The Motor Finance Review: our thoughts

Two months on from the FCA announcing it will undertake further work in the Motor Finance sector in respect of commission following Financial Ombudsmen Scheme (FOS) judgements, I thought it was a good time to provide some thoughts on the matter after fully considering what the full implications are for the industry. The judgements found in favour of the borrower, where the lender had allowed a discretionary commission arrangement to exist and subsequently required the lender to pay compensation to the borrower, as the arrangement resulted in the customer paying a higher interest rate on the loan. The FCA had previously conducted a review of the motor finance industry in 2018 which resulted in new rules related to certain types of commission structures and introduced wider commission disclosure requirements across all credit brokers.

Firstly, I am concerned by these FOS judgements, given that car dealerships often rely on income from credit broking and other services to “keep the lights on” and provide competitively priced vehicles and lending in a very competitive market. The Ombudsman appears to have opined that brokers should be accepting very low levels of commission which are unlikely to support a sustainable business. Where dealerships are unable to add to their income from additional services, they will simply charge more for the vehicles they sell and drive down part exchange values to fill the void. This will undoubtedly result in worse outcomes for consumers, less competition, and higher costs in the future.

The judgements also mean that, regardless of the fact that borrowers have been given ample information regarding a credit product on offer and time to consider the offer, as well as the opportunity to shop around, they would be able to renege on the credit product because they had not been made fully aware of how the interest payable would be distributed between the broker and the lender.

This situation is very different from the PPI mis-selling scandal because PPI had been knowingly sold to customers who would never have benefited from the policy in the event of claim. Also, the cost of the policy was often bundled and disguised within the loan product, and staff selling the policies were undertrained, highly performance managed and incentivised to sell the cover. The question the ombudsman should be asking with the motor finance review is whether the customer was able to make an informed decision, whether the product performed as it was expected and finally if the rate offered was competitive given the market standards at the time.

Since the announcement of this review, we have seen reports of Lloyds putting aside £450 million in readiness for a potential redress scheme which is a clear indication of the current concern being shown by the largest of providers in this space. Templated complaint letters including subject access requests have been made readily available via newspapers and Martin Lewis, the money saving expert, even before the review has been completed. Lenders and even brokers are being inundated with complaint letters, which will inevitably draw significant cost to resourcing the resolution of these complaints, regardless of the outcome of the FCA’s review.

This might be an alternative view, however, let’s liken commission being built into the cost of the loan, to buying a tin of beans. Hear me out… when you go into a supermarket and look at the price of a tin of beans, the supermarket is not required to disclose their profit margin in much the same way that a broker is not required to disclose their commission, unless specifically requested by the borrower. A potential customer simply looks at the price on offer and then makes a decision as to whether to buy at this price, or visit another supermarket that might be charging a lower price for the same tin of beans. There is no room for negotiation, the price offered is the price offered and as the consumer you make an informed decision. Whilst beans and credit are very different, in my eyes the concept is the same. What is materially important to the consumer is what they are being offered and the price they are asked to pay when making the decision.

Another alternative “glass half full” view of the commission debate is that, in most cases, the discretionary element of the commission allowed to be “added” by a broker was capped by the lender and was the starting position for the broker. Any reduction from this rate of commission was an improved outcome for the customer in order to allow the broker to forego commission. In other words, the commission was not loaded, it was discounted.

Commission disclosure has been a topic previously visited by the FCA, but in other sectors where commission disclosure takes place (such as mortgages), the provision of this information simply does not affect customer decision making. If there was any conclusive evidence that commission disclosure would make a difference, this would have already been introduced as a rule within credit. The issue we currently face is that the rule that has been breached, simply stated lenders should not enter into discretionary arrangements without justification.

Regardless of opinion, at this stage all affected firms should be ensuring they are working in line with the revised rules put in place by the FCA in January to provide the required extended timescales to customers with discretionary commission arrangement complaints, and also ensuring they deal with non-DCA complaints in line with the unchanged FCA complaint handling requirements.