The opinions expressed here are those of the authors. They do not necessarily reflect the views or positions of UK Finance or its members.

The Financial Conduct Authority is also considering an industry-wide redress scheme, which could potentially impact lenders and the availability of motor finance options for consumers.

In Alvarez & Marsal’s latest report, "The Quantum Dilemma: Navigating Commission Risks in Motor and Asset Finance", we highlight the pressing issues of commission risks, consumer redress, and the evolving landscape of lending.

The core issue: commission risks and consumer redress

The controversy surrounding discretionary commission arrangements (DCAs) became a focal point since the Financial Conduct Authority published its review in 2019.

DCAs link broker commissions to customer interest rates and are the subject of huge numbers of consumer complaints. The Court of Appeal (COA) ruling in October 2024 subsequently found that brokers owed their customers a fiduciary duty, increasing the scope of potential liabilities. However, with the UK Supreme Court hearing this week, the motor finance sector now stands at a critical juncture on what comes next.

Industry impact: operational and financial strain

Following the COA ruling, legal and regulatory developments are disrupting operations across the sector. Many lenders and brokers temporarily paused lending, non-performing loans rose, and management teams now face increased job insecurity. With FCA Section 166 reviews, there is also potential operational expenditure from third-party consultants and legal counsel, potentially creating cautious lending practices that could further strain profitability. 

Funding market dynamics: challenges and opportunities

The lending community primarily involves banks and non-bank lenders. Banks with access to deposits can have more flexibility in resuming lending. Whereas, non-bank lenders, tend to be more reliant on institutional funding, theoretically creating harder conditions to resume lending. 

With some lenders using potentially more costly corporate loans or block discount facilities, firms must carefully consider their higher operational expenses and liabilities. Likewise, players that pursue securitisation funding, to find cheaper debt solutions, should also consider the varying levels of complexity involved.

Next steps: proactive measures for stakeholders

As the sector awaits the Supreme Court’s decision, proactive firms can better position themselves for success. By addressing consumer protection, fostering innovation, and rebuilding trust, the industry can emerge stronger and more resilient.

Immediate steps that firms may wish to take include:

1. Review historical commission arrangements and sales processes for potential liability
2. Review available data, identify and remedy gaps, and prepare data sets amenable to efficient processing of complaints and potential redress payments
3. Estimate potential liabilities under various scenarios
4. Assess options and understand the range of potential solutions to address estimated liabilities

Looking ahead: opportunities in disruption

In our latest report, we build on the above recommendations and ask pertinent questions that leaders can build on to head in the right direction. Download the full report.