Much has been written in recent weeks about the motor finance industry.  The resounding theme that I’ve taken away from reading insight articles and discussing at length with financial services and regulatory professionals is a sense of uncertainty.  Until the Supreme Court (and I’m assuming it will at some point) reviews the Court of Appeal judgments in the conjoined cases of Johnson v FirstRand Bank Limited (London Branch) T/A Motonovo Finance, Wrench v FirstRand Bank Limited, and Hopcraft v Close Brothers Ltd, firms involved in the various distribution channels where commissions were not adequately disclosed will need to carefully consider what these judgments mean for them.

The Court of Appeal’s decision is far-reaching, and could have implications way beyond financially regulated products. Interestingly though, and this will be the topic of a separate insight piece, will consumers be in a better position in the future by virtue of any of these decisions?  In my view, I think not.  I suspect, for the average consumer (if there is such a person), their purchasing decisions in relation to a motor vehicle and any associated finance product have little to do with whether they are aware of the value of commission a broker or salesperson is benefitting from, but how much the monthly payments are and whether they can afford them.  As I said, I will share further thoughts on this is another article.

Santander UK recently announced it was setting aside £295m to cover the costs of any potential redress to customers.  Lloyds, which owns Black Horse, the UK’s largest motor finance provider had already set aside £450m to cover the potential costs of redress; following the latest Court of Appeal decision that provision may increase.

However, not all regulated firms who will be impacted by the latest legal judgments will be of the size and scale of Santander or Lloyds.  The vast majority will be small and medium sized firms, now lost in a world of legal and regulatory uncertainty.  To deal with this uncertainty, these firms need to be prepared.  As the proverb goes, ‘prepare for the worst and hope for the best’.

This is the time for regulated firms to dust off their wind down plans (WDPs).  A WDP should be a ‘living document’; the risk of legal or regulatory change or intervention should, if not already included in the WDP, be captured and wind down scenarios and reverse stress testing should be developed.

The scenario of historic commissions needing to be redressed to customers, together with the costs of running any redress or remediation programme, should be modelled, and overlayed with some sensitivity analysis.  Firms should consider the impact full scale redress (and the associated costs) would have on its business model and whether it is able to absorb the total costs.  If it can’t, serious consideration will need to be given as to whether the firm can continue as a going concern, and what alternative options it has.  This could necessitate a solvent or potentially insolvent wind down.

The WDP is a useful risk management tool for any regulated firm.  Modelling the risk scenario should result in a set of management actions to deal with the worst case outcome.  Given the potential extent of redress, for those firms whose balance sheets and/or regulatory capital cannot easily withstand this ‘uncertain’ event, the management actions should include seeking appropriate independent professional advice from a restructuring professional.