Court ruling: key actions for firms following Johnson v FirstRand decision

Join us for a special Helping Hands briefing to discuss the recent Court of Appeal decisions in the Johnson, Wrench and Hopcraft cases.  Lee Finch from Gough Square Chambers will also be in attendance to share his insights. Register here. This Q&A guidance session will include a brief overview; open Q&A; attendee feedback - what support do you need? and next steps.

The team has been discussing the Court of Appeal decision in Johnson v FirstRand Bank Ltd, Wrench v FirstRand Bank Ltd and Hopcraft v Close Brothers Ltd over the weekend. It’s fair to say it took a lot of people in industry, including us, by surprise, and while we’ve been reviewing and digesting it we have noted a lot of reaction from our contacts across the industry summarising the case, sharing assessments of its potential impact and also commenting on prospects of appeal...

While we think the potential far-reaching ramifications of this decision have been well highlighted, we’ve not yet seen much of an actionable steer for firms as to what steps to consider taking right now in response to the decision and the significant areas of risk it has raised/created, so have opted to share some of our initial thoughts below. What is appropriate will depend on whether you’re a lender, broker or dealer, and your particular circumstances, but we think the following actions are ones many firms should be considering in response to the risks faced by industry right now:

1.      Look at the customer journey and commission disclosures, particularly in documentation. To mitigate the risk right now you should consider whether you need to enhance how you are explaining and disclosing commission arrangements and how the services being provided are characterised and explained. Changes to documentation and processes could be a double-edged sword in terms of how they reflect on past practices, but this should be a reason for managing and designing them carefully, not dismissing taking this action out of hand. It seems some in the sector are already on with this action, including Close Brothers (from the announcements made publicly on Friday).

2.      Particularly in view of Johnson, look at disclosures around independence and the way in which the broker/dealer presents the performance of its obligations to customers, particularly around suitability, and how customers understand this – especially in arrangements where lenders have “rights” of first refusal.  

3.      Prepare for the inevitable influx of CMC correspondence, in particular complaints, claims and DSARs. It is important to work out what resource you may reasonably need and how you can make the management of the activity more efficient (for example by doing gap analysis of what records you have now, allocating dedicated resource, agreement within networks as to complaints forwarding etc). Some complaints received off the back of these decisions may not relate to DCAs so will not be subject to the FCA’s complaints handling pause.

4.      Consider whether this case triggers review of your product approvals under Consumer Duty (particularly in respect of the distribution strategy and design of distribution arrangements). Regardless of your decision on this front, engagement and response to this decision should be led by the management team and decisions clearly recorded in line with Consumer Duty

5.      Look at your conflicts of interest policy and how you are identifying and managing conflicts in distribution arrangements. Update your documentation and registers and enhance it to recognise how risks are managed.

6.      Talk to Trade Associations and engage with output from both the FCA and the FOS, and also talk to each other! You’ll see from our bullets at (1)-(6) above, parties cannot work alone or be fully effective operating in isolation. Managing the risks on a forward-looking basis will need collaboration.

We can completely understand the frustration and shock being felt by industry - lots of people have rightly pointed out that the FCA has not in the last ten years taken the decision to mandate disclosure of the specific commission/remuneration payable to intermediaries in the consumer credit market (unlike in other sectors such as mortgages and investment advice) – but to many this decision of the Court of Appeal appears to essentially impose that standard through the common law. The FCA will undoubtedly have some thoughts, and we expect an attempt to appeal the decision will be mounted – but what the regulator can do to “assist” industry (even if it wanted to) is limited and the appeals process is not guaranteed to be quick or successful. In the meantime, firms shouldn’t sit on their hands but should look at the risks they are faced with right now.

Our summary on this landmark decision can be downloaded here.

If you need some help, please reach out and talk to one of the team!