Clarity is needed as to whether a potentially landmark court ruling on the use of the use of discretionary commission agreements (DCAs) will be the judiciary’s final word on the issue, the Financial Conduct Authority (FCA) has stated.
The FCA banned DCAs – which allow brokers, typically car dealers, to increase the interest rate on a car finance contract and in return to earn more commission from the lender – in 2021 and in the face of rising complaints about the use of DCAs announced an investigation in January 2024.
Meanwhile three customers’ complaints about DCAs prior to 2021, which had been rejected by the lenders, were taken to the Court of Appeal and on Friday 24th October the court ruled in favour of the customers The court decided that it was unlawful for car dealers to receive a commission from a lender providing motor finance to a customer unless it was disclosed to the customer and they gave informed consent to the payment. (full story here).
The ruling sent shock waves through the automotive finance industry with several lenders including Close Brothers – one of those named in the Court of Appeal ruling – and car manufacturer Honda pausing all new finance business while the potential effect of the ruling was digested.
Speaking at the annual dinner of the Investment Association on 29th October, FCA chief executive Nikhil Rathi said that the judges’ ruling was rooted, not in the FCA’s rules, but the longstanding common law principle of fiduciary duty which meant that the broker – in this case the car dealer – must act in the best interests of the customer and not put themselves in a position of conflict.
“Since the judgment was issued, we have been in close contact with the firms involved, the wider sector and the Government to monitor the market, analyse the impact on industry and consumers and identify what action is required,” Rathi said.
“First and foremost, we need clarity on whether this is the courts’ final word on the issue. The two lenders in the case intend to appeal and it is in everyone’s interest that when they do, the Supreme Court decides quickly whether it will take the appeal and, if it does, whether it agrees with the Court of Appeal.”
This added that the FCA’s focus in the intervening period will be to ensure customers receive fair treatment in line with the law and that the market for motor finance continues to function well, recognising that more than two million people rely on it each year to buy a car.
“We are encouraging firms to engage with us as they consider the impact the Court judgment has on their products and services, and we are grateful for the way firms have acted responsibly so far. We are working closely with the financial services sector, the Financial Ombudsman Service and the Government to understand any wider consequences and further steps needed.”
The FCA had already paused until December 2025 an eight-week deadline finance firms have to respond to complaints in its current investigation to determine whether motor finance customers have been overcharged because of the past use of DCAs.
“Some in the industry are asking us to expand that pause to cover complaints relating to other types of commission in motor finance – we are considering this carefully and working at pace through the potential benefits and risks of doing so,” Rathi said.
“We understand industry’s desire for time to take stock. Equally, the Court of Appeal has made the law clear and, if that is not challenged further, then firms need to handle any complaints in line with that.”
Sue Robinson, chief executive of the National Franchised Dealers Association (NFDA), also called for time to analyse the potential effects of the ruling. “NFDA acknowledges the recent of Court of Appeal decision and is currently obtaining legal advice,” she said.
“It is important to emphasise that the present judgement will take time to digest, so drawing firm conclusions at this stage would be premature. NFDA will continue to monitor developments closely, keep members updated, and encourages members to reach out with any queries.”
