New Guest Feature: An Unfair Relationship. A look into the Supreme Court judgement on Motor Finance 

A few weeks ago, the FCA published their interim report on their investigation into the premium finance market.  When Matt Brewis of the FCA labelled premium finance a “tax on being poor”, the share prices of several firms involved in premium finance fell sharply in anticipation of swift regulatory action.  18 months later, a measly 11 page report seemed like an anticlimax.  Those 11 pages said that the FCA did not intend to make any significant interventions in the premium finance market, making it seem like there was ‘nothing to see here’ after all. 

Supreme Court judgement on Motor Finance 

Before breathing a huge sign of relief, the industry did also have a wary eye on the outcome of the Supreme Court judgement about motor finance – which has been likened to premium finance in some ways.  The Supreme Court only upheld one of the three test cases put before it – the case of Johnson v FirstRand Bank Ltd.  As a result, interventions in the premium finance market seem more distant than they have at any other time during the last 18 months. 

Anyone involved in premium finance is also likely to have an interest in the insurance which it supports, and the Supreme Court judgement may well have a sting in it’s tail for insurance brokers. 

In the one case that was upheld, the court found that a commission of 55% was a “powerful indicator” that the relationship between the lender and the borrower was unfair. 

Why could this be important? 

The judgement in the case of Plevin v Paragon from 2014 found that a failure to disclose to a client a large commission payment on a single premium PPI policy made the relationship between a lender and the borrower unfair under section 140A of the Consumer Credit Act 1974.  In this instance, the amount of commission was 71.8% of the PPI premium which was taken out in connection with a loan. 

Following this earlier judgement, the FCA started suggesting that 50% commission was a reasonable tipping point between ‘fairness’ and ‘unfairness’.  This was clearly over 20 percentage points lower than the Plevin case.  Now that a commission level of 55% has been judged to indicate an unfair relationship, some people are starting to ask whether 50% could now be seen as too high to indicate a tipping point between ‘fairness’ and ‘unfairness’.   

In both the Plevin case and the Johnson case, the protection from an ‘unfair relationship’ were derived from the Consumer Credit Act.  With the Consumer Duty now firmly embedded across the financial service sector, however, there is unlikely to be a clear distinction between an unfair relationship with a borrower and an unfair relationship with a policyholder.  Just a few years after the Plevin case, the FCA’s investigation into the General Insurance Distribution Chain suggested, somewhat obliquely, that commissions above 50% could be excessive and risked causing consumer harm.  The same ‘trickle down’ is likely to occur from the Johnson case if 50% is now seen to be ‘too high’. 

Following the ruling in the Johnson case, the FCA has announced that it will consult on a compensation scheme for motor finance complaints.  This is likely to be the first place we get an indication of whether commissions lower than 50% could now be considered “too high”. 

The FCA’s motor finance compensation scheme 

Commentators are suggesting that the motor finance compensation scheme will be the biggest compensation scheme since PPI.  I believe this scheme may contain several points that will be useful to any insurance broker looking to refine their Consumer Duty approach. 

The main things to consider are: 

• Commission disclosure.  In both the Plevin case and the Johnson case, the commission was undisclosed.  It is worth checking that any commissions are disclosed clearly and in accordance with ICOBS 4.3-7R.  Whilst you don’t have to proactively disclose the exact amount or percentage of commission you’ll receive, it is worth being prepared for more people to ask you the question following the huge amount of publicity the Johnson case has generated. 

• The relationship with providers.  The Supreme Court found that the disclosure document misrepresented the arrangements between the credit broker and the lender, as they stated that the credit broker would choose from a panel when they were, in fact, a tied agent.  It’s worth checking your disclosure documentation to ensure it fairly represents the arrangements with providers that you have in place now.     

• Don’t rely on customers reading the documents you give to them.  The Supreme Court considered the borrowers failure to read the documents provided to him by the credit broker.  The judge prior to the Supreme Court had decided that Mr Johnson “displayed an almost wilful disregard of the precontract information and the terms and conditions of the agreement”.  The Supreme Court did not agree with this, however, finding that “It must be questionable to what extent a lender could reasonably expect a customer to have read and understood the detail of such documents. Furthermore, no prominence was given to the relevant statements (about the possibility of commission) in these documents.”   As a minimum, it is worth reviewing your terms of business documents to ensure that key points, such as how you are remunerated for your services, are highlighted.    

• The ‘commercial sophistication’ of a client is a likely indication of a characteristic of vulnerability.  This point was somewhat skimmed over in the final judgement and the publicity that followed, perhaps out of respect for the fact that Mr Johnson finds himself somewhat in the public eye as a result of this case.  Nonetheless, Mr Johnson’s lack of commercial sophistication, coupled with the fact that he had to take out a loan in order to purchase a car, made him vulnerable according to the judgement.  In its written submission to the court of appeal, the FCA also made reference to the “the characteristics of the consumer” as a relevant factor in deciding whether a relationship is unfair.  The implication here is that some customers may require more explicit disclosure than others, and so a ‘one size fits all’ approach may not always be an appropriate approach to disclosure requirements.       

There are still several weeks to go before the FCA publishes its consultation about the motor finance compensation scheme.  Until then, many of the above points will be debated furiously inside the walls of FCA meeting rooms.  Whilst the news on premium finance was welcome, fresh expectations may still be set elsewhere in the general insurance market.  

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