This is a guest article provided by BRC Associate Member, Grant Thornton.
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Motor finance has dominated headlines over the last year, raising questions over what the broker-borrower relationship should look like. We take a closer look at the recent Supreme Court judgment and the implications for the retail sector.
Last year, the Court of Appeal heard three related motor finance complaints on undisclosed commissions. The claimants asserted that the commission was unduly high and constituted bribery. The Court of Appeal ruled in their favour, stating that it was unlawful for brokers to receive commission from lenders without a customer’s informed consent. It ultimately found that the brokers had a fiduciary duty to their customers, which they breached.
This was largely overturned by the Supreme Court in August. Finding against two claimants, it concluded that brokers have a legitimate commercial interest and do not have a fiduciary duty to consumers, with no subsequent evidence of bribery. However, the Supreme Court upheld the third case (Johnson vs FirstRand). This related to commissions, which the court found to be unduly high and constituted an unfair relationship with the customer.
The role of fiduciary duty
It’s still early days and the wider implications of the ruling remain to be seen. Initial analyses suggest that the findings are positive for retail credit brokers, particularly around fiduciary duty. As a key term throughout the proceedings, it’s worth stopping to consider what fiduciary duty means in practice. In short, it’s a legal obligation to act in the best interest of another party. To achieve that, the duty holder must avoid conflicts of interest and not make unauthorised profit from the associated activities.
In this specific instance, relating to motor finance, the court found that the broker-borrower relationship did not equate to a fiduciary relationship. This suggests a broad read-across to other broker-borrower relationships, with no immediate restrictions to commission arrangements. However, it could depend on the individual sub-sector, services or products offered.
Unfair relationships
Turning our attention to Johnson vs FirstRand, the case that the Supreme Court did uphold, the findings focused on disproportionately high commissions and a lack of transparency. This constituted an unfair relationship under the Consumer Credit Act, which requires fair terms, reasonable enforcement and appropriate actions from lenders or intermediaries.
As such, it’s important to make sure that all broker-borrower relationships are fundamentally fair. This could prove tricky as there isn’t a clear template for what good looks like. When considering whether a relationship is fair or unfair, key considerations may include the size and nature of the commissions, disclosure arrangements, or consumer characteristics, among other factors.
The potential for claims activity
Following the Supreme Court judgement, the FCA will consult on a redress scheme for motor finance agreements. This won’t have any immediate implications for retail credit brokers or lenders, who won’t be in-scope of this work. It will most likely focus on discretionary commission arrangements, which were sector-specific and now banned, but it could also look at other commission arrangements where the broker-borrower relationship was unfair.
Firms that provide retail credit should pay close attention to any reference to unfair relationships within the FCA’s consultation paper (due by early October) . In the meantime, retailers should consider the details of Johnson vs FirstRand and make sure that customer credit arrangements are transparent and easy to understand, with full disclosure over commissions. This needs to be clearly documented to support any future regulatory or legal scrutiny.
Firms should also be mindful that the FCA’s consultation could lead to increased news coverage and a surge in complaints. So it’s essential for firms to have a plan in place to respond to, and address, customer concerns.
Looking further ahead, the FCA could apply lessons learned from the motor finance redress scheme, to assess whether broker-borrower relationships are fair across the broader credit sector.
Contact Darren Castle for further information.
