Since a High Court Ruling on Friday 25th October relating to the payment of commissions for arranging finance agreements, a wave of uncertainty has swept across the entire finance industry. The nature of the ruling, i.e. full commission disclosure in the motor finance sector, was not unexpected, but the lack of clarity and generalisation detailed within the Ruling has caused confusion impacting the far wider introducer community. At Focus we have tried to ensure that this has had as little impact on our clients as possible.
The initial intention of the ruling was to ensure that the customer’s best interests were centric to the decision-making process when arranging finance. In the case of motor dealers where the commission on the vehicle is in addition to their margin on the vehicle sale, clients could detrimentally be presented a more expensive finance agreement, to increase the dealer’s commission. It is this practice that the ruling was set out to change. Instead the implications of the ruling were far wider than this, with the court finding that a commission cannot lawfully be received from lenders “without obtaining the customer’s fully informed consent to the payment”. As there was no differentiation between the type of commission i.e. if the sole income in the case of a broker, or if additional in the case of a dealer, this has been implemented across the entire asset finance sector.
As is often the case with scenarios like these, there is very likely to be unintended consequences. Whilst the full scale of these are unlikely to be seen for some months, we anticipate, particularly in the consumer market, there being less choice and increased vehicle prices and finance rates to cover compliance and recoup profit.
What this means for you
This should have very little impact on your dealings with Focus, as in reality nothing has really changed. As a finance broker, our sole income has always been from arranging finance for our clients and we haven’t paid commissions to suppliers for many years as we felt this wasn’t in the clients’ best interest.
The commission is paid to us directly by the funder and is included within the finance charges on your agreement. This income covers all of the following:
- Initial discussion to understand your requirements
- Explanation of finance options including deposits, terms and relevant agreement types
- Provision of detailed finance illustrations to assist your decision
- Review of the market to suggest the best and most appropriate solution
- Consideration of existing exposure and the impact this has on available options
- Obtaining the right financial information from you to expedite an approval for you
- Understanding of vendor requirements and the impact this has on lending routes available
- Presentation of financials along with application to achieve best approval
- Raising of documentation and ensuring any credit conditions fulfilled
- Liaising with suppliers to explain the process and obtain invoices
- Processing of payment, or payments, to your supplier
- Responses to in life agreement queries
- Obtaining settlement figures, statements etc.
The only difference now is we will require you to sign an additional form confirming the existence and amount of the commission we are being paid. This is very much akin to being told Costa’s profit margin when purchasing your daily coffee!
Find out more here
A word of warning: Be careful if using the broker’s commission amount as a comparison tool. Just like profit margin, a broker’s expertise and buying power will play a part in the amount they earn, so your monthly payments could be less, with a broker earning more.
How the broker model works
Just like an insurance broker, the majority of the funders we have on our panel are not available directly, meaning that we have access to wholesale rates.
Instead of the funders having a direct sales force, which is expensive, difficult to manage and not as effective, they use brokers to find business that suits their parameters. Using the broker model enables funders to keep their costs lower, resulting in a more competitive overall payment for the customer.
Of course the other benefit of a broker from your perspective is you have access to a large panel of funders, which a direct sales force wouldn’t be able to offer.
Our funders’ responses to the Ruling
We deal with a wide range of funders, which enables us to offer you the right solution depending on asset etc. however each funder has taken a slightly different approach to the Ruling.
All have requested a signed document with each agreement, confirming you are happy with the amount of commission we are being paid.
Some have increased their rates and moved to a fixed rate structure, meaning we no longer can dictate how much we earn from a deal (often less than we are being stipulated to charge). For these funders, this pricing move has resulted in the monthly payments being significantly more than it would have been 3 weeks ago.
We will continue to ensure that the most appropriate solution is offered to you and that you are given choice where appropriate to make an educated decision on the best route forward for your business.
For the last 30 years Focus have been putting our clients at the centre of every decision we make – this is not going to change. We know we offer fantastic value for money with market leading expertise and funder relationships and like to think the clients we have worked with would agree. For anyone we have dealt with over the last few weeks, we thank you for your patience whilst we have navigated changes in our funders’ requirements and processes.