The finance industry is preparing for the Supreme Court’s ruling on commission disclosure
The Finance and Leasing Association admits it is bracing for all possible outcomes – both good and bad – in the imminent Supreme Court’s ruling on commission disclosure which will ultimately determine a lender’s fiduciary duty and whether it will be enshrined as a permanent legal standard.
An October 25 landmark judgment by the Court of Appeal raised significant questions about the legality of undisclosed “secret” commissions agreed between car dealers and finance companies when car loan providers Close Brothers and FirstRand – the owner of MotoNovo – challenged earlier court rulings that had found in favour of the consumer.
Those lenders are now appealing in the Supreme Court.
In the latest Auto Trader webinar on the issue, industry experts Adrian Dally, FLA director of motor finance and strategy and Jo Davis, chief executive of compliance specialist Auxilias, offered insights into the legal, regulatory, and financial aspects of the case and discussed its implications and possible outcome.
Providing a detailed overview of the events leading up to the Supreme Court hearing which is scheduled for April 1-3, Dally, said the case revolves around whether car loan providers and their dealership intermediaries should disclose not only the existence but also the exact amount of commission they receive from lenders before securing written consent.
The Court of Appeal’s decision to treat the relationship between dealers and customers as a fiduciary ‘best level of care’ one was unexpected and triggered a wave of uncertainty in the industry.
Dally said that prior to this ruling, the Financial Conduct Authority (FCA) had set out clear regulations stating that while the existence and nature of commission had to be disclosed to consumers, the regulator did not require the explicit disclosure of the commission amounts unless the customer specifically requested them.
However, the Court of Appeal determined that the duty of care in car finance transactions is akin to that of a fiduciary relationship, demanding not only the disclosure of the commission’s existence but also its amount.
Furthermore, the Court ruled that consumers must give written consent for these payments, a ruling that stunned the industry and created immediate compliance challenges. Dally described the moment as “one of those, ‘where were you when Kennedy was shot moments?’,” underscoring the gravity of the decision.
Dally noted that the Court of Appeal judgment, though significant, is still not final, until the Supreme Court’s forthcoming decision – which will be live-streamed – ultimately determines whether the fiduciary relationship holds, and whether the disclosure and consent requirements will become permanent legal standards.
FCA’s Role and the DCA Redress Scheme
The FCA is already conducting a review into discretionary commission arrangements (DCA). Dally explained that the FCA has been working on developing a redress scheme for consumers unfairly treated by excessive rates on interest.
However, the timing of the Supreme Court’s judgment may influence the expected May announcement on the DCA compensation measures as part of that probe, potentially delaying or altering the specifics of how this process will be organised.
“If the judgment from the Supreme Court is later rather than earlier, then the FCA would put back its work a bit as it clearly can’t consult on a redress scheme before the Supreme Court has given its judgment on the disclosure appeal,” said Dally.
The FCA, on receiving the judgment on commission disclosure, would then consult on a redress scheme possibly from as early as July, and confirm the way forward by the year-end with a redress scheme which would likely be launched in 2026
Dally highlighted the complexity of the situation, noting that finance industry body FLA is preparing for both favourable and unfavourable outcomes, depending on what the Supreme Court rules.
“That is the most likely scenario. The FCA, upon receiving the judgment on commission disclosure, would then consult on a redress scheme possibly as early as July and confirm the way forward by year-end with a redress scheme that would likely be launched in 2026
Dally highlighted the complexity of this situation noting that finance industry body FLA is preparing for both favourable and unfavourable outcomes depending on what Supreme Court rules.
“That is most likely scenario. All scenarios are possible, but the one presented is most likely. However, it’s not certain. So they’re all possible, but that scenario laid out is the most probable, but it’s not certain.”
Any redress scheme itself is a point of contention, with some in the industry questioning the necessity of compensating consumers – ratings agency Moody estimates up to PS30 billion in potential claims – who they suspect were in no way harmed by the undisclosed commissions.
“Consumers, they would turn down the commission arrangements. No, they’ve not been doing that in their hundreds of thousands so we believe on commission disclosure, there was no harm.”
Treasury Failed Bid To Intervene
The Supreme Court earlier this year rejected Chancellor Rachel Reeves’ attempt to intervene in mark case, after urging the court to prevent what she described as “windfall” payouts to borrowers who were unknowingly paid additional fees.
The rejection of the Treasury’s request to intervene in the case was a significant moment, which Dally interpreted as a sign of the court’s independence from political and executive pressure, ensuring that the legal process remains impartial, particularly in cases with such far-reaching economic implications.
“The best clue about its decision, essentially is to look at who is there in the April hearing. The best clue to its decision is who was present at the April hearing. Close Brothers and First Rand are the original lenders. And the third industry party is the National Franchise Dealership Association.
“Now you’ve also got a seventh party, an independent one, namely the regulator or the competent authority. You’ve now got a panel that is balanced. You may ask, “Why the NFDA and not, for example, the Treasury or the FLA?” There wouldn’t really be justice if, if both dealers and lenders weren’t there at the table in the hearing, so it does seem logical and fair that the third slot is taken up by dealers to allow for balance.”
Consumer Harm and a Potential Redress Scheme
Jo Davis offered insights into the role of banks and lenders in the potential redress process. She explained that many institutions had already set aside provisions to cover the potential costs of compensation, but these provisions were based on realistic scenario analysis.
Banks, she explained, use provisions to ensure their financial stability and to demonstrate to regulators and investors that they are prepared for any eventuality. The banks often estimate the costs of claims, as well as the administrative costs. One of the main discussions on the panel concerned whether a redress system was necessary. Davis supported the Treasury’s proposal for a “harm test,” arguing that compensation should not be automatic but should instead be based on demonstrable harm to consumers.
“One of the things I did quite like about the Treasurer’s application was that they wanted there to be some sort of test around consumer harm and not just an automatic payout and that it’s not going to be one of those situations that we’re just paying out regardless of consumers being able to prove that they’ve had suffered some harm.
She pointed out that the vast majority of consumers are consenting to commission payments once they have been informed about them, with very few rejecting the arrangements. In her view, this consent suggested that there was no widespread consumer harm that would justify large-scale compensation.
Dally agreed, adding: “The vast majority, literally, north of 99.9% of consumers are consenting to the payment of commission… so they are consenting in full knowledge of commission arrangements, including the amount.
“Very few have refused. A very small percentage of consumers who refused to sign the contract have signed it after they have shopped and realized they got a great deal. So that’s a very important fact.”
However, Dally acknowledged that there could be exceptions. Certain discretionary arrangements, especially the most egregious, could have been harmful to consumers.
