Wind down planning: What are the options for Motor Finance Lenders and Credit Brokers?
Wind down planning: What are the options for Motor Finance Lenders and Credit Brokers?
In October 2024, the Court of Appeal delivered its verdict in Johnson v Firstrand Bank Limited t/a Motonovo Finance. This ruling has made it illegal for finance providers to pay commissions to car dealers or credit brokers unless the borrower was informed about the commissions and gave their consent.
The judgment has caused considerable uncertainty regarding fiduciary and agency relationships and the disclosure of commissions paid by motor finance providers to credit brokers and car dealerships. This raises questions about the duty to disclose and potentially extends the duties owed by the lender to the borrower. This confusion led some lenders to stop lending pending a full review of their commission procedures.
The consequence of the ruling means that if the disclosure and consent requirements are not met, the borrower is entitled to compensation or redress. The Court left the exact form of redress open. For instance, Mr Johnson, the first applicant, was awarded compensation and interest, but not rescission, as he had already sold the vehicle. However, the Court did not rule out rescission as a remedy if the claimant still owns the vehicle.
Any redress scheme could have a significant financial impact on motor finance providers and credit brokers. Rescissionary claims could have even broader impact, as borrowers could potentially claim back the commissions paid to the credit broker with interest and return the vehicle to the lender in exchange for the payments and interest made to date. This would expose lenders to residual value risks on the vehicles and the administrative burden of reselling them.
Given the potential for significant redress programmes and the associated operational costs, lenders, brokers, and other firms in the brokerage chain must consider the financial impact. While the largest motor finance providers may be able to manage these costs, smaller firms need to assess how the decision, and any subsequent judgment from the Supreme Court, could impact them.
Firms regulated or authorised by the FCA should already have wind down plans in place. These plans need to be reviewed and updated to model the range of outcomes related to potential redress, providing management with the necessary information to plan for the effects of such redress, including seeking appropriate independent advice from restructuring professionals.
How We Can Help
If you are interested in exploring how we can assist you in planning for different regulatory or legal outcomes, please contact Tim Thornton in BDO’s Business Restructuring team.
For more from BDO on the sector, see our Motor 150 Report 2024.