1. Introduction

      Three claims by individuals against motor finance lenders have recently been upheld by the Court of Appeal which decided that they should receive refunds of commission payments that the lenders had made to the car dealers who were acting as intermediaries/ brokers in respect of the finance arrangements (interest was also awarded to one claimant).  This decision, known as the Hopcraft case, may have wider implications for situations in which:

      1. an intermediary owes a duty to the customer to be disinterested or to act in the best interests of the customer (in other words, a ‘disinterested’ or ‘fiduciary’ duty is owed);
      2. the intermediary receives a benefit from the product provider (such as a commission payment) which represents a self-interest and which conflicts with the intermediary’s ability to discharge this duty; and
      3. the intermediary and/or the product provider has not taken sufficient steps to make the customer aware of the commission and/or has not obtained informed consent from the customer in respect of the payment of the commission.

      As such, the decision has potential relevance beyond the FCA’s existing work on discretionary commission arrangements within the motor finance sector to any intermediary or brokerage arrangement across both regulated and unregulated products in the financial services sector and beyond and could have significant financial implications for participants in this and other markets.  Any business involved in any intermediary/brokerage arrangements (either as the third-party provider/lender or as intermediary/broker) should be considering the extent to which their arrangements may be impacted and planning next steps with a view to mitigating and managing any such impact. 

      We set out below some practical steps to conduct an impact assessment and to determine next steps.  

      2. Internal Governance

      With any legal or regulatory development there can sometimes be an internal call for immediate action which prompts a flurry of activity.  In these circumstances, and where the landscape is still developing, it may be most time efficient and stand the business in good stead for some planning and governance to be implemented first. 

      Steps to consider include establishing an internal project with a working group bringing together key internal stakeholders.  The working group may be assisted by some terms of reference including reporting guidelines and communication protocols.  Where internal or external legal advice is being sought, regard should be had to the protections afforded by legal professional privilege and ensuring that privilege is created and maintained where appropriate.  An action plan and tracker with a realistic timetable can be developed by the working group and kept updated as the project proceeds.  Keeping records of the decisions made and steps taken may also prove useful over time and in the event of any regulator or other enquiries.

      3. Impact Assessment

      Before consideration is given to what action is needed, the business will need to understand to what extent it is impacted by the relevant legal principles both on a historic and forward-looking basis.  A view will need to be taken on the relevant time period for the review including how far back in time it extends in respect of considering historic transactions.  This may depend on the longevity of the business and relevant underlying facts such as the extent of complaints received and information held.  Any impact assessment should consider the application of the relevant legal principles to the following aspects of current and historic business:

      1. the business model;
      2. the customer base;
      3. relevant relationships with fellow members of the distribution chain and current/historic disclosure practices;
      4. pricing structures.

      Looking at each of these in more detail:

      1. business model: the following factors are relevant to consideration of whether a business may be impacted:
        i) whether the business has introduced and/or currently introduces products/services of third parties or relies on intermediaries / brokers to distribute its products/services; and
        ii) whether the business has provided and/or provides, or has been or is involved in distributing, a regulated product (if yes, then it may also be necessary to have regard to regulatory requirements including FCA rules)
      2. customer base: the extent of the disclosures required may depend on the nature of the customers including:
        i) the extent to which they were or are financially sophisticated;
        ii) whether they were or are individuals or businesses;
        iii) whether any customers were or are vulnerable (either due to a particular characteristic such as a disability or in context of the relationship, the purpose of the transaction and the customer’s circumstances)
      3. relationships and current/historic disclosure practices: a review and analysis of the following may assist in informing a gap analysis with a view to understanding both any forward and/or backward implications:
        i) contractual arrangements and information flows/ communications between intermediaries/ brokers and product providers/lenders;
        ii) policies, procedures and how they operate in practice;
        iii) how and when disclosures (if any) are made to customers about commission/any benefits received by the intermediary/broker from the product provider/lender? This is likely to require consideration of the following (and potentially different iterations over time):
        • when disclosures are provided to the customer (and whether they have sufficient time to consider them),
        • the medium in which any disclosure is made (including both oral and written disclosures);
        • how prominent the disclosure is to the customers (for example is it included within lengthy standard terms and conditions or in a separate disclosure document / flagged by the salesperson to customer); and/or
        • how the customer’s understanding of the disclosure is evidenced (for example, whether the customer signs an acknowledgment/disclosure statement).
      4. pricing structures: the impact assessment will need to be conducted with a focus on the level of any commission payable to the intermediary/broker in comparison to the cost of the third-party product or service provided to the customer.  For products within scope of the Consumer Credit Act, the higher the relative cost, the more likely it may be considered as ‘unfair’ by a Court.

      4. Action plan

      Following the completion of any impact assessment, those businesses potentially impacted are likely to want to formulate an action plan for identifying and implementing next steps both in the immediate, short and longer term and some potential considerations may include:

      1. Immediate: Given the law as it stands pending the outcome of any appeal to the Supreme Court, firms will want to consider the extent to which any changes could be made to customer disclosures/ commission arrangements for in-flight or new transactions (recognising that these will need to be implemented consistently and efficiently and that it may be prudent to give fuller disclosures than might be strictly necessary).  The FCA has identified a risk of firms making changes to ensure informed consent is obtained from customers which are not implemented efficiently or consistently and will consider whether it may be appropriate for the FCA to provide firms with further guidance to support appropriate market conduct.  In the meantime, firms will want to consider their own position, taking a risk-based approach, and seeking to mitigate the risks of non-disclosure and/or inconsistent approaches to disclosure;
      2. Short-term:
        i) Complaints/ claims handling: As the FCA has acknowledged, firms are likely to experience an increase in motor finance commission complaints and the resulting additional pressures could impact on these being dealt with in an orderly, consistent and efficient way.  The FCA’s proposal does not prevent consumers taking legal action though the courts.  Consideration will need to be given to developing a consistent set of responses for cohorts of complainants/ claimants (including some who have already complained) taking into account the FCA’s consultation (see below).  Firms may also receive requests for information and responses to these will need to take into account what information is available and any obligations that require the provision of information;

        ii) Resources: The business may require additional resources for dealing with customer complaints and/or claims; for conducting an impact analysis and considering next steps; and maintaining adequate records of steps taken.  It may be necessary for resourcing to be escalated as appropriate within the firm’s governance structure.  Any lack of resourcing could itself give rise to a regulatory issue for firms and senior management; 

        iii) Financial impact: Determining the possible / likely financial impact on the business as a result of customer complaints / claims (taking into account potential liability for commission payments plus interest) may include consideration of:
        a. the particular factual circumstances emerging from the analysis carried out to map the findings of the court against the firm’s customers, commission arrangements and disclosures as referenced above;
        b. the extent of any historic impact taking into account any relevant milestones both in terms of the regulatory and legal landscape and any changes in the factual circumstance that occurred at particular points over time;
        c.any resulting impact of potential liability on financial resilience (particularly for regulated firms); and
        d. whether any notifications are required following this assessment such as to regulators, insurers, the market);

        iv) Engagement: Given that liability for inadequate disclosures may be shared amongst various relevant parties and their shared interest in evidencing compliance, communication and co-ordination may assist in assessing potential liabilities; considering communications; and exploring and implementing any future changes such as to customer disclosures/journey and/or commission arrangements.  Firms may also wish to consider responding to the FCA’s consultation paper (see further below) and engaging with trade bodies as the situation develops.
      3. Longer term: In light of the impact assessment, firms will be able to give consideration to the extent to which any remediation and/or enhancements should or could be carried out.  Careful review, analysis and decision-making will be needed and time spent on getting this right.  Initial steps are likely to involve:
        i) analysis of what good looks like and consideration of the firm’s risk appetite in particular scenarios;
        ii) reviewing policies, procedures and training materials for staff with a view to identifying any potential gaps and any required or desirable enhancements; and
        iii) consideration of the distribution model and reviewing and re-negotiating distribution arrangements (where required) to reflect any changes to this (such as pricing and the customer journey).

      5. Looking Ahead

      Although the FCA, UK government, trade associations and market participants have all expressed a desire for the Supreme Court to decide any appeal on an expedited basis (and the FCA will consider intervening in any appeal), it could be 2026 before any outcome is known.  In the meantime, those potentially impacted will need to assess the impact on their businesses and may wish to take action to mitigate the potential risks.

      Within the motor finance sector, the FCA is consulting on broadening the scope of the current pause on complaints handling to cover complaints about a regulated credit agreement for the purchase, hire or bailment of a motor vehicle where the lender paid commission of any kind to the broker (not just complaints concerning agreements where there was a discretionary commission arrangement which currently benefit from a pause until 4 December 2025). The FCA has put forward two options:

      a. for the broader pause to persist until 4 December 2025;

      b. for the broader pause to be in place until 31 May 2025 by which time the outcome of applications to the Supreme Court for permission to appeal could be known.  

      The deadline for responding is 5 December 2024 and the FCA hopes to publish its policy statement by 19 December 2024. The FCA flags that, notwithstanding the scope of the proposal, where commission is not relevant to the complaint, the FCA expects firms to progress complaints and not to apply the extension so as not to deprive consumers of a timely response.

      Beyond the motor finance sector and regulated credit agreements, the FCA has recognised that there is some uncertainty in the market regarding the extent to which the common law principles applied by the Court of Appeal apply (including those within other parts of consumer finance, the financial services sector and the broader UK market).  Given the scope of the proposed extended pause and the FCA’s expectations, commission-related complaints outside scope would need to be handled in the normal way.  The FCA recognises that firms will be getting their own legal advice but has indicated it is considering whether it would be helpful for it to publish its own views to help firms navigate the uncertainty, recognising that the final decisions on these matters rest with the courts. Those potentially impacted by the Judgment will need to closely monitor developments and considering the approach to broader complaints.   

      If you have any questions or require assistance on the steps outlined above, please feel free to contact Katie Stephen (Partner, Financial Services and Co-Head of the Contentious Financial Services Group), Matthew Gregory (Partner, Financial Services) or your relationship partner at Norton Rose Fulbright LLP.