Over the coming weeks, a major law case (The Hopcraft case) will receive judgment after a hearing in April 2025 on appeal from the Court of Appeal. This case will be potentially significant for the financial services industry. The Supreme Court is examining the legality of lenders paying car dealers undisclosed fees when they broker car loans for consumers.
While the judgment will have most impact on the motor finance sector, the outcome may have potential implications across the wider industry around disclosure and the interaction between providers and intermediaries and of course customers.
The case will be closely followed given that the Supreme Court is re-looking at some of the fundamental principles of an intermediary’s duties that are common across most financial services sectors.
Depending on the outcome, its conclusions may result in rapid regulatory action, including a likely consumer redress scheme.
This case will be potentially significant for the financial services industry
The insurance sector is another that is having the area of commissions looked at quite closely.
The Financial Conduct Authority’s 2019 wholesale insurance market study found that approximately 76% of broker remuneration came from insurers.
The FCA‘s findings indicated that there were weaknesses in some firms’ ability to manage and/or mitigate conflicts.
The regulator has recently announced a market study into the pure protection market, including a review of commission structures that may drive poor behaviours and poor customer outcomes and whether premiums are being raised to pay higher commissions to intermediaries.
While the Retail Distribution Review has sought to reduce bias in the investment advice and financial planning market, with the introduction of adviser charging and the removal of product commissions, we still see some instances of poor or a lack of disclosure particularly involving introduced business.
The new world – Regulating for growth not risk
There is no doubt, based on experience, that historical practices such as undisclosed referral fees, “kickbacks” and performance-based incentives etc are far less frequent.
However, with the Consumer Duty shortly to have been in force for two years, the commission/conflict issue remains a challenge that the FCA is interested in from an outcomes perspective and notably in respect of the cross-cutting rules, foreseeable harm and acting in good faith.
The recent announcement of the survey to all 5,000 advice firms and the launch of the Investment Advice Assessment Tool emphasises FCA’s interest in the sector.
There are a number of primary issues where firms and their senior management may want to take stock of their own internal systems of control.
Conflict of interest: Commissions or incentives can create conflicts of interest where financial advisers or intermediaries may prioritise their own financial gain over the best interests of their clients and customers.
This can lead to biased advice and recommendations that are not in the client’s best interest. Having a clear conflicts of interest policy with examples and case studies to bring it to life as well as a proportionate training approach can really help staff fully understand the importance of conflicts and recognise where a conflict may arise.
Lack of transparency: When commissions are not disclosed or not disclosed clearly, clients are unaware of the potential biases in the advice they receive. This lack of transparency undermines trust in the sector.
Misleading information: Clients may be misled about the true cost of financial products and services. Hidden commissions can inflate the cost of products, making them more expensive than they appear or uncompetitive for the benefits they are supposed to deliver.
Regulatory compliance: Poorly disclosed commissions or charges can lead to a breach of regulatory requirements. Firms are required to disclose any conflicts of interest and ensure that their practices are transparent and fair.
Reputation risk: Firms that engage in hidden/secret commission practices risk damaging their reputation.
There is no doubt, based on experience, that historical practices such as undisclosed referral fees, “kickbacks” and performance-based incentives etc are far less frequent
Negative publicity and loss of client trust can obviously have long-term detrimental effects on the business and its economic viability. Importantly, it is not just the Firm’s reputation, it is the Board, directors and senior managers whose reputations can also be tarnished.
Client detriment: Ultimately, of most interest to the FCA is that impact on the end client. Clients may suffer financial losses or miss out on better opportunities due to biased advice influenced by secret or hidden commissions or poorly disclosed charges. This can erode their financial well-being and confidence in the financial system.
We will have to see how the judgment in the Hopcraft case lands and the reaction of the industry, regulators, trade bodies and customers alike.
Regardless of that outcome, considering areas of potential conflict within a firm’s operations is a practical and sensible exercise as part of an overall risk management function and something from the smallest to the largest firms should have on their radar.
Simon Collins is managing director, regulatory, at Konexo, a division of Eversheds Sutherland
