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Plevin and Wood: Implications for Motor Vehicle Finance Regulation

Posted on by darion

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The decision by the Financial Conduct Authority (FCA) on 11 January to open an investigation into commission arrangements in motor finance has sparked considerable debate.

Much of the debate centres on whether these arrangements result in ‘unfair’ contracts under s140B of the Consumer Credit Act 1974 (CCA). However, the landscape is complex and involves many factors beyond a narrow consideration of interest rates and fees.

In a blog post on 22 February, DWF Finance’s litigation team considered the broader context of vehicle finance transactions and the precedents set by Plevin v Paragon Personal Finance Ltd AND Wood v Commercial First Business Ltd.

The legal team raised several issues which are highlighted below:

The Complex Nature of Vehicle Financing

Purchasing a vehicle on credit is not a simple transaction. It involves many elements: the price of the car, the trade-in value of the parts, the amount of the deposit, optional extras, the warranty, manufacturer promotions, the installment amount, the term, and the annual percentage rate (APR). These components, known and unknown to the customer, combine to determine whether you have obtained a “good deal.” Focusing solely on commission and interest rates oversimplifies the issue, ignoring the nuances of each unique transaction.

The Role of Negotiation in Motor Vehicle Financing

Most importantly, vehicle finance agreements are the result of negotiations between the dealer and the customer. The interaction of various factors can lead to adjustments that are beneficial to the customer, even when a commission fee is involved. Therefore, assessing the fairness of a transaction requires a holistic view of all elements, not just the commission model.

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The judicial approach: a comprehensive analysis

When courts consider whether a contract is unfair, they look at all the circumstances of the particular transaction. This nuanced approach contrasts with the focus of some consumer advocates on isolated factors such as commission. Both Plevin and Wood, key cases in this context, illustrate the importance of considering all the elements, but also highlight important differences from vehicle finance contracts.

The Plevin Case: Distinguishing Factors

In Plevin, the Supreme Court held that the failure to disclose significant commissions in a Payment Protection Insurance (PPI) policy made the credit relationship unfair. The case hinged on the extreme amount of commission (71.8%) and the failure of the lender to disclose it. However, in the case of vehicle finance, commissions are usually much lower and the lender does not receive them directly. The onus of disclosure lies with the broker or dealer, not the lender, which distinguishes these cases from Plevin.

What’s more, Ms Plevin’s decision to buy PPI was influenced by the undisclosed commission, whereas car finance customers compare different finance options with clear cost information, enabling them to make informed decisions. It could therefore be argued that the unfairness in Plevin does not directly translate into car finance scenarios.

The Wood Case: Different Contexts

In Wood the Court of Appeal dealt with an unregulated commercial lending arrangement where a broker, employed by a client, failed to disclose a commission in excess of £250. The role of the broker and the contractual relationship between the client and the broker differ significantly from the dynamics of motor vehicle finance. In motor vehicle finance, dealers act as principals, not agents, with no obligation to provide impartial advice, unlike mortgage brokers in Wood.

Implications for the FCA investigation

The FCA investigation must take these distinctions into account. While Plevin and Wood offer valuable insights into the impact of undisclosed commissions, their contexts are very different from regulated vehicle finance transactions. A comprehensive analysis must consider all elements of the transaction to determine its fairness, recognising that a dealer commission can co-exist with a beneficial agreement for the customer.