arrangements by which commission payments were tied to the rate of interest on hire-purchase agreements and under which the broker had the discretion to pick out from a pre-determined range set by the finance house, with a choice of a better rate of interest paying more commission.
For those who were due to this fact sold a automobile finance deal within the run as much as the FCA ban, you’ll be able to due to this fact potentially make a criticism and be compensated. And lots of 1000’s have tried. And due to TV’s Martin Lewis speaking on Money Saving Expert, ITV on 6 February 2024, many more will probably try.
The standard argument runs that dealerships and lenders typically act as fiduciaries with customers when brokering finance and thus owe them a special duty of care. A part of that duty, they claim, is just not only to reveal that a commission may need been paid, but what that commission is. Within the event of non-disclosure, the complainants argue that any breach of an FCA rule is actionable by anyone who suffers a loss.
During the last couple of years, a handful of claims lawyers, a few of whom even operate from the identical constructing, have deluged lenders and dealers with the identical template letters.
The available defences, now widely rehearsed, are typically that,
- The sector is within the business of selling and supplying cars.
- Lenders may or is probably not prepared to lend.
- Dealers and lenders should not whole-market independent financial advisors or specialist providers of economic services, nor do they hold themselves out to be. They don’t give advice or make recommendations and are actually not under any obligation to act in a disinterested or impartial manner. They may say the deal they provide is the most effective available in group, but they don’t hold it out to be the most effective deal out there.
- Per the FCA’s own Rules, namely the Consumer Credit Sourcebook (“CONC”) rule 4.5.3 R, every customer can have been told within the dealer’s Initial Disclosure Document, perhaps within the respective finance agreement or pre-contractual documentation, in addition to on a web site, that the relevant broker could also be incentivised for the introduction to the finance company. This has been perfectly legitimate following the case of Hurstanger Ltd v Wilson and one other in 2007. There, the Lord Justice said, “Did the word “may” negate secrecy? I believe it did. For those who tell someone that something may occur, and it does, I don’t think that the person you told can claim that what happened was a secret. The key was out when he was told that it would occur. This was the recorder’s view and I agree with him.”
- The client has not suffered any actionable loss. She or he has often obtained a deal they were completely satisfied with, haven’t made a related customer criticism and there isn’t any evidence that she or he could have obtained a greater rate of interest elsewhere, and the quantity of commission is of no concern to them.
No breach, no loss, no claim.
In our view, those defences are robust and bonafide. Thus far so good.
Unfortunately, the Financial Ombudsman Service (“FOS”) has now driven a coach and horse, or relatively, a automobile on finance, through this because it presses its pro-consumer agenda as a part of the ethos that has driven the recently introduced Consumer Duty.
In two recent decisions, Mrs Y and Barclays (2016) and Mrs L and Clydesdale (2018), the FOS present in favour of the complainants, effectively finding that it was a breach of the Rules for brokers in those cases, two finance houses, not merely to not disclose the quantity of the commission however the very structure of the discretionary commission arrangement.
In each these cases, it ordered the client to be repaid the difference between;
- the payments made under the finance agreement (on the flat rate of interest of 5.5%); and
- the payments the client would have made (including when the loan was settled early) had the finance agreement been arrange at the bottom (zero discretionary commission paying) flat rate of interest permitted (that’s 2.49%); in addition to interest on each overpayment at the speed of 8% easy per yr calculated from the date of the payment to the date of settlement.
This is incredibly alarming.
In our view, these decisions ignore sound interpretation of the FCA’s own CONC Rules. In addition they traverse the normal role of the Courts and well-established case law written by judges having heard oral argument, and evidence at Trial.
The consequence is that the FCA’s approach now poses an existential threat to some dealers by impacting potentially hundreds of thousands of transactions in respect of latest and used cars over a 15 yr period between 2007 and 2021, when one has to ask why?
If the FCA’s motivation is to de-clog the courts and paralyse claims management corporations, such an approach is cynical and deplorable and needs to be robustly opposed.
If then again, a business evaluation determines that stimulating the automotive sector by putting a refund into the hands of consumers to spend money on recent automobile finance which the FCA actively desires to encourage, then mockingly, the sector might come to thank the FCA for its recent decisions.
Nonetheless, until the true position is thought, the FCA’s intervention begs the query whether supposed harm to consumers under the discretionary commission arrangements pre-2021 was greater or lower than it can actually be now under the brand new regime. Perceived unfairness pre-2021 is just not the identical as unlawfulness.
Under the old regime, dealers had the discretion to pick out/offer an rate of interest from the pre-determined range, but they’d no ability to offer finance at that rate. All they may do, and might do now, was make an application on behalf of the client at that rate. There was and isn’t any guarantee that the client can be accepted at that rate.
That call was and is within the hands of the lender only. It could possibly be that they consider the actual customer a credit risk (after conducting checks/reviewing the credit file etc.) and so are only prepared to lend at a better rate for instance.
Also, as is typical of finance corporations, borrowing a better amount can often end in a lower rate, because the profit made by the lender is higher so a reduction is obtainable on some occasions. If a customer is borrowing a lower amount, which leads to minimal profit, the lender may only lend at a better rate with the intention to make the lending value it and maximise their profit. That is something the dealer has no control over in any respect.
In among the agreements between lender and broker, there’s a clawback provision, whereby if the creditor defaults inside a certain time frame, commission (or a percentage thereof) is clawed back.
This needs to be taken into consideration by the broker when considering what offer to make. In the event that they were to supply everyone the bottom possible rate and receive little commission (and due to this fact receive less profit per deal) after which the client defaults, commission is clawed back and so they are susceptible to making a loss/no profit in any respect, depending on the scenario.
Due to this fact, for some more dangerous customers (not very long employment history/credit history etc) it should be reasonable to guard that position and profit, by offering a better rate which continues to be throughout the customer’s budget, which is made known to the dealer before negotiations proceed.
It may be said that DCAs pre 2021 actually promoted competition throughout the marketplace, and due to this fact higher deals. What we see now isn’t any competition and stuck rates of interest that can’t be negotiated. These are typically at 9.9% APR or above.
With DCAs, nearly all of customers were receiving much lower. Arguably then, before DCAs were banned, if a customer had an honest credit history, income etc, she or he was rewarded by with the ability to borrow more or she or he received a lower rate of interest. Those with a poor credit history couldn’t, but that is just not necessarily a nasty thing if it precluded a customer taking over further debt.
Now everyone is identical, automobile prices are actually generally higher and discretion has gone. The FCA doesn’t appear to be taking a look at the general position but relatively taking the perceived bad bits out of context. After all, in case you only say that dealers got more commission the upper the rate of interest, it sounds a nasty thing and that buyers have been harmed, but this rarely happened with reputable dealers.
The overall position is that dealers would consider the deal within the round. Customers are available with a selected budget in mind, and dealers will negotiate on the rate of interest to balance profitability of the deal, the necessity to sell stock, and the client’s budget. They don’t simply select the very best rate, as this is able to greater than likely end in the lack of a sale because it’s outside of the client’s budget. Some unscrupulous dealers may make the most but on the entire, that is how the business operated.
Business operates to make profit. This isn’t any different with automobile dealers. That profit may come from quite a lot of sources. On this case, commission on finance deals, commissions on insurance or other product sales, and profit on the vehicle itself.
But take two automobile dealers for example, each with different business models. Each have the identical range of interest to supply on DCA finance models. Dealer A advertises and typically offers higher rates of interest than Dealer B. It is because Dealer A makes most of their profit on finance sales/commission.
This enables Dealer A to sell vehicles at a cheaper price than Dealer B. Dealer B makes less profit on finance sales/commission as they provide a lower rate to draw customers, however the selling price of the vehicle is higher, as nearly all of the profit comes from the vehicle.
So, let’s say a customer obtains finance at 10% with Dealer A and 5% with Dealer B for a similar make and model of car. But, that vehicle costs more at Dealer B than at Dealer A. Because the quantity borrowed with dealer B was higher, regardless that the price of borrowing was lower, each customers find yourself paying the identical monthly payment which was inside their budget.
Where is the harm there?
It simply relies on the client’s preference, namely, whether or not they wish to borrow more, with a lower cost of borrowing, or in the event that they are content with borrowing less but with a better cost of borrowing.
If consumers are paying a greater price now than they did before, what harm is the FCA’s intervention actually stopping, and what protection to consumers is it actually promoting?
And naturally, the FCA has said nothing about that.
Jonathan Butler is a partner in Geldards’ litigation practice handling large and complicated business disputes across a broad range of sectors including transport,
This Article First Appeared At www.am-online.com
