Our expectations of motor finance firms following the Court of Appeal's decision in Johnson and others.
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On 25 October 2024, in the 3 joined cases of Johnson and others, the Court of Appeal decided it was unlawful for motor finance brokers (car dealers) to receive a commission from the lender providing motor finance without getting the customer’s informed consent to the payment.
The 2 lenders in the cases have been granted permission to appeal[1] by the UK Supreme Court. The appeal will be heard in 2025.
Pending the UK Supreme Court’s judgment on the appeal, the Court of Appeal’s judgment sets out the legal position for both new business and past transactions.
Firms will be reviewing their practices in light of the judgment, and we're aware that firms are making changes to comply. Firms must also ensure they comply with our rules.
To help firms navigate this, we highlight some things firms should consider under the Consumer Duty, and particularly the Consumer Understanding outcome rules, with examples informed by our engagement with firms and trade bodies. This outcome is of particular relevance to the Court of Appeal judgment, given the focus on consumer disclosure and consent. Read more about our expectations relating to complaints[2].
Firms are ultimately responsible for their own compliance with regulatory requirements and the law. We will act where we find that firms are not meeting our expectations.
Summary of the Court of Appeal’s decision
Below we set out a summary of the Court of Appeal’s main conclusions on the common law and equitable duties that arose in the 3 motor finance cases.
Firms should seek legal advice to inform their responses to the judgment. As a regulator, we are not able to provide this advice.
Our expectations under the Consumer Duty, particularly the Consumer Understanding outcome
Our expectations under the Consumer Duty are outcomes-focused, so firms have a degree of flexibility to adopt different approaches to deliver good outcomes for consumers.
Firms must communicate in a way that equips customers to make effective, timely and informed decisions. This means giving customers the information they need (including information about commission arrangements) at the right time, and presenting it in a way they can understand.
Engaging communications
Communications should be designed in a way that encourages consumers to engage with them. Key information should be easy to identify, for example, by using headings or layout.
We’ve seen firms provide customers with a standalone document explaining the commission arrangements, or clearly presenting the commission amount and how it is calculated in a box within a document, and reading this information out to customers. These approaches are likely to support consumer understanding by giving greater prominence to this information. In contrast, some firms have key information in small print, which makes it difficult for customers to spot.
We expect firms to respond flexibly to the needs of customers with characteristics of vulnerability. Firm will usually need to be able to provide support to their customers through different channels. Our Guidance on the fair treatment of vulnerable customers (PDF)[3] provides examples of how different vulnerabilities can make certain channels of support unsuitable. For example, some customers may find it difficult to take in information provided over the phone and have a need for written communications only.
Relevant information
Firms should think carefully about what information is required to support effective decision-making by consumers and should avoid unnecessary disclaimers. Short, concise communications in plain English are more likely to be read and understood, while lengthy and technical passages of text can confuse or overwhelm consumers.
Simple, plain language
Where possible, jargon or technical terms should be avoided (eg we’ve seen terms such as ‘fiduciary duties’ and ‘disinterested advice’ being used).
Where the use of technical terms is unavoidable, firms should explain their meaning in plain language that consumers would likely understand. Where brokers engage with customers directly, they should, where appropriate, tailor communications to meet the information needs of the customer. They should proactively ask the customer if there is anything they do not understand or if they have any questions.
We have seen the commission calculation being disclosed using ambiguous phrases such as ‘a percentage of the loan borrowed or a fixed amount’. This information needs to be presented as clearly and simply as possible. According to our Financial Lives Survey[4], 17.7 million adults (34%) have poor or low levels of numeracy involving financial concepts, and brokers/dealers need to consider this when presenting and explaining information to customers.
Timely communication
Firms should provide customers with appropriate information on the product, sufficiently early in the customer journey so that customers have enough time to consider this in their decision-making.
We have seen examples of firms sharing information about commission arrangements with customers at multiple points in the customer journey (at the quote, proposal, and agreement stage). This can improve the likelihood that consumers understand and act on the information.
Conversely, we have seen examples of firms only providing information about commission arrangements just before a customer signs an agreement. Providing such information so late in the journey does not give customers sufficient opportunity to engage with the information, compare the product with others in the market and make an informed choice. It is also likely to exploit consumers’ behavioural bias to complete the transaction at this late stage.
Brokers and lenders working together to drive good outcomes
Under the Consumer Duty, while firms are generally only responsible for their own actions and omissions, we expect firms along the distribution chain to work together with the shared goal of good customer outcomes.
As firms reflect on their communications following the Court of Appeal’s judgment, they should consider what consumers receive from both the lender and the broker and work together to ensure that their approach delivers the necessary clarity for customers. For example, information being explained in conflicting or materially different ways by each party could cause confusion.
Where brokers use communications produced by lenders, they should provide relevant feedback to the lender where they find that the communications aren’t clear enough, eg due to customer queries. The lender can then amend the communications accordingly.
Testing and monitoring customer understanding
It is important that consumers understand key information including, where relevant, commission arrangements, so they are able to act on it. Firms should consider how they can most effectively deliver this outcome, for example by consumer testing. Firms should seek to remedy issues where testing suggests this outcome isn’t being met.
We appreciate it would have been challenging for firms to test whether consumers understood their new disclosures where they acted quickly to comply with the law.
However, we expect firms to test their communications as appropriate, and to monitor the impact they have on consumer behaviour. We expect to see a record of this testing activity and how results were used. Simply asking a consumer to confirm that they have understood something, eg by ticking a box, is unlikely to be enough. Our Consumer Duty guidance (PDF)[5] includes how firms of different capabilities can think about consumer testing.