Context
Late on Friday 1st August the Supreme Court passed judgement on three cases related to commission payments in motor finance, in a 110-page document, publishing the judgment and a Press Summary. The Court has ruled that, in many cases, commission payments in motor finance arrangements could be legal, but that a lender did act unfairly – and therefore unlawfully – due in part to the size of the commission it paid to the motor dealer and how it was disclosed. The Supreme Court agreed with several factors the FCA had identified which could point towards an unfair relationship and fall foul of the Consumer Credit Act (CCA), whilst recognising that it depends on the facts of each case.
Key points to note and next actions
The court handed a partial win to motor finance companies and for two of the cases it ruled that lenders are not liable for hidden commissions payments in motor finance schemes. However, in the case of Mr Johnson, the Supreme Court found that the relationship between Mr Johnson and the finance company was unfair – as a result of:
- the size of commission the dealer received; and
- poor disclosure of that commission, which was ruled as unfair and therefore unlawful.
The Court ruled that the commission, in this case, should be repaid to Mr Johnson by the lender. This is because:
- a high commission had been paid (55% of the total charge for credit across the HP and loan, and 63% of the interest payments alone) and had not been disclosed to the customer; and
- there had been no disclosure of the commercial tie between the dealer and the finance company.
It’s this decision which has set a precedent for the industry and means some car buyers may now be entitled to compensation.
What does this mean for insurance intermediaries and premium finance?
- We still await a judgment in the Barclays appeal case on a FOS decision, which is due in September, having been delayed until after Friday’s judgement.
- The FCA’s final insurance premium finance report is due by the end of the year, which will propose changes to address any issues identified.
The FCA’s interim report acknowledged the importance of insurance premium finance, as well as the risks associated with bad debt, but it still found examples of what it found to be potentially high APRs (citing ‘over 30%’), with costs for paying monthly differing substantially between motor and home insurance, as well as between distribution channels. The FCA found that premium finance revenue materially exceeds costs for some providers
The FCA intends to explore its concerns further in the next phase of the study, which as a reminder will focus:
- more closely on firms’ price setting for higher-priced products, assessing the value these products provide and the extent to which the prices are paid by vulnerable customers;
- on the differing approaches in motor and home insurance to understand whether there are any issues with fair value and the way competition works;
- on the effect of specific features of the market such as commission and clawback arrangements; and
- on the extent to which consumers can effectively compare premium finance with other credit products.
It is safe to say that the spotlight remains on commission practices, fair value, costs versus revenue and commission disclosure. Firms should be mindful that where insurance premium finance practices have been deemed to be unfair, then customer redress may be required.
As we have outlined before, under existing Consumer Duty and Product Governance requirements, intermediaries offering insurance premium finance should ensure that they:
- understand and have documented the costs for providing premium finance, including how much of their premium finance debt they are writing off;
- consider the remuneration received, in light of the above, to justify the product provides fair value to customers; the FCA does not want premium finance to be used to prop up low insurance commissions;
- consider whether any other charges are reasonable and do not dilute the fair value;
- provide communications that are clear, fair and not misleading, so customers understand the costs for paying by premium finance and your relationship with premium finance providers;
- ensure that vulnerable customers are identified and do not receive poorer outcomes; and
- make changes where your review highlights concerns.