A decision on 11 January by the Financial Conduct Authority (FCA) to investigate commission arrangements in motor finance has sparked considerable debate.
Much of the discussion focuses on whether these arrangements result in “unfair” agreements under s140B of the Consumer Credit Act 1974 (CCA). However, the landscape is complex, involving multiple factors beyond a narrow consideration of interest and commission rates.
In a February 22 blog posting, the DWF Finance litigation team considered the broader context of vehicle finance transactions and the precedents set by Plevin v Paragon Personal Finance Ltd and Wood v Commercial First Business Ltd.
The legal team made several points highlighted below:
The complex nature of vehicle finance
The purchase of a vehicle on finance is not a straightforward transaction. It encompasses numerous elements: car price, part exchange value, deposit amount, optional extras, warranty, manufacturer promotions, instalment amount, term, and Annual Percentage Rate (APR). These components, known and unknown to the customer, collectively determine whether a “good deal” is obtained. Focusing solely on commission and interest rates oversimplifies the issue, ignoring the nuances of each unique transaction.
The role of negotiation in motor finance
Crucially, motor finance agreements are the result of negotiations between the dealer and the customer. The interplay between various factors can lead to adjustments favourable to the customer, even when a commission is involved. Thus, assessing the fairness of a transaction requires a holistic view of all elements, not just the commission model.
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The judicial approach: a comprehensive analysis
When courts consider whether an agreement is unfair, they assess all circumstances of the specific transaction. This nuanced approach contrasts with some consumer champions’ focus on isolated factors like commission. Both Plevin and Wood, key cases in this context, illustrate the importance of considering all elements but also highlight significant differences from motor finance agreements.
The Plevin case: distinguishing factors
In Plevin, the Supreme Court ruled that non-disclosure of substantial commissions in a Payment Protection Insurance (PPI) policy rendered the credit relationship unfair. The case hinged on the extreme commission amount (71.8%) and the lender’s failure to disclose it. In motor finance, however, commissions are typically much lower, and the lender does not receive them directly. Disclosure obligations fall on brokers or dealers, not lenders, distinguishing these cases from Plevin.
Moreover, Mrs Plevin’s decision to purchase PPI was influenced by the undisclosed commission, whereas motor finance customers compare different finance options with clear information about costs, enabling informed decisions. Therefore, it could be argued, that the unfairness in Plevin does not directly translate to motor finance scenarios.
The Wood case: different contexts
In Wood, the Court of Appeal dealt with unregulated commercial lending where the broker, engaged by the customer, failed to disclose a commission exceeding £250. The broker’s role and the customer’s contractual relationship with the broker differ markedly from the dynamics in motor finance. In motor finance, dealers act as principals, not agents, with no duty to provide impartial advice, unlike mortgage brokers in Wood.
Implications for the FCA investigation
The FCA’s investigation must consider these distinctions. While Plevin and Wood offer valuable insights into the impact of undisclosed commissions, their contexts differ significantly from regulated motor finance transactions. A comprehensive analysis must account for all the elements of the transaction to determine fairness, recognising that a dealer’s commission can coexist with a beneficial deal for the customer.
