DCA appeal rulings will be critical to financial watchdog determining probe

The autumn moratorium imposed by the UK financial watchdog will likely be moved back to sit 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 respond to complaints lodged after mid-November 2023 by customers who feared they had been unfairly overcharged for buying their cars on finance.

Before January 2021, some lenders had allowed dealerships acting as their brokers to adjust the interest rates they offered customers for car finance. Typically, the higher the interest rate, the more commission the broker received. This was known as a discretionary commission arrangement.

The FCA banned this practice in 2021, believing discretionary commission arrangements created an incentive for brokers to increase how much people were charged for their car finance.

Despite banning the practice, there has been a high number 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 problem.

In a recent FOS case which is to go before the Court of Appeal, the FOS ordered Barclays Partner Finance to pay the customer the difference between the payments she made at the flat interest rate set by the broker and the payments she would have paid if the agreement had been set up at the lowest, zero discretionary commission paying interest at a rate of 2.68%. 

Clydesdale Financial Services trading as Barclays Partner Finance last month initiated judicial review proceedings relating to the case involving a car bought from Arnold Clark. 

Speaking to a Vehicle Remarketing Association (VRA) event organised in partnership with motor retail legal specialists Geldards, Jonathan Kirk KC of Gough Square Chambers (pictured) which is engaged in the Judicial Review for the appellant, said the FCA's approach did not consider the realities of car purchasing.

“The problem with (the Judicial Review case) is obvious. The first point is that it didn't take into account the fact that the consumer had received a £1,500 discount on the cost price of the car. So if you look at the overall picture, even with a slightly higher rate, they were doing really well as it was a very good deal.

“The second point is that the dealer simply wouldn't have offered it at that low rate as it wasn't commercial to do so and so the idea that they could have got it just by negotiating is nonsense.

“And then the third point which is really obvious is that the offer was available nowhere else on the market.”

In March, three county court decisions relating to motor finance commission were also granted permission to proceed to the Court of Appeal. These were all in favour of the lender.

“We are reasonably confident that in relation to the areas of secret commissions and fiduciary duties they're going to find in favour of the lenders and against the claims management companies,” said Kirk, who added that these cases are scheduled to be heard in early July although the outcome may not be known for another six months.

He also warned dealerships as suppliers to scrutinise their lenders’ indemnity provisions: “I suspect that we will find - as we have found in other areas - that the issues surrounding indemnities will start coming to the fore because at some point the lenders are going to say, ‘well, we're not bearing all of this, we're going to try and pursue the suppliers under the terms of the indemnity."

“There are good arguments where the lender has itself been responsible for the (discretionary commission) model that has caused the problems, but in those circumstances, there may be arguments one way or the other,” he added.

VRA members were also reminded of the importance of maintaining documents, particularly pre-2021 IDD documentation that could prove crucial.

“Going forward, make sure your documentation clearly shows that the consumer is aware that commission will be paid and if you can do it and you feel it won't alter the way in which the consumer approaches the transaction according to how much you're receiving a commission, that is the way forward,” delegates were told.

The FCA is known to be considering the option of a formal redress scheme to compensate consumers found to have been overcharged for motor finance.

"It's one of the options based on the evidence that we receive," FCA chief Nikhil Rathi told a parliamentary treasury committee earlier this month.

Rathi confirmed that in addition to scrutinising motor finance complaints, the FCA was awaiting these court rulings before announcing its next steps in September. "We will then take a view as to what further action may be needed," he said.

Another element that could 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 carefully.

Jon Butler, joint head of the automotive team at law firm Geldards, told AM: “The subtext of all this is the ethos of Consumer Duty so it's all about what are the outcomes for the consumer and there's a perception that the automotive sector is just there to cause consumers harm.

“But I think that the more likely outcome after lots of shenanigans and appeals and stuff, will be that, rather than find no redress, they're going to find some redress and give some back to the industry, some to the consumers.

“It needs to be enough to make consumers go away and claims management companies to drop their cases but not so much that the industry gets absolutely destroyed because that is possible.”

He said typical commission sums averaged at around £1,100 so he suspected compensation could amount to half of that at around £500.

Jonathan Goulding, also from Gough Square Chambers, said cases were brought usually on two grounds, firstly that there was a discretionary commission model before 2021 and secondly, on the failure to disclose fixed rate commission.

“Our estimate is that overall, in terms of success - because we do an awful lot of defence work of these claims - we think that we are winning 75% of those cases, which is quite a high number.

“We're winning more of the fixed rate commission, fewer of the discretionary commission cases, but overall, we'd say that for three out of four cases, we're winning, which suggests that it can't go on for very much longer. On that kind of basis, the claims management companies won't be able to afford to keep going.”

Some lenders have already begun setting aside cash 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 year as a precaution against potentially huge compensation payouts.