Ahead of Asset Finance Connect Autumn 2024 on Tuesday, I’d like to throw my two pennies’ worth on how the asset finance industry should respond to the Court of Appeal case.
I’m not a lawyer. I’ve only had a minor role in supporting lessors on this issue. I haven't been part of industry meetings. But I’m happy to support many excellent asset finance brokers, and feel they need a better solution than what’s in place today.
All references to brokers include dealers, and this is not only for regulated business.
Here’s what I think business asset finance funders should be looking for:
Evidence that the existence of commission has been prominently disclosed to the customer before any broking service is provided.
In addition to the above, either disclosure of the actual commission (if it is known at the first meeting - very unlikely) or disclosure of the average levels of commission earned by the broker (which might be in a range) so that the customer is clear about the general level of commission.
A clear and very positive explanation to the customer to explain the purpose of the commission, so that the customer can understand that using a broker helps them to get good value.
A clear explanation to customers that the broker’s role is to help find a competitive and suitable deal, not the ‘best’ deal, and that the broker will not advise the customer on whether to accept the deal and proceed (this isn’t the negative and legalistic ‘terms and conditions’ type document I’ve seen a few brokers use!).
If the broker has a ‘first option’ funder who sees all deals, a clear disclosure of this to the customer with an explanation of why it works in the customer’s interests (as it usually does).
Evidence that commissions earned by brokers are reasonable. I think we need an industry level study looking at the costs of running broking firms, to help eradicate the myth that commissions are profits. This could end up being very valuable in dealing with claims over historical business.
Where Difference in Charges commissions apply, evidence that brokers either have set commission at or near the bottom of the range or have a reasonable basis for charging more.
If the broker is operating at a ‘point of sale’ (e.g. within a dealership) evidence that it has been made clear they are free to speak to other brokers or direct lenders, and that there are no barriers to them doing so.
What’s not on the list? ‘Full’ commission disclosure to all business customers. I look forward to the debate at Asset Finance Connect, but I’m far from convinced full disclosure is the right long-term solution (but I do appreciate it was the only quick-fix available to funders).
Lawyers seem to have quite a mixed view over whether 'full disclosure' is needed for business finance, provided the existence of commisison is clear. More importantly, disclosing average commission at the start of the broking service together with other information about the role of the broker seems far more useful information for the customer, and in line with the FCA 'in good time' requirement for regulated business. If actual commission varies considerably from the average, follow-up communication would probably be needed, but this should be rare.
The current arrangements are also hardly a great way to conclude the broking service. Speaking to brokers, it does appear that we will soon see the effects on volumes, harming our industry, small businesses and the wider economy.
If these steps were taken, is it possible we could end up with a stronger industry? Not that I think there are problems on any scale at all, but with upfront disclosure of average commisison any errant use of commission would be eradicated, as would any confusion about the role of brokers. Business customers would see a much clearer, consistent and positive explanation of the role of brokers.
If this has been useful (or even not!) it would be wonderful if you would consider using my new book, the third edition of the A to Z of Leasing and Asset Finance in your business. Deals available on direct orders. Training also available, I run courses providing an overview of the industry, and focused on regulation and accounting matters.
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