UK regulation

Commission disclosure: speaking with one voice


The asset finance industry is committed to greater transparency, but is divided on the question of whether or not to disclose both the existence and the amount of any commission payments. That was the clear message from Asset Finance Connect’s webcast on the topic, which questioned whether a broader focus on price and value across the finance ecosystem is needed, and ended with a call for closer working between lenders, brokers and trade associations and a thorough examination of the options.

Jo Davis, co-founder of specialist law firm Auxillias, emphasised that the asset finance sector is and will remain committed to commission disclosure.

The webcast, sponsored by LTi Technology Solutions, went on to debate the practicalities of what a move to enhanced disclosure could look like, with an expert panel comprising Mike Randall, board director of the Finance and Leasing Association (FLA) and CEO of Simply Asset Finance, alongside Andy Taylor, sales director of Haydock Finance and a board member of the National Association of Commercial Finance Brokers (NACFB), and David Foster, managing director of broker Anglo Scottish Asset Finance.

There is a need to continue to ensure that at least the existence and the nature of the commission is disclosed and expressly so whether or not the lender or broker is in the regulated or unregulated market, and that needs to be done with clarity and not hidden in the small print. We all need to think about what this would look like in practice, and to co-ordinate between brokers and lenders so it is done properly.

“there is a need to ensure that at least the existence and the nature of commission is disclosed… and that needs to be done with clarity”

Jo Davis, Founder, AuXillias

Driving forces

Observing that the Financial Conduct Authority (FCA) has not changed its position – that while disclosure of the existence and nature of any commission in regulated markets is mandated, it is only if the customer requests to know the amount that a specific figure is required – nonetheless Davis emphasised that asset finance sector participants are invited by their trade associations to start thinking hard about the question of disclosing the commission amount.

In the motor finance sector, the recent Wood case has shone a light on the issues around disclosing the existence and the amount of any commission. The asset finance industry does disclose the existence of the commission because firms are invariably required to disclose the existence of commission amounts pursuant to CONC 4.5, and therefore the FCA’s own rules already preclude Wood from being applicable. In addition, there is a whole list of distinguishing features in the motor and asset finance industry that support that Wood does not apply.

So where are we?

On regulated agreements, which as an industry even on unregulated deals, the asset finance sector takes into account, the FCA has not changed the rules – it is still the case the commission amount is disclosed upon request. In its paper around the change in commission models for the motor industry the FCA stated: “we are not convinced issuing more prescriptive rules and guidance would improve customer outcomes in a way that would justify the costs involved. Increased prescription on what to disclose, how and when, is likely to be counterproductive given the range of products and commission arrangements across the entire consumer credit industry.”

We know that the Financial Ombudsman Service (FOS) has written to a number of dealer groups who have these claims sitting with them. The letters asking for views on these ‘complex’ cases and specifically, their opinion on whether the recent Court of Appeal judgement in Wood v Commercial First Business Finance Limited & Others [2021] EWCA Civ 471 (Wood) was relevant to these types of claims within the motor retail sector. My understanding is that FOS have confirmed that they had suspended the investigation of Commission Disclosure cases submitted by claims management companies (CMCs). The FOS plans to carry out a full review into the whole CMC activity in this area and will then look to provide clarity and parameters on what it will take on as complaints as an output of that Review. This is likely but not definitely going to cover time barring and the prevailing FCA guidelines at the point of inception of any finance agreement. No specific timescale for the review was provided.

Source: Auxillias

However, both regulators and the public are increasingly demanding greater transparency in financial transactions, and in response the asset finance sector should ensure it can demonstrate it is operating in good faith. While every case is different depending on the roles of the lender and broker, against this background, Davis emphasised that both groups need to ensure they can demonstrate the fairness of the terms on offer and the fairness of the customers’ bargaining power. With regulators focusing on duty to the consumer, the price and value outcome becomes a critical consideration, particular in relation to retrospective claims of unfair relationship.

“In the asset finance market we haven’t been required by the regulator to review non-motor commission models (although the industry have ensured that they do not operate models similar to DIC models) that were banned in the motor market in Jan 2021. The asset finance industry have not yet gone through a review on commissions similar to the DiC review in the motor finance market.

But one of the things to address first is pricing in every single market. Are commissions too high, or are they adding value?” Davis pointed out.

Who makes the disclosure?

The FLA has been considering a recommendation that lenders should be the ones to disclosure payments made to brokers, although an immediate concern is that such a disclosure would not differentiate between income paid direct to the broker or intermediary and fee income passed on to other participants, such as the retailer at point of sale.

In view of the need to identify and mitigate any unintended consequences from such a move, the Asset Finance Connect panel agreed that lenders and brokers should work to build a common approach and speak with one voice, or risk seeing regulators impose a regime which may present disadvantages and difficulties for both.

Watch Mike Randall explain why he’s taken on his FLA role to help make this happen:

While Andy Taylor is clear that the gap between the two sides must be bridged:

And David Foster underlines the strength of feeling within the broker community:

Mike Randall pointed out that currently there is no clear definition of what disclosing the amount of commission means or what it would entail for the regulated and the unregulated sectors, suggesting a much wider conversation around potential options needs to happen. He, along with the other panellists, underlined the need for both the FLA and the NACFB to be on the front foot about how any changes will be implemented.

“I want to try to get lenders to understand what this is and agree a way forward, which is also in agreement with the view of the broker community. A high proportion of the lenders in the FLA rely on the broker channel to serve SMEs – there is commonality between the two groups and it’s imperative that we get this right”

“lenders in the FLA rely on the broker channel to serve SMEs – there is commonality between the two groups and it’s imperative that we get this right”

Mike Randall, CEO, Simply

For his part, Foster pointed out that brokers represent the “boots on the ground” for a lot of funders and yet while broker commission may be disclosed in future, a lender’s sales team on permanent salaries would not be required to share details of their bonus arrangements on a particular deal.

This sensitivity is important in the asset finance sector as, unlike the motor finance area where an applicant is able to drive away a vehicle on conclusion of a deal, the outcome of the deal and any commission disclosure, is markedly different.

What are the consequences?

At first glance, disclosing the amount of any commission looks like a move to level the playing field for all participants, but the panel pinpointed a number of potential stumbling blocks, including:

  • customer focus is distracted from other consideration, such as the APR, because of the emphasis given to commission rates
  • brokers and lenders withdraw from regulated business because it is too complicated to comply, reducing choice for consumers
  • while brokers may be prevented from perceived profiteering with high rates, they may also be barred from being competitive with offering lower rates

David Foster explains his concerns about unintended consequences:

While Andy Taylor underlines concerns around reducing funding to SMES

Jo Davis emphasises the need for a holistic view of any deal

and Mike Randall raises the question of what is best for the customer

Coming together

To avoid the creation of a two-speed regulated/unregulated market, and choking off funding to groups such as SMEs, the panel was unanimous that the main industry bodies need to work closely together to explore how why commission disclosure would operate. Both Randall and Taylor pledged to find ways for the trade associations they represent to start to do this, with regular updates on progress.

Mike Randall discusses the case for strengthening the links between funders and brokers:

Andy Taylor calls for a joined up approach between the FLA and NACFB

For her part, Davis underlined the need for action across a broad range of options, to meet the challenges facing the asset finance sector, encompassing not only the voluntary decision on commission disclosure but also price and value considerations. In Davis’s opinion, the commission models, price and value considerations need to be undertaken first.

Analysis from Jo Davis co-founder Auxillias and head of IAFN compliance community

As contributions to the AFC webinar demonstrated, discussing commission disclosure prompts strong debate within the asset finance community. On one hand, there is concern that done badly, it will disrupt the financial stability of the market and reduce competition. On the other, some voices believe that it would create significantly more transparent outcomes for consumers.

The industry is divided on whether or not full disclosure of the amount of commission is something that is necessary when the regulator or case law (with any persuasive authority) does not dictate this to be the case within our sector, coupled with concerns about the operational changes, additional resource, upskilling and training required. And of course we need to remember that both lenders and brokers are still in early discussions on this and as yet no conclusion has been reached.

However, it’s my view – and this was echoed at the conference – that the industry needs take a wider view of the issues and to be reviewing its price and value proposition first. This needs to be done anyway in light of the proposed changes on Consumer Duty by the FCA, and it is potentially a complex process.

In brief, Consumer Duty is much wider than treating customers fairly requirements (TCF), with the regulator seeking an industry-wide shift in the treatment of retail customers. It will not apply directly to the unregulated market, but as the asset finance market has a mix of regulated and unregulated products, firms are likely to be caught and therefore need to consider the FCA proposals as the timescale for implementation currently proposed is tight.

We already know with Consumer Duty, the regulator has put the onus on firms to undertake fair value assessments, and ensure the total price paid by consumers is reasonable in relation to the benefits offered by the product or service.

Price is the most important aspect of any business model, so hence the level of important the FCA places on this. We’ve seen with price interventions in other markets the FCA can make a significant impact.

Price and value outcomes

When considering price and value, a key starting point is to look at where do the profits come from? Which part of the supply chain is generating the most profit? If the business model is built on a long distribution chain like asset and motor finance for example, with cross-subsidies and tangential revenue streams, it is more likely that the model will need a full review as there will likely be risks to address and the model be open to challenge.

Manufacturers and distributors must be able to obtain sufficient detail, in order to undertake a value assessment, or otherwise it will be very difficult to justify the continued sale of the product.

Here are some example questions for manufacturers that might be applicable for the asset finance market:-

  • Could I demonstrate fair value across all customer types – including vulnerable customers who may have a different experience of the product?
  • Does my value assessment hold true for closed book products?
  • Are my senior managers clear they will be accountable for the outcomes of the value assessments?
  • Does the funding represent the economic life of the equipment?

And a couple of examples of questions for distributors:-

  • Do I fully understand the nature of the product, and the benefits and limitations the customer receives at point of sale?
  • Am I able to obtain from the manufacturer sufficient information in order to make a value assessment and can I show that the services I provide add value?
  • Could I demonstrate fair value across all customer types – including vulnerable customers who may have a different experience of the product?

Looking to the future

While one argument against moving to voluntary disclosing the amount of the commissions is that customers typically have little interest in the amount of commission and rarely ask, there are also arguments in favour regarding the voluntary move to the disclose of the amount of commission such as why would anyone be reluctant to reveal the existence of commission, or its value, assuming that it is fair value?

The challenge comes in circumstances where a finance commission is subsidising a less profitable part of the transaction. The overall price paid by the customer may be correct, but income to the seller is distributed badly, and hence the reason why the price review is important.

However, I think price and value will be challenging to resolve at an industry or trade body level, given that those functions need to be very clear that price is not discussed between competitors. That said, a general framework or set of principles could be established.

But to get to a truly circular economy, where assets are routinely used, refurbished, reinvented and recycled, requires a lot of work. Marije is clear that the asset finance industry as a whole, needs to get together to work effectively on this, and to align to manage some of these topics.

Not least of the challenges is the complexity of the reporting required, and that is an area where the sector will want to collaborate to ensure its particular requirements are acknowledged. Working groups are already being contemplated to tackle such reporting issues, and the asset finance industry needs to unite to make its voice heard. Finance providers will want, for example, to be part of the discussion on how to measure and report on their material emissions – the Scope 3 emissions that come from upstream asset manufacture and downstream usage of assets. There is no doubt, however, that the push to make more of the assets available is set to be a guiding principle for years to come. The asset finance industry has a clear role to play, given the wealth of data available on asset usage, maintenance, output and lifecycle.

AFC is ideally placed to help the industry create communities and working groups that can bring together ideas and solution for everyone.