Recent developments, including significant rulings from the Court of Appeal, have underscored the importance of transparency in vehicle finance agreements. The legal precedents currently in place, and the supporting regulatory principles envisaged by the Consumer Duty, are not just about compliance – they are about fostering trust and fairness between financial service providers and consumers.
While formal regulatory guidance on this issue may be pending further developments (including potential court decisions), adopting transparent practices now will help to mitigate compliance risks and any associated financial risks. Adoption of the guidance should reinforce consumer trust, while supporting regulatory obligations under the FCA’s Consumer Duty (Principle 12) and fair management of conflicts of interest (Principle 8).
Below we set out the six important principles which form Kroll’s Guidance for firms when amending existing communications:
- Offer clarity and simplicity by using plain and straightforward language (e.g. avoiding industry/legal jargon) that consumers can understand. Information used to disclose the commission amount should be sufficiently prominent, e.g. either as a separate, easy-to-read document, or as a clearly signposted and highlighted part of a wider finance agreement.
- Clearly state the commission that the lender will be paying to the broker/third-party, both in cash terms and as a percentage of the loan amount. Explain how the commission has been calculated, for instance is it a fixed fee or a percentage of the overall loan amount.
- Be clear about the purpose and implications of the commission, for example explain, in simple terms, what the commission is being paid for (e.g. “this is paid as an arrangement fee”) and the impact on the consumer (e.g. if the commission impacts the terms of the loan, such as the interest rate offered, be upfront about this so the consumers are in a position where they can make an informed decision).
- Ensure the information is accessible for a broad range of consumers who may have differing needs, for instance highlight key terms using bold text or border-boxes. Break up blocks of information using bullet points where necessary and consider, where appropriate to the firm’s target market and the form of communication, whether alternative formats should be made available, such as additional languages, large-print or braille.
- Summarize any key information and emphasize that if the consumer needs more help to understand the document, that is fine. The consumer should not feel rushed, pressured or that they cannot ask further questions. Indicate where further help can be found if more information is needed.
- Require the consumer to acknowledge and consent (either in writing or digitally) that they have read, understood and agreed to the terms of the commission disclosure before proceeding. Firms may consider making this more bespoke to the individual, for instance, by using specific acknowledgement statements such as “you acknowledge that you are aware that [Finance Provider] will pay [credit broker/dealer] the amount of [£XXX] under this agreement. You also understand that the commission is calculated as part of the overall finance amount” (as a hypothetical example)
We believe the above guidance will support consumer understanding by providing relevant information in an accessible, transparent and digestible way, while allowing the firm to show it is acting in good faith, by approaching the current legal precedent with a customer lens in mind.
If you would like to discuss this in more detail, please reach out to one of Kroll’s experts to arrange a discussion.
