Why the non-regulated market is not the same as consumer motor finance

A personal opinion by Martin Brown, Chair of Fleet Alliance

THE recent Court of Appeal decision relating to three consumer finance deals on used cars found that a motor finance broker has a duty to disclose the existence and nature of the commission being paid, as well as obtaining the customer’s consent for this commission before agreeing the finance deal.

It would appear, though, that some of the potential new ways of managing the commission arrangements between lenders and brokers are treating corporate customers in the same way as retail buyers.

Why are the two being treated the same way then?

The legal answer is that it falls under common law and the law doesn’t distinguish corporate customers from private individuals in this area. Whilst this is true it still requires a totally different commercial approach from the sector to each customer type in my opinion.

A court decision on customers buying used cars on HP is a long way – by some distance – from a corporate business asking us to manage its fleet of cars and vans.

What makes you say that?

There are a whole host of reasons but the fundamental difference is that corporate customers are deemed to be professional or sophisticated buyers whereas private individuals are seen to be much less financially sophisticated.

Indeed, this Is the central tenet of the FCA’s approach to regulating our sector. It recognises that consumers need more protections than corporate buyers and I would agree with that.

You mention other differences, so what are they?

Well, firstly, they have two very different points of sale. The dealer sells new or used vehicles at a retail outlet and provides finance to assist the sale of the vehicle.

A leasing broker operates from a remote office location and provides the client with advice on vehicle availability and suitability, access to a variety of vehicles at discounted rental rates across a broad range of funders, while also bundling in fleet management to lower the client’s cost of operation.

So non-regulated business is very different in operation and outcomes compared with regulated point of sale car finance. One is a service; the other is a means to access a vehicle.

Another clear distinction is in the nature of the products. In the legal cases that this judgement related to you had potentially vulnerable customers being sold a hire purchase agreement for a used vehicle. Compare that to a fleet management agreement on multiple vehicles that will be funded via a business contract hire product.

There is a fundamental difference here in terms of ownership versus usership and in the complexity of the sale.

There is much talk of fixed commissions. What’s your view?

I can see why there has been a move towards fixing commissions in the consumer space as it plays into the treating customers fairly ethos. It’s also a simpler, more transactional sale so the service levels are pretty consistent.

It’s clearly a whole different matter when it comes to selling to corporates where there is a wide range of complexity and the sales process is much more involved and consultative. This is clearly totally at odds with the idea of fixed commissions.

The other consideration is whether fixed commissions might even be deemed to be anti-competitive. I’m not a lawyer but I think this would need to be given serious consideration for anyone going down that route.

What about commission disclosure though?

For me it’s back to the same distinction between consumer and corporates.

I can see how helping a retail buyer assess the value for money of the service they’re accessing via a broker would be appropriate, but for professional/sophisticated buyers I don’t think the argument necessarily follows.

They should perhaps be able to make their own judgements as to whether the combination of the rental that has been quoted and the service that they received represents value for money.

Could there be an impact on the leasing broker sector?

It depends on where all of this lands.

Leasing brokers provide value to clients with the range of services they offer but this requires significant investment in systems and people to deliver it.

This has to be reflected in the income that the brokers receive from the funders. So if there are changes made to the model as a result of the court ruling that severely impacts the viability of the business model, this could result in there being fewer brokers operating in the market.

The unintended consequence of the Court of Appeal’s decision may well be a reduction in the level of competition in the market and a decrease in the availability of fleet finance offers.

So what would you like to see?

First and foremost I think it’s time for calm heads. There is a danger that we could knee jerk into making decisions that could prove, in hindsight, to have been too hasty.

We of course need to be guided by the law but let’s make sure we don’t use a sledgehammer to crack a nut.

In particular, I would want to see the sector recognise the fundamental differences in the provision of contract hire and fleet management services to businesses compared to a retail sale, and reflect that in the arrangements going forward.

So this is why the non-regulated leasing sector is different

It’s provision of a service – not a transactional agreement to own a vehicle.
Non-regulated business is not point of sale finance.
It provides competition in the market and provides value for businesses.
It’s essential that the Court of Appeal’s judgement does not leap the fence from consumer finance to business rental.
Fixed commissions have no place in a competitive business market.

I’m asking for a period of reflection to consider these points and for the sector’s regulators – the FCA and the BVRLA – to provide clear guidance and authority on the provision of non-regulated contract hire agreements.