Executive View: the FCA & Martin Lewis – where’s the harm anyway?

If consumers are paying a greater price now than they did before, what harm is the FCA’s intervention actually preventing, 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 interest rate on hire-purchase agreements and under which the broker had the discretion to select from a pre-determined range set by the finance house, with a selection of a higher interest rate paying more commission.

If you were therefore sold a car finance deal in the run up to the FCA ban, you can therefore potentially make a complaint and be compensated. And many thousands have tried. And thanks to TV’s Martin Lewis speaking on Money Saving Expert, ITV on 6 February 2024, many more will probably try.

The usual argument runs that dealerships and lenders typically act as fiduciaries with customers when brokering finance and thus owe them a special duty of care. Part of that duty, they claim, is not only to disclose that a commission might have been paid, but what that commission is. In the event of non-disclosure, the complainants argue that any breach of an FCA rule is actionable by anyone who suffers a loss.

Over the last couple of years, a handful of claims lawyers, some of whom even operate from the same building, have deluged lenders and dealers with the same template letters.

The available defences, now widely rehearsed, are typically that,

• The sector is in the business of selling and supplying cars. 
• Lenders may or may not be prepared to lend.
• Dealers and lenders are not whole-market independent financial advisors or specialist providers of financial services, nor do they hold themselves out to be. They do not give advice or make recommendations and are certainly not under any obligation to act in a disinterested or impartial manner. They might say the deal they offer is the best available in group, but they do not hold it out to be the best deal in the market.
• Per the FCA’s own Rules, namely the Consumer Credit Sourcebook (“CONC”) rule 4.5.3 R, every customer will have been told in the dealer’s Initial Disclosure Document, perhaps in the respective finance agreement or pre-contractual documentation, as well as on a website, that the relevant broker may be incentivised for the introduction to the finance company. This has been perfectly legitimate following the case of Hurstanger Ltd v Wilson and another in 2007. There, the Lord Justice said, “Did the word “may” negate secrecy? I think it did. If you tell someone that something may happen, and it does, I do not think that the person you told can claim that what happened was a secret. The secret was out when he was told that it might happen. This was the recorder's view and I agree with him.”
• The customer has not suffered any actionable loss. He or she has usually obtained a deal they were happy with, have not made a related customer complaint and there is no evidence that he or she could have obtained a better interest rate elsewhere, and the amount of commission is of no concern to them.

No breach, no loss, no claim.

In our view, those defences are robust and legitimate. So far so good.

Unfortunately, the Financial Ombudsman Service (“FOS”) has now driven a coach and horse, or rather, a car on finance, through this as it presses its pro-consumer agenda as 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 found 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 amount of the commission but the very structure of the discretionary commission arrangement.

In both these cases, it ordered the customer to be repaid the difference between;

• the payments made under the finance agreement (at the flat interest rate of 5.5%); and
• the payments the customer would have made (including when the loan was settled early) had the finance agreement been set up at the lowest (zero discretionary commission paying) flat interest rate permitted (that is 2.49%); as well as interest on each overpayment at the rate of 8% simple per year calculated from the date of the payment to the date of settlement.

This is extremely alarming.

In our view, these decisions ignore sound interpretation of the FCA’s own CONC Rules. They also traverse the traditional 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 millions of transactions in respect of new and used cars over a 15 year 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 companies, such an approach is cynical and deplorable and should be robustly opposed.

If on the other hand, a commercial analysis determines that stimulating the automotive sector by putting money back into the hands of consumers to spend money on new car finance which the FCA actively wants to encourage, then ironically, the sector might come to thank the FCA for its recent decisions.

However, until the true position is known, the FCA’s intervention begs the question whether supposed harm to consumers under the discretionary commission arrangements pre-2021 was greater or less than it will actually be now under the new regime. Perceived unfairness pre-2021 is not the same as unlawfulness.

Under the old regime, dealers had the discretion to select/offer an interest rate from the pre-determined range, but they had no ability to provide finance at that rate. All they could do, and can do now, was make an application on behalf of the customer at that rate. There was and is no guarantee that the customer would be accepted at that rate.

That decision was and is in the hands of the lender only. It could be that they consider the particular customer a credit risk (after conducting checks/reviewing the credit file etc.) and so are only prepared to lend at a higher rate for example.

Also, as is typical of finance companies, borrowing a higher amount can often result in a lower rate, as the profit made by the lender is higher so a discount is offered on some occasions. If a customer is borrowing a lower amount, which results in minimal profit, the lender may only lend at a higher rate in order to make the lending worth it and maximise their profit. This is something the dealer has no control over at all.

In some of the agreements between lender and broker, there is a clawback provision, whereby if the creditor defaults within a certain period of time, commission (or a percentage thereof) is clawed back.

 This has to be taken into account by the broker when considering what offer to make. If they were to offer everyone the lowest possible rate and receive little commission (and therefore receive less profit per deal) and then the customer defaults, commission is clawed back and they are at risk of making a loss/no profit at all, depending on the scenario.

Therefore, for some more risky customers (not very long employment history/credit history etc) it must be reasonable to protect that position and profit, by offering a higher rate which is still within the customer’s budget, which is made known to the dealer before negotiations continue.

It could also be said that DCAs pre 2021 actually promoted competition within the marketplace, and therefore better deals. What we see now is no competition and fixed interest rates that cannot be negotiated. These are typically at 9.9% APR or above.

With DCAs, the majority of customers were receiving much lower. Arguably then, before DCAs were banned, if a customer had a decent credit history, income etc, he or she was rewarded by being able to borrow more or he or she received a lower rate of interest. Those with a poor credit history couldn’t, but that is not necessarily a bad thing if it precluded a customer taking on further debt.

Now everyone is the same, car prices are now generally higher and discretion has gone. The FCA does not seem to be looking at the overall position but rather taking the perceived bad bits out of context. Of course, if you only say that dealers got more commission the higher the interest rate, it sounds a bad thing and that consumers have been harmed, but this rarely happened with reputable dealers.

The general position is that dealers would consider the deal in the round. Customers come in with a particular budget in mind, and dealers will negotiate on the interest rate to balance profitability of the deal, the need to sell stock, and the customer’s budget. They don’t simply select the highest rate, as this would more than likely result in the loss of a sale as it’s outside of the customer’s budget. Some unscrupulous dealers may take advantage but on the whole, this is how the business operated.

Business operates to make profit. This is no different with car dealers. That profit may come from a variety of sources. In this case, commission on finance deals, commissions on insurance or other product sales, and profit on the vehicle itself.

But take two car dealers as an example, both with different business models. Both have the same range of interest to offer on DCA finance models. Dealer A advertises and typically offers higher interest rates than Dealer B. This is because Dealer A makes most of their profit on finance sales/commission.

This allows Dealer A to sell vehicles at a lower price than Dealer B. Dealer B makes less profit on finance sales/commission as they offer a lower rate to attract customers, but the selling price of the vehicle is higher, as the majority 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 the same make and model of vehicle. But, that vehicle costs more at Dealer B than at Dealer A. Because the amount borrowed with dealer B was higher, even though the cost of borrowing was lower, both customers end up paying the same monthly payment which was within their budget.

Where is the harm there?

It simply depends on the customer’s preference, namely, whether they want to borrow more, with a lower cost of borrowing, or if they are content with borrowing less but with a higher cost of borrowing.

If consumers are paying a greater price now than they did before, what harm is the FCA’s intervention actually preventing, and what protection to consumers is it actually promoting?

And of course, the FCA has said nothing about that.

Jonathan Butler is a partner in Geldards' litigation practice handling large and complex commercial disputes across a broad range of sectors including transport,