Motor finance case: Landmark ruling made

December 2024

• 2021: the FCA banned DCAs on the basis these arrangements provided an incentive for a customer to potentially be charged a higher interest rate. In response, related complaints and County Court cases increase significantly.
• Jan 2024: key decisions by the FOS on two DCA complaints were found in favour of the customers. Simultaneously, the FCA launch a review under s166 of historical motor finance commission, to conclude by Sept 2024. Firms were allowed to place DCA complaints on pause until this date.
• March 24: cases stemming from the regional courts are given permission to Appeal the decisions of their respective courts, defended by Close Brothers and Firstrand Bank.  
• April 24: Barclays Partner Finance launch proceedings for a Judicial Review (JR) of the FOS decision against them basing the challenge on alleged misinterpretations of the law.
• July 2024: FCA extend the timeline for concluding the s166 review to May 2025 and the associated complaint handling pause until December 2025. The FCA indicate their interest in the outcome of the test case appeals and the JR decision, it is noted that they consider a redress scheme is more likely than when they started their review.   

The Court of Appeal Decision

The three cases stemming from regional courts (Hopcraft v Close Brothers Ltd, Johnson v Firstrand Bank Ltd, and Wrench v Firstrand Bank Ltd) were merged and heard by the Court of Appeal in July 2024³

On 25 October 2024, the Court of Appeal set out its judgment:

• The Court of Appeal decided it was unlawful for the brokers (who were also the car dealers) to receive a commission from the lender providing motor finance without obtaining the customer’s informed consent to the payment.
• The Court inferred that informed consent required the consumer to be told in clear and prominent terms all material facts regarding the commission, including the amount of the commission and how it was to be calculated.
• The judgment related to fixed commission in motor finance agreements as well as DCAs.

The decision therefore extends to any motor finance commission arrangement where informed consent was not provided by the customer.  

In one of the three cases the commission was deemed to have been kept secret (i.e. the commission was not disclosed to the customer at all), in the other two it was considered that there was partial disclosure (i.e. there was some disclosure in the customer documentation) but in these specific cases the disclosure wasn’t adequate.

Consumer Credit Act 1974

In one of the cases (Johnson) the Court of Appeal found that the relationship between the customer and the lender was also unfair based on the level of disclosure combined with the value of the commission in relation to the sum borrowed (in this instance the commission was 25% of the sum borrowed).

Appeals to the Supreme Court

• Both firms immediately confirmed their intention to appeal the decisions to the Supreme Court.
• The Supreme Court has granted permission to appeal the cases on 11^th December 2024⁴, confirming that the cases will be heard prior to the end of March 2025.

The FCA’s response

The FCA in response to the decisions has:

• Engaged with industry, government and consumer representatives. 
• Confirmed the common law position and the expectation that FCA authorised firms are required to follow both this and the FCA rules and regulations.
• Been supportive of the referral to the Supreme Court and the expedition of the hearing.  The FCA have confirmed they are considering whether to formally intervene in the case to share their expertise to assist the Court on the substantive appeal.
• Responded to market analyst questions in relation to expectations for firms to maintain appropriate financial resources.⁵
• Intimated the potential read-across of the issue to other product and sectors by noting “ “there may also be wider implications for other financial services markets regulated by the FCA that involve intermediary arrangements.”⁶

Extension of the complaint handling pause for non DCA related commission complaints

The FCA signalled that the Court of Appeal decision is likely to result in a sharp and significant increase in motor finance non-DCA commission complaints, creating additional pressures on firms and the FOS.

In light of this expected increase in complaints, the FCA subsequently opened a consultation on extending the DCA related complaints handling pause to all commission related complaints (13^th November 2024) , the consultation period was short concluding by 5^th December.⁷

On 19^th December 2024, the FCA issued Policy Statement PS24/18, confirming that they are extending the time firms have to respond to complaints about motor finance agreements not involving a DCA:⁸

• Firms now have until after 4 December 2025 to provide a final response to non-DCA complaints received on or after 26^th October 2024 (this is in line with the extension already provided for complaints involving DCAs). 
• The pause incorporates an expanded definition of a motor finance non-DCA commission complaint to cover regulated motor finance consumer hire agreements, as well as regulated motor finance credit agreements.
• The FCA is clear that firms will need to use the time provided so as to be ready to issue final responses to complaints at the end of a  extension, stating “that the rules do not remove the obligations on firms to progress complaints under the DISP rules. This includes continuing to investigate and collect evidence to help with the eventual resolution of these complaints, taking into account all relevant factors (including the Court of Appeal’s judgment)”.

Back to the DCA issue 

It’s important to remember that, in April 2024, Barclays launched proceedings for a Judicial Review over a FOS decision in January 2024, against them, basing the challenge on alleged misinterpretations of the law. This case’s hearing commenced on 15^th October 2024. 

On 17 December 2024, the High Court found in favour of the FOS, the Court dismissed all 3 grounds of appeal brought by the lender, Barclays Partner Finance.⁹ Barclays immediately confirmed their intention to appeal the decision¹⁰. The FCA also issued a statement on the same day welcoming the clarity the judgement provided on important areas of law relevant to their review and noting their intention to set out the next steps for the DCA review in May 2025¹¹.

Informed consent is currently a legal requirement

Firms are now required to adhere to this common law position.

• As a result, immediately following these decisions, lenders were required to update their processes and controls to be compliant with the articulation of informed consent through the judgements.
• For some firms, this led to the need to temporarily pause the payment of commission and/or the issue of new finance whilst these arrangements were put in place.

All firms were operating at pace and a period of embedding and refinement of the updated processes and controls will ensue.

Complaint volumes are likely to spike

As a result of the judgements, firms are likely to see a surge in complaint volumes relating to disclosure rather than the discretionary nature of the commission model.

• In particular, the online template issued by Martin Lewis on the Money Savings Expert website has now been updated to cater for non DCA related complaints.
• Following the release of this initial tool for DCA complaints, firms were reported to have received c1M complaints in the first month of this going live¹².
• Firms will need to be appropriately set up to manage the logging and appropriate acknowledgement of complaints throughout the pause period.

The FCA has been clear it expects firms to have taken preparatory steps to be ready to issue responses to the complaints once the pause is lifted.

There is a need to review and segment the back book

Regardless of the expedition of the Supreme Court Hearing, the current state of uncertainty will persist at least for Q1 of 2025.

As a priority, firms now need to understand any potential future liabilities based on the dynamics of the back book. This requires a review to identify the resemblance of the book to the specific Court of Appeal case fact patterns.

This review should take into account, for example:

• The sophistication of the customer which appears to have been directly relevant to the appeal decisions.
• The position in relation to fully secret versus partial disclosure, particularly where a firm may consider their controls and disclosures went beyond those of the Court of Appeal cases.
• Other relevant factors such as how processes and controls may have changed over time, the customer journey, the tied nature of the broker, the relationship of the broker, and materiality of the commission amount.

Firms should then segment the back book accordingly supporting both financial and operational planning around a range of different scenarios (which will depend on the conclusions of the FCA’s review and Supreme Court hearing).

There are potential impacts on commission arrangements outside of motor finance

Whilst the fact patterns of these individual cases relate to motor finance, it is without doubt that commission arrangements more generally are an area of focus for the regulator.

For example, in August this year, the FCA announced its intention to conduct two Market Studies on pure protection and premium finance. A central tenet of both these market studies related to commission and commission disclosure.   

Firms should consider how their broader arrangements are resulting in good customer outcomes and whether they meet the existing expectations under the Consumer Duty – especially in relation to Price & Fair Value and Customer Understanding outcomes.  

The cases, at a minimum, emphasise the need for firms to be aware that where commission is being paid, this needs to be clear and transparent to the consumer.

We offer multi-disciplinary professional services that allow us to support our clients across the full range of activities required through our Consulting, Legal and Managed Service businesses.

Three key immediate priorities:

1. Scenario modelling

Our legal, regulatory and modelling SMEs can support with:

• Detailed scenario planning based on different approaches and depending on varying assumptions including scope and redress.
• Identification of distinguishing factors, understanding the dynamics of the back book and how disclosures may have varied and improved over time. 
• Insights into variables, key metrics and assumptions by agreement type, dealer, time period relevant to any future reporting including, for example, adjustments for complaint rates, settlements and processing costs.

2. Complaint Handling Surge Support

In response to the expected sharp and significant increase in commission related non-DCA complaints, the FCA have now confirmed that firms have until after 4 December 2025 to provide a final response to these (if received on or after 26^th October 2024). This is in line with the extension already provided for complaints involving DCAs. The extension expanded the definition of complaints to include motor leasing / consumer hire agreements.

Fuelled by media interest and the updated Martin Lewis complaint template, an impending surge of complaints and Data Subject Access Requests (DSARs) is now likely to follow.

KPMG can provide the following assistance:

Technology and Automation - tactical technology capabilities to automate complaint and DSAR logging and workflow (including automation of acknowledgements and updates).

Complaint handler resourcing - access to trained complaint handling personnel through our KPMG academy and managed service offerings. We offer trained ‘pod’ resourcing capacity both onshore, offshore and near shore to help manage short term spikes safely and efficiently.

3. Front book process and control review / validation

Changes to disclosure processes and controls to adapt to the new common law position have been progressed at pace. A period of refinement and embedding is now underway.

KPMG’s regulatory and legal subject matter experts can support with:

• Review, outcome testing and validation of changes made
• Assessing any broader commission arrangements outside of motor finance on a review and recommend basis

Looking to the future

Longer term planning is also required to ensure operational readiness to respond to the Supreme Court rulings and regulatory instruction.

Population analysis and data readiness

An effective response to the future Court and FCA verdicts will rely on accurate and complete data. Our data team can assist with:

• Design of data enrichment strategies to enable greater automation in complaints handling / proactive redress.
• Collating a robust, auditable and tested data source for all motor finance arrangements, including the commission arrangement, commission value, transactional history, and personal information where available.

Scaled complaints processing

The FCA have indicated that in relation to DCA commission a redress scheme is now more likely than when they started their review. Unless the outcome of the Supreme Court judgements is a significant overturn of the Court of Appeal rulings the current position will materially extend the scope of this exercise. Either way, 2026 is likely to bring the requirement for firms to scale up operational and technology capabilities for processing complaints. KPMG can support:

• The design and development of strategic complaints management to enable a data led response at scale when the pause is lifted.
  
• Design and implementation of appropriate technology and automation to support a digital-first complaints journey, redress calculator, customer portal.
• Operational stand up and execution for mass customer engagement. Exception processes and controls.
• Independent quality assurance partnering to validate the completeness and accuracy of the complaint processing.