Money Covered: The Week That Was – 10 January 2025

Welcome to The Week That Was, a round-up of key events in the financial services sector over the last seven days.

In the first episode or Season 4 of our Money Covered podcast, Mel Redding and David Allinson look at the top 10 risks facing the financial sector as 2024 comes to a close and 2025 commences.

To listen to this and all previous episodes, please click here.

Headline Development

Supreme Court sets hearing for Johnson v FirstRand Bank Appeal in April 2025.

The Supreme Court has scheduled the appeal hearing in Johnson v FirstRand Ltd (London Branch) t/a MotoNovo Finance [2024] EWCA Civ 1282 for 1-3 April 2025. This follows the Court of Appeal's decision, which addressed key issues surrounding lender liability in motor finance commission arrangements.

On 19 December 2024, the Supreme Court updated its online case listing for 3 linked appeals heard together by the Court of Appeal. These cases all focus on the issue of undisclosed "secret" and "half secret" commissions paid by lenders to credit brokers within the motor finance sector. 

The 3 cases under appeal are:

1. Hopcraft v Close Brothers Ltd (UKSC 2024/0157)

2. Johnson v FirstRand Bank Ltd (London Branch) t/a MotoNovo Finance (UKSC 2024/0158)

3. Wrench v FirstRand Bank Ltd (London Branch) t/a MotoNovo Finance (UKSC 2024/0159)

The Supreme Court had previously granted permission to appeal on 11 December 2024.

The appeals focus on whether lenders can be held liable when they fail to disclose commissions paid to credit brokers, particularly when those commissions may influence the terms of motor finance agreements.

The Supreme Court's decision is expected to have significant implications for the motor finance industry, particularly in relation to both brokers' and lenders' liability for commissions paid without disclosure to consumers.

To read the Court of Appeal's judgment handed down in October 2024, please click here.

Auditors

FRC: A balanced audit market will take time 

The Financial Reporting Council (FRC) has stated that achieving a balanced and competitive UK audit market will take considerable time, despite some progress from smaller firms.

In its Audit Market and Competition Update, the FRC noted that non-Big Four firms increased their share of FTSE audits from 11% in 2022 to 13% in 2023. Public Interest Entity (PIE) audit fees rose by 27% to £1.4 billion, with the Big Four – Deloitte, EY, KPMG and PwC – still earning 98% of FTSE 350 fees.

In 2023, 23 FTSE 350 companies changed auditors, with most switching between Big Four firms. However, there was a slight increase in companies moving to non-Big Four auditors. Over 5 years, non-Big firms have grown their market share from 4% to 13%, with firms like BDO gaining prominence.

The report highlights ongoing challenges, including limited capacity among smaller firms, rising fees and difficulty securing auditors. The FRC emphasised the need for smaller firms to grow their capacity and quality, supported by initiatives like Scalebox.

However, the FRC made it clear that creating a firm to rival the Big Found is not the goal. Instead, the focus is on fostering a broader choice of audit providers.

FRC CEO Richard Moriarty stressed that access to quality audits is crucial for economic growth and highlighted positive signs of challenger firms taking on more complex audits. He concluded that significant structural changes will take time.

To read more, please click here.

Tax Practitioners

New service to disclose R&D tax relief errors

HMRC has announced a new voluntary online service for companies and their agents to disclose errors in claims for research and development (R&D) tax relief. The service can be used if:

• A company has claimed too much R&D relief; and

• The deadline to amend the tax return to correct the claim has expired; and

• The company has corporation tax or overclaimed tax credits to pay; and

• The error was not deliberate.

The online service includes an electronic form to be completed, and the company needs to submit supporting computations. In the form, the company can make an offer to HMRC to settle, which should include the tax due, interest and penalties. HMRC will then accept the offer or request more information.

Whilst the service is voluntary, the interest and penalties due using the service will be less than if a company waits for HMRC to get in touch. The ICAEW has warned its members to ensure that before making a disclosure, a company (1) has the requisite knowledge and skills needed to make a disclosure, and (2) understands the consequences of making the disclosure.

To see HMRC's guidance on using the service, please click here. To see the ICAEW's press release on the announcement, please click here.

Pensions

Increase in 'no loss' redress calculations for defined benefit pension transfer complaints

Defined Benefit (DB) pension complaints continue to show falling sums for redress with many cases now showing no loss to the complainant.

Broadstone consultancy (Broadstone), who deliver advice to employers, insurers and pension scheme trustees and hold themselves to be ''redress" specialists, have a DB redress tracker which has been created to calculate redress according to the FCA's rules. 

Those complaining of unsuitable advice relating to their DB pensions are now often seeing little or no loss payable in respect of their complaints. This comes as a consequence of investment performance and increased Gilt yields, which lowers the cost of purchasing retirement income.

The head of redress solutions at Broadstone, Brian Nimmo, has noted the correlation between increasing Gilt yields and decreasing redress, something we are likely to continue to see.

To read Broadstone's previous article on this topic please click here.

The Pension Ombudsman confirms a SIPP provider's duty of care in crystallising a SIPP does not extend to subsequent tax charges from future crystallisation. 

Mr R brought a complaint to the Pension Ombudsman (TPO) against his SIPP provider and other personal pension trustee in 2020. The complaint was in respect of both delays in crystalising the SIPP and the subsequent tax penalties incurred due to the payment being above the Lifetime Allowance (LTA). 

The SIPP provider, whilst acknowledging that there had been some delay in acting upon Mr R's instructions in crystallising the SIPP, rejected Mr R's complaint. They submitted that the minor delay actually benefitted Mr R as the SIPP value and maximum pension commencement lump sum had increased in the delay period, resulting in an overall reduced tax liability. In recognising the inconvenience of the delay, the SIPP provider offered M R a compensation payment of £2,000. 

The Trustee also rejected Mr R's complaint, submitting that it was not a regulatory requirement or standard practice, to confirm the crystallisation status of investments. The Trustee did offer Mr R £500 as inconvenience compensation in line with the TPO's initial recommendation. 

TPO relied upon the Supreme Court decision in Khan v Meadows [2021] UKSC 21, and concluded that the SIPP providers' duty of care to Mr R did not extend to responsibility for any subsequent tax charges resulting from a future voluntary crystallisation event. TPO was sympathetic to Mr R in recognising that the intention behind the crystallisation was to minimise a tax burden in uncertain (covid19) market conditions. However, the crystallisation event concerned a pension arrangement which the SIPP provider did not administer and the timing of the crystallisation event was ultimately beyond its control. 

TPO also declined to award Mr R any compensation and instead suggested Mr R write to the SIPP provider and the Trustee to accept the compensation payments they had previously offered. 

To read more, please click here.

The Pension Ombudsman reviews 2024

On 18 December 2024 the Pension Ombudsman (TPO) posted their 2024 reflections. 

With pension complaints up 53% compared to 2023, TPO noted that they "rose to the challenge" and implemented changes to expedite decision making processes and thus efficiency in the organisation. TPO said that they will start to publish periodic summaries of cases which have used the expedited decision-making process to highlight the steps taken.

Through 2024 TPO implemented a number of case management initiatives which included:

• Reducing the number of older and complex cases in their historical caseload; and

• Accelerating lead cases through the process where a systemic issue has been identified.

TPO set out that these changes will affect those managing pension schemes and therefore people must ensure that there are strong complaints procedures in place, that navigation to TPO is easily identifiable and that they consider the appropriateness of the lead case approach where a potential systemic issue is identified. 

To read TPO's full update please click here.

FOS Developments

FOS confident to tackle challenges in 2025

Abby Thomas, the Chief Executive of the Financial Ombudsman Service (FOS) has said that 2025 will see more challenges facing FOS due to "rising complaint volumes, increasing complexity, and new regulations", testing the service's capacity and capability. However, Ms Thomas believes the FOS is prepared and will continue "to build on the foundations…laid". She highlighted that FOS has worked hard over the last two years to invest in its processes and technology, resulting in the "striking…reduction in the time it takes to resolve complaints". The beginning of this year will see FOS "significantly reduce older complaint levels". Ms Thomas has also said that the introduction of a fee for claims management companies (CMC) is a "defining moment" for FOS and will improve the fee model in terms of fairness, as a significant number of complaints received from CMCs are poorly articulated.

Regulatory developments for FCA regulated entities

House of Lords Committee questions FCA regarding motor finance case

The House of Lords Financial Services Regulation Committee (the Committee) published a letter on 20 December 2024 which it sent to the FCA Chief Executive, Nikhil Rathi, regarding the recent Court of Appeal judgment in Johnson v FirstRand Bank Ltd (London Branch) (t/a MotoNovo Finance) [2024] EWCA Civ 1282, which, as we have reported previously, deal with matters of motor finance commissions.  

The letter was in response to a letter from the FCA to the Committee sent in November 2024, which provided background details of the case and explained how the FCA had responded to it.  Among other things, the Committee's letter of response seeks details of the FCA rules governing fixed and discretionary commissions, as oral evidence given to the Committee by the Finance & Leasing Association suggested that the Court of Appeal judgment was in conflict with the FCA rules.  The letter also asks the FCA to confirm whether it took legal advice prior to its decision to ban discretionary commission arrangements in 2021.  If the FCA did take legal advice on this, the Committee is seeking a full explanation of the circumstances under which the advice was sought, as well as a copy of the advice received.  

To read the letter, click here.

Emerging risks

PRA Demands Crypto Data

The Prudential Regulation Authority (PRA) has requested data from firms to assess their current and future crypto asset exposures, including their application of the Basel framework for crypto asset exposures introduced in December 2022. The data collected will help the PRA calibrate its regulatory approach to crypto assets, evaluate different policy options and monitor the financial stability of these assets. Firms must comply by March 2025.

This move requires firms to ensure that crypto asset risks are effectively managed and that the necessary Basel management frameworks are in place. The PRA’s request also covers firms' use of permissionless blockchains, noting the challenges in mitigating risks from assets using such blockchains.

This request reflects growing regulatory focus on crypto assets and their impact on consumers, urging firms to stay updated on evolving regulations. It also highlights the need for clear regulations to help firms manage crypto-related risks, especially regarding cybersecurity. Financial institutions and insurers may soon seek similar disclosures to assess potential exposures.

To read RPC's blog post on this development, please click here.

Relevant case law updates

High Court affirms Financial Services Compensation Scheme's discretion to determine the finality of its compensation decisions

In a decision of 31 December 2024, R (on the application of Chong & ors) v Financial Services Compensation Scheme Ltd [2024] EWHC 3374 (Admin), the High Court dismissed an application for judicial review of a compensation decision taken by the Financial Services Compensation Scheme Limited (FSCS), affirming that the FSCS' decision was a lawful one.

The application involved claims initially made to the FSCS for compensation following allegedly wrongful advice by an unregulated adviser to transfer funds from the claimants' occupational pension schemes into self-invested personal pensions (SIPPs) provided by Liberty SIPP Limited (Liberty) in order to invest in what transpired to be a high-risk fund. In February 2021, the FSCS accepted the claims and paid compensation, accepting that, had Liberty completed adequate due diligence and warned the claimants about the risk, they would not have invested in the fund. Compensation was assessed on a "monies in, monies out" basis, with the original investments being refunded together with fees incurred.

In April 2021, the Court of Appeal handed down its judgment in Adams v Options UK Personal Pensions LLP, the implication of which was that a SIPP provider (and ultimately the FSCS) may be liable not only on a monies in, monies out basis, but also for loss caused by transferring the pension out of the original fund. On the back of this decision, the claimants appealed the FSCS' decision on their claims.

The FSCS accepted that it needed to reassess its approach to compensation following Adams. It formulated a policy based on the principle that compensation should be paid on the basis of the law as understood at the time of assessment. Its policy ultimately provided that: (1) new claims or outstanding claims as at 1 April 2021 should be assessed applying Adams; (2) claims that had already been finally assessed 1 April 2021 were not to be reopened either proactively or on appeal but (3) the FSCS would consider appeals from earlier decisions extant as at 1 April 2021 but would not entertain appeals lodged after that date in respect of earlier compensations. Applying this policy, the FSCS declined to consider the investors' appeals.

The investors made a claim for judicial review of the FSCS' decision before the High Court. The High Court dismissed the claims, finding that the FSCS' policy was a rational one, the claimants' compensation claims had been finally settled, and the process the FSCS followed in formulating its policy based on the Adams decision (albeit taking some time to do so) was a reasonable one.

This case affirms the FSCS' discretion to determine the finality of its compensation decisions based on the legal context at that time and its own internal policies. It also serves as a reminder to claimants to stick to stipulated timeframes for appeals, with failure to do so risking the loss of their right to contest the compensation decision. Finally, claimants should remember that judicial review may not always provide a remedy if the relevant authority has acted within its lawful authority and discretion. 

You can read the full judgment here.

With thanks to this week's contributors: Lauren Butler, Heather Buttifant, Cory Gilbert-Haworth, Hattie Hill,  Eleanor Jones,  Melanie Redding,  Kristin Smith, Alison Thomas and Kerone Thomas.