Leasing companies and brokers impacted by Court of Appeal ruling

Leasing companies and brokers are assessing the impact of a Court of Appeal decision on commissions paid on vehicle finance deals.

Some paused quoting for business while they assessed the ruling’s implications, with others have introduced new measures to reflect the judgement.

In the landmark ruling, the Court of Appeal found in favour of the three consumers, who claimed they were mis-sold motor finance products by Close Brothers, Firstrand Bank and Motonovo. 

The court concluded it was unlawful for a broker, such as a car dealer, to receive a commission from a lender providing motor finance to a customer unless it was disclosed to the customer and they gave informed consent to the payment.

The judges’ ruling did not reflect the rules of the Financial Conduct Authority (FCA), but the longstanding common law principle of fiduciary duty which meant that the broker – the car dealer in this case – must act in the best interests of the customer and not put themselves in a position of conflict. 

Nikhil Rathi, the FCA’s chief executive, told this week's Investment Association Annual Dinner: “Since the judgment was issued, we have been in close contact with the firms involved, the wider sector and the Government to monitor the market, analyse the impact on industry and consumers and identify what action is required. 

“First and foremost, we need clarity on whether this is the courts’ final word on the issue. 

“The two lenders in the case intend to appeal and it is in everyone’s interest that when they do, the Supreme Court decides quickly whether it will take the appeal and, if it does, whether it agrees with the Court of Appeal.

“In the meantime, our focus is on ensuring that customers receive fair treatment in line with the law and that the market for motor finance continues to function well.”

Even though this was a business to consumer (B2C) case, the court’s decision applies to both regulated and non reulated business, which means business-to-business (B2B) deals need to have commission disclosure included. This has ramifications for B2B brokers and funding panels.

In a statement to Fleet News, the British Vehicle Rental and Leasing Association (BVRLA) said: “The broad nature of the ruling effects a wide range of sectors and services, extending beyond automotive. There will be an impact on the fleet sector, although there are currently more questions than answers, creating very high levels of uncertainty and major disruption. The scale and nature of that impact will depend on a host of factors that are specific to each use case and the business models involved.”

The BVRLA has appointed legal firm, Norton Rose Fulbright, to advise it on the details of the case and how it could impact the sector.

Vince Pemberton, chief executive officer at Rivervale, which operates as both broker and an own-book funder, described the broker sector's “genuine surprise” by the judgment.

“For many years, we have consistently informed our customers whether B2B or B2C of the existence of finance commission. This transparency is not new or incidental, it’s a part of our culture and has been integral to our ongoing external audits process," Pemberton told Fleet News.

“It is difficult to see how the cases at the centre of this Court of Appeal ruling bear any resemblance to what leasing brokers across the country do daily. It feels as though a ‘one size fits all’ solution has been imposed on an industry where such an approach doesn’t apply.

“We anticipated some changes regarding commission disclosure, but it appears that both the industry and our regulator were caught off guard by this decision.

“At Rivervale, we work with 11 funders, and we hope they will collaborate closely as we adapt to these new process requirements.”

Fleet News understands that Kinto, which provides access to a panel of funders, is assessing whether the Court of Appeal decision impacts commissions payable on corporate fleet leasing.  

It is said to be monitoring the situation while it awaits further guidance from the British Vehicle Rental and Leasing Association (BVRLA) and the FCA, but is continuing to place orders.

However, funders are unlikely to be taking a different approach for standard fleet leasing contracts which are believed to be out of scope as they are based on management fees and charges for ancillary services rather than commission.

Ian Plummer, commercial director at Auto Trader UK, explained: “As well as having wide ranging impact on B2C automotive finance sales, the Court of Appeal ruling applies just as much to any B2B deals which include any commissions and therefore need to be disclosed transparently and given informed consent by customers.

“However, while this will capture broker business it seemingly won’t include traditional corporate fleet where there isn’t usually any form of commission.”

Lloyds, parent company of Lex Autolease and retail arm Black Horse, says the ruling “sets a higher bar” for the duties that credit brokers owe to customers when disclosing commission arrangements. The bank added that it was “assessing the potential impact” of the decision.

A spokesperson for Novuna Vehicle Solutions said it has introduced a new commission consent form, for all new hire agreements and those in progress across the business, where there is a commission or fee paid.  

“Working closely with our partners and customers we’re ensuring we now have explicit consent to commission payments as part of their hire agreements, integrating this into pre-contractual stages, ensuring we remain transparent at all times and minimise any disruption to our customers,” the spokesperson added.

“The changes we’ve made are in line with our commitment to provide good outcomes for all our customers, ensuring that they are treated fairly at all stages of their agreement, and we’ll continue to monitor developments, working with the industry including the BVRLA and the FLA (Finance and Leasing Association).”

In a statement, BMW Financial Services, including Alphabet, said it has made the “necessary changes” to its provision of finance and leasing products to comply with the judgment.

Martin Brown, chair of Fleet Alliance, explained why corporate customers are being treated in the same way as retail buyers following the court ruling.

“The legal answer is that it falls under common law and the law doesn’t distinguish corporate customers from private individuals in this area,” he said. 

“Whilst this is true it still requires a totally different commercial approach from the sector to each customer type in my opinion.

“A court decision on customers buying used cars on HP is a long way - by some distance - from a corporate business asking us to manage its fleet of cars and vans.”

Brown says that there are a whole host of reasons, but the fundamental difference is that corporate customers are deemed to be professional or sophisticated buyers whereas private individuals are seen to be much less financially sophisticated.

Indeed, this Is the central tenet of the FCA’s approach to regulating the sector. “It recognises that consumers need more protections than corporate buyers and I would agree with that,” continued Brown. 

The dealer sells new or used vehicles at a retail outlet and provides finance to assist the sale of the vehicle. 

A leasing broker operates from a remote office location and provides the client with advice on vehicle availability and suitability, access to a variety of vehicles at discounted rental rates across a broad range of funders, while also bundling in fleet management to lower the client’s cost of operation.

“So non-regulated business is very different in operation and outcomes compared with regulated point of sale car finance,” he said. “One is a service; the other is a means to access a vehicle.”

Another clear distinction, according to Brown, is in the nature of the products. “In the legal cases that this judgement related to you had potentially vulnerable customers being sold a hire purchase agreement for a used vehicle,” he added. 

“Compare that to a fleet management agreement on multiple vehicles that will be funded via a business contract hire product.

“There is a fundamental difference here in terms of ownership versus usership and in the complexity of the sale.”

Brown concluded: “Leasing brokers provide value to clients with the range of services they offer but this requires significant investment in systems and people to deliver it.

“This has to be reflected in the income that the brokers receive from the funders. So if there are changes made to the model as a result of the court ruling that severely impacts the viability of the business model, this could result in there being fewer brokers operating in the market.

“The unintended consequence of the Court of Appeal’s decision may well be a reduction in the level of competition in the market and a decrease in the availability of fleet finance offers.”