In October 2024, you may well have seen the finance pages of several newspapers and numerous social media platforms all talking about the issues effecting the car finance industry and what some have termed the “mis-selling” or “hidden” commissions being paid to motor dealers”. This breaking news followed a Court of Appeal ruling. What has been far less publicised are the far wider implications for the UK finance sector.
Due to the industry-changing nature of this ruling, we wanted to take a moment to explain what has happened in more detail and what that means here at Wise Business Finance as a result.
The Court of Appeal Ruling
On 25th October 2024, the Court of Appeal handed down judgement on Johnson v FirstRand Bank Ltd, Wrench & FirstRand Bank Ltd and Hopcraft v Close Brothers Ltd, three test cases concerning the payment of commissions to car dealers arranging motor finance.
The Court of Appeal ruled that in each of the three cases before them, it was unlawful for car dealers to receive a commission from a lender providing motor finance to a customer, unless it was properly disclosed to the customer and that they gave informed consent to the commission payment being made.
Whilst this ruling was assumed to concern solely the provision of motor finance when sold by a motor dealer, the implications of the ruling have drawn in all forms of finance for which an introducer or broker is paid a commission.
Following what was very much an unexpected ruling from the Court of Appeal, on Monday 28th October, the majority of UK motor finance providers essentially paused all new business, this also extended to those lenders providing asset and equipment finance to UK SME’s. In essence, the ruling impacted way beyond the B2C motor finance and has extended into the B2B market.
Surmising the ruling, lenders and brokers simply didn’t have the correct process or documentation in place to proceed with business in a way that was deemed to be lawful.
Thankfully, all lenders are now open for business again, complete with new document suites and updated guidelines. New procedures are now in place for how the intermediary community, must operate and engage with our clients, processes that ensure how we do business operates within the law as it is now being interpreted.
The Previous Position
As a client or professional introducer of ours, you will be aware that rarely do we ever charge borrowers any direct fees for our service (i.e. the sourcing and securing of finance). Instead, we rely almost solely on being paid by way of a commission or fee by the finance company when a finance facility has successfully drawdown or paid out. Wise Business Finance has always been very clear that any commission payment we receive, is included within the finance charges that form part of the finance agreement. In cases where a lender has paid us a fee (as opposed to a commission), we have explained this is how we are being remunerated.
This is the model that almost every asset and motor finance broker has historically employed in the UK.
The New Position
Whilst brokers and motor dealers (finance intermediaries) being paid a commission has always been made clear by the vast majority of firms, the ruling now requires those arranging finance to proactively disclose the exact amount of commission paid and to obtain our clients signed consent for the payment of commission to us, before the agreement can complete.
The question of when the commission should be disclosed remains one under active discussion with many lenders in the sector suggesting that the amount of any commission can be disclosed shortly prior to completion. Some within the industry still feel that commission should not need to be disclosed at all, a practice we in no way subscribe to.
Please rest assured that Wise Business Finance has always sought to adopt a level of transparency that goes way above any industry “minimum standards” and we continue to do so under the new disclosure rule.
From the very beginning of our conversation any quotation we provide you or one of your clients with will clearly detail the likely commission amount that will be payable to us should a borrowing requirement proceed. We feel this is the most ethical way of doing business.
This ruling means there were changes to the processes all finance intermediaries (brokers and motor dealers) needed to follow.
Clarification Around Commission
We also want to provide a brief explanation around how commissions in our industry work, enabling you that you to gain a better understanding of how the sector operates.
Commission paid to us is in more simple terms our “turnover”, it is not our profit. In setting the level of commission we receive from a lender; we always sought to ensure that we balance our pricing in a way that we remain commercially competitive against other businesses operating in our sector. We also have to set the commissions and fees we charge within tolerances that allows us to generate sufficient revenue to meet our fixed costs which includes our premises, employee salaries, IT & data security, and of course ever-increasing compliance obligations.
Lenders pay us a commission, typically calculated as a percentage of the amount borrowed. In almost every case, that commission will be between 1% and 10% of the amount financed. In the majority of cases, we will earn a commission of between 3% and 5% of the amount financed. For smaller transactions and for those larger transactions that are much more complicated, we may charge a higher percentage to reflect the additional time and effort involved. In some instances, the commission we receive will be a fixed sum of money (again a percentage of the amount financed) a sum preset wholly by the lender. For more complex transactions, we may directly charge you an additional fee which we will notify you of.
Summary
Since our inception in 2006, our aim has always been to achieve an outstanding result for our clients and professional partners. We have always explained and made it clear to new clients that a commission amount is built into any finance quotation we issue.
We would also like to take this opportunity to underline that unlike some finance intermediaries operating in our marketplace, we are directly authorised and regulated by the Financial Conduct Authority (FCA) for credit broking. For the additional comfort of our clients and intermediary partners, we are also members of the National Association of Commercial Finance Brokers (NACFB) our industry trade body.
Thames Valley Asset Finance, now trading as Wise Business Finance commenced trading in 2006 as an independent and privately owned commercial finance brokerage and that still remains the case today. We continue to have direct access to many (but not all) of the UK’s leading Banks and Finance Houses and we remain committed to offering a range of finance solutions to UK business and the professional community that underpins those SME’s.
If you have any questions or wish to know more about how we operate, please get in touch with one of our team.
