The Supreme Court’s decision in the motor finance commission cases wasn’t just about whether dealers owe fiduciary duties to customers (and the answer is they don’t). At its heart, the case was about information asymmetry and the fundamental question: When is a consumer truly informed?
Past couple of weeks has been an interesting one from a legal and regulatory perspective. The Supreme Court, having been advised by the FCA to do so, handed down their judgement on the motor finance commission on Friday after the markets had closed.
The FCA announced Sunday afternoon that they would be consulting on a redress scheme potentially covering both Discretionary Commission Arrangements and unfair relationships. But the judgement and the consultation say something more fundamental about the current regulatory standards applied when looking at consumer communication, and their level of understanding when it comes to complex financial documents. It might be argued all financial documents supposedly targeted at consumers are, to most at least, beyond understanding.
While the Supreme Court rejected the blanket application of fiduciary duties in typical three-cornered motor finance transactions, it made several crucial findings about communication and transparency.
It emphasised the importance of looking at the nature of the relationship between the parties and how, when looking at unfairness, it’s important to consider how the creditor has discharged all its regulatory and legal duties.
The characteristics of the borrower are also important. The Supreme Court specifically addressed the imbalance of power when the consumer is not financially sophisticated. The unfairness test is not fixed, but nuanced. The factors may be similar but the relative weighting of each may change from case to case. For example commission levels might be the same,and the information disclosed in the documents the same, but the relative financial sophistication of customer A compared to customer B might make one case unfair and the other acceptable.
This is important because section 140A to 140C of the Consumer Credit Act empower courts to intervene and grant remedies if a consumer credit relationship is unfair to a debtor, taking a broad, holistic view and not just looking at contract terms. The law gives courts sweeping powers to ensure fairness, and shifts the burden of proof to creditors once a consumer raises a claim of unfairness.
The case was decided on several bases:
The research conducted by Amplified Global clearly shows the limits of applying simplistic readability scores to the assessment of document intelligibility. Doing so fails to address whether a customer truly understands the concepts being put forward, whether they can apply them and whether they understand the framework set out by the document as a whole and how it will operate through the life of the relationship. The way that key information is made prominent, the structure and navigability of the document all play a part in supporting, or hindering, the consumer's understanding.
In the Johnson case, the documents presented suffered a number of significant problems in relation to disclosure being vague, incomplete and misleading. So notwithstanding Mr Johnson signed a Suitability Document which addressed disclosure of commission the relationship remained unfair.
The level of sophistication required to actually “fully understand” modern financial service agreements should not be underestimated. You have to understand the words used, a barrier heightened by archaic language, jargon and complex mathematical concepts. If these were provided in a single location then that would be easier but cross-referring to multiple documents is often required. To address consumer duty firms have bolted on FAQs and videos in an attempt to simplify some of the language, which they might but they add to the breadth of documents that the customer must hold in mind simultaneously. The industry is asking the novice juggler to throw 5 balls in the air and perform like a pro.
Providing clear, intelligible disclosure is not sufficient to make an unfair relationship fair. But it is also hard to see how, without addressing the fundamental question as to whether a consumer understands what they are signing up to, a relationship can ever be fair. If you don’t know what it is you are agreeing to, this imbalance immediately puts you at a significant disadvantage.
Adapting a holistic approach recognises (as Amplified Global have long championed) one size does not fit all when it comes to considering whether the average consumer can:
The Supreme Court made the point very clearly that car dealers are, whether selling a car or arranging the finance, very obviously looking after their own commercial interests.
Simply asking consumers to tick a box saying they understand something doesn’t create genuine understanding. The Supreme Court recognized this, requiring a fact-specific assessment of whether disclosure was sufficient for that particular consumer in those specific circumstances. In Mr Johnson's case it clearly was not.
For too long firms have relied on readability and tick box consent to ‘prove' that customers have read documents. Amplified Global research shows that when customers diligently try to read and comprehend the documents, simple tests reveal that is not the case, even if the customer thinks that they have done so.
As the Supreme Court observed “However, Mr Johnson was commercially unsophisticated and it must be questionable to what extent a lender could reasonably expect a customer to have read and understood the detail of such documents.”
Whilst most of the focus will rightly be on the motor finance industry this does not mean that the implications end there. There is a natural read across to all agreements governed by the Consumer Credit Act. What is unfair in motor finance might be similarly unfair in loan and other credit agreements. But outside of credit does this mean everyone else can rest easy?
It seems that would be a brave conclusion to draw. FCA principles require that firms treat customers fairly and there are parallels which might be drawn especially when considered in light of Consumer Duty and the good outcomes required. It may be fair to say that the FCA now expects firms to go beyond current practices, to do more to ensure terms can be engaged with, and understood by all customers.
Whilst the implications for precedent setting and wider scrutiny are clearest in other consumer credit products (as unfair relationships are clearly defined within CCA 1974), fairness is an integral part of the FCA principles.
But there are many situations outside of financial services where firms deal with an unsophisticated consumer, presenting them with a bundle of virtual papers which they expect them to agree to. Most of the time the papers are barely skimmed, let alone understood. The appeal or necessity of the good/service makes the process of agreement meaningless. The consequences for the consumer might be trivial, but they might be giving away rights to privacy, data where informed consent should be required.
Technology evolves as does law and regulation, firms need to ensure that they use this as an opportunity to comprehensively consider how they are ensuring every customer understands the key facts, whether they are classified as vulnerable or not. In doing so, firms may ensure they protect themselves from future redress, or at least mitigate the impact.