Hot on the heels of changes to FCA rules affecting the use of Difference in Charges commission models (see my previous articles), a recent Court of Appeal judgement (Wood v Commercial First) has led some in the industry to argue that not only should asset finance brokers disclose the existence and type of commission (as already required by FCA rules for regulated agreements) they should go further and disclose the actual amount of commission. And not only for regulated, but for all agreements.
In this blog, I suggest that changes are needed, but that there is a better outcome for everyone - starting with brokers, but including lenders and particularly small and medium sized businesses using asset finance.
Before getting into the details of this latest development, it’s important to rehearse the unique role of asset finance brokers.
The broking channel in asset finance is a highly efficient way of getting finance to hundreds of thousands of UK small and medium-sized businesses. Compared to a direct salesforce, it is far more efficient for lenders in small ticket leasing. Businesses looking for finance receive personalised attention, typically in person in normal circumstances, from a local expert who gets to know their business and its needs. For businesses, it’s what replaced the local bank branch manager - someone who understands your business and can be trusted.
The directory of asset finance brokers that I publish currently lists around 420 independent broking firms. This is down from around 500 firms in 2014. There has been some consolidation and some welcome new entrants, but every year there has been a net loss of broking firms. This is not an easy business, and many brokers - probably most - earn amounts through salaries and dividends well below the average salaries and bonuses of those employed full time in the asset finance industry.
A statement of the obvious, but users of asset finance broking services are businesses, and just the facts that they are investing in new equipment and are creditworthy demonstrates that their leaders are smart business people. They know that if they aren’t being charged a fee for a service, the business helping them will earn a commission. They have a good idea what professional service providers charge for their time and expertise. And if they found out the broker wasn’t making a reasonable return, they would question whether they are getting the support they need.
The Court of Appeal judgement
It’s easy - too easy - to dismiss the Wood v Commercial First case as irrelevant to routine asset finance. The products involved were large and complex property mortgages, including refinancing elements. The commissions involved were substantial, in total over £100k. The broker had said that it might earn a commission, and if it did it would tell the customer the amount (which it then failed to do). The broker charged fees as well as earning commission. One of the loans brokered was provided by a lender owned by the broker.
It doesn’t come across as particularly relevant, and indeed the Judgement alludes to this when it states: ”The precise scope of the duties of the brokers in the present case, as in all cases, will require examination by reference to the terms of their engagement”.
Yet there seems to be a broad view across legal specialists (that I aim here to simply report rather than add to or comment on, as I am not a lawyer) that the Judgement is significant in terms of confirming or clarifying two important points of principle:
1) Whatever the broker tells the customer they will do (for example, if they say they will disclose the amount of commission) then they must do that in each case, FCA regulated or not.
2) For all business, FCA regulated or not, broker commissions should be ‘sufficiently’ disclosed. This is likely to mean both the existence of commission and, to some degree, the quantum. There is nothing in the ruling saying that the exact amount should be disclosed. The question instead is what is ‘sufficient’ to allow the customer to make an informed judgement about whether they are happy with the arrangement.
Implications for asset finance
This case is not a reason for brokers to start to disclose the exact amount of commission to all of their customers. That would be hugely bureaucratic, as commission disclosures would need to be recalculated and reissued each time a proposal is amended. There would be plenty of scope for things to go wrong with an incorrect disclosure.
Instead, what is needed here is a pragmatic response that is supported by lenders across the industry and reflects who asset finance brokers are dealing with (smart business people, as above). Brokers would provide all of their customers, regulated or not, with a statement about commissions. This statement should be prominent but could very reasonably be issued be issued as part of a standard pack of information about the broking service that many brokers already use for their regulated business.
The statement is likely to include the existence of commission, the type of commission model (at a high level, see my previous article), and the general scale of the likely commission (e.g., “Last year, our average commission was [x]% of the value of the agreements made”).
Like most regulatory changes, what has come out of this case is not unreasonable. No asset finance brokers I know have any issue with being transparent with their customers, just providing it can be built into their standard procedures without unnecessary complexity and reflecting the specific characteristics of the asset finance market.