Two silver linings in commission disclosure clouds

Automotive finance lenders and brokers have received two encouraging pieces of news as they anxiously await the Supreme Court’s verdict on the commission disclosure cases that have gripped the industry since last October.

Firstly, in a move that could limit the cost to lenders of any redress scheme, the Financial Ombudsman Service (FOS) is consulting on a cap for the interest rate applied to compensation awarded to consumers in a financial dispute.This rate has historically been set at 8%, but the FOS is now recommending it tracks 1% above the Bank of England’s base rate.

And secondly, the Financial Conduct Authority has dialled down expectations of generous payouts in any redress scheme, should the court rule against the industry. The FCA has also indicated it is considering one of two options – either consumers will have to opt in to a redress scheme or consumers will automatically be included unless they opt out. The latter would involve more work for firms, but would fulfil the FCA’s pledge that any redress scheme must be easy for consumers to understand and join.

As regulators prepare for the Supreme Court’s decision, legal and compliance experts advise lenders and brokers to plan for spectrum of outcomes, rather than a win-lose verdict.

Firms caught up in the crisis need to assemble granular levels of data on all the contracts they have issued that might be covered by the Supreme Court, and ensure they have the management information tools to track the complaints they receive and process.

Looking ahead, a potential change to firms’ ‘fiduciary duty’ to customers to a ‘disinterested duty’ could accelerate the shift of car dealers from a preferred lender business model to a whole-of-market platform of lenders, in order to ensure the customer gets the very best deal.

All this worry and work comes against a backdrop of declining consumer car sales, despite “unsustainable” discounts and incentives.

Employer cheque books accounted for 63% of registrations in May, with fleet and business sales nudging the market up 1.6% year-on-year, but total volumes were still -18.3% below pre-pandemic levels. Battery electric sales were up 25.8% to secure a 21.8% market share, but are still tracking well below the 28% threshold of this year’s Zero Emission Vehicle mandate.

Lenders may well be content to see more modest EV sales, given the losses they are haemorrhaging on EV PCP and lease deals signed between 2020 and 2022, although longer term, EV batteries have extended value.

Electric van sales are doing no better, accounting for just 7.6% of the market in May, while the entire light commercial vehicle market, a bellwether of the economy, was down for the sixth consecutive month.

The SMMT is calling for more targeted investment in van-specific charging infrastructure, at a time when research indicates that a significant number of UK businesses remain “ill-prepared or ill-equipped” to calculate, record and report vehicle emissions from their fleets, with 38% still relying on spreadsheets to monitor their greenhouse gas emissions.