The protection sector needs to focus its attention on a ruling which threatens to drive a “coach and horses” through every part of commission in financial services, according to Robert Sinclair, chief executive at the Association of Mortgage Intermediaries (AMI).
Sinclair (pictured) warned that while the sector appears to be focused on the Financial Conduct Authority’s (FCA) upcoming review of the protection market, the industry needs to be mindful of the Hopcraft, Johnson and Wrench ruling in the motor sector and its impact on commission.
In the three combined cases there was a similar scenario; each claimant had visited a motor dealership to purchase a vehicle. Each dealership helped the claimants in obtaining finance to fund the purchase.
The claimants then entered into the credit agreements arranged by the dealerships and provided by the defendants and the dealerships received commission from the defendant lenders.
The commission structure in all three cases, Johnson v Firstrand Bank Ltd, Wrench v Firstrand Bank Ltd and Hopcraft v Close Brothers Ltd, allowed the dealer a level of discretion to fix the interest rate – meaning the higher the interest rate, the higher the commission.
Speaking at the Protection Review Conference 2024, Sinclair warned the ruling could drive a “coach and horses” through commission in every part of the financial services sector if the Supreme Court does not overturn it.
“Most people are worried about a market study when I think they should be looking at another way,” he said.
“The reason I talk about what I said on stage two years ago is that I challenged insurers and said I think you bribe people to buy your products. You don’t pay commission for the right reasons.
“There is now a legal case that basically says, I was right.”
FCA response
Speaking at the Investment Association Annual Dinner a few days after the ruling, FCA chief executive Nikhil Rathi acknowledged the Court of Appeal had ruled it was unlawful for car dealers 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 was rooted, not in the FCA’s rules, but the longstanding common law principle of fiduciary duty which meant that the broker – the car dealer here – must act in the best interests of the customer and not put themselves in a position of conflict,” he said.
Rathi said the regulator had been in close contact with the firms involved, the wider sector and the government to monitor the market, analyse the impact and identify what action was required.
“First and foremost, we need clarity on whether this is the courts’ final word on the issue,” he continued.
“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.”
Along with engaging the motor finance market, Rathi acknowledged the regulator was “working closely with the financial services sector, the Financial Ombudsman Service and the government to understand any wider consequences and further steps needed.”
He also noted that while the case itself was not focused specifically on discretionary commission, it clearly related to our work to determine whether motor finance customers had been overcharged because of the past use of discretionary commission agreements.
And Rathi revealed the FCA was consider carefully the potential benefits and risks of including complaints relating to other types of commission in motor finance.
He concluded: “The Court of Appeal has made the law clear and, if that is not challenged further, then firms need to handle any complaints in line with that.”
Regulator facing challenges
Continuing his speech, Sinclair added while the protection market review was “interesting” the regulator is facing a “cavalcade” of announcements from government.
“We’ve got MPs this week saying the FCA is not fit for purpose, incompetent, perhaps even corrupt,” Sinclair said.
“Now that’s a big thing for politicians to say about the regulator.
“We also have the chancellor in a range of speeches telling the Prudential Regulation Authority (PRA) and FCA to back off, be less bureaucratic and let people compete better.
“And the regulator’s answer to that? We’re going to ask you about what you’d like us to take away.
“They haven’t even got the ability to make that judgement themselves – 5,000 of them and they have to ask us how to do their job. Rubbish.
“In our world it’s okay to be imperfect in my view. It’s a journey not a destination. We’ll never be perfect. I’m perfect but my other half says I’m not.”
