21 novembre 2024

Neither a lender nor a broker be: Court of Appeal clamps down on insufficient disclosure of motor finance commissions

Briefing

The phrases "fully secret commission", "half-way house", "disinterested duty" or "ad hoc fiduciary duty" are probably not what most customers are thinking about when considering purchasing a car with finance. Yet all of these feature prominently in a recent Court of Appeal judgment, which found that it was unlawful for brokers (the car dealers) to receive a commission from lenders without obtaining the customer's informed consent to the payment. The judgment has sent shock waves across the motor finance industry and beyond.

The case

The Court of Appeal judgment in Johnson v FirstRand Bank Ltd (London Branch) (t/a MotoNovo Finance) [2024] EWCA Civ 1282, delivered on 25 October 2024, related to three appeals concerning the legality of commission payments from lenders to motor dealers: Hopcraft v Close Brothers Ltd, Wrench v FirstRand Bank Ltd and Johnson v FirstRand Bank Ltd.

Hopcraft, Wrench and Johnson, described as "financially unsophisticated consumers on relatively low incomes", each bought a second-hand car from a dealer by entering into a hire purchase agreement, a type of regulated credit agreement, with the lender.

The dealer arranged the financing of the car and was therefore acting as a credit broker and received commission from the lenders for introducing the customer.

The nature and extent of disclosure to the customer of any commission payment differed in each case, in brief, as follows:

Hopcraft	No disclosure: not told (in writing or orally) that there would be a commission payment
Wrench	Partial disclosure: lender's standard terms said that a commission "may be payable by us [the lender] to the broker who introduced this transaction to us. The amount is available from the Broker [undefined] on request."
Johnson	Partial disclosure: as in Wrench but in addition the dealer provided a "Suitability Document", which near the start stated "… we may receive a commission from the product provider."

Key takeaways

It is unlawful for brokers (such as car dealers) to receive a commission from a lender (such as motor finance providers) without obtaining the informed consent of the customer to the payment. This requires the consumer to be told all material facts. What amounts to the "material facts" is likely to vary from case to case but could include the amount of the commission and how it is calculated.
The impact of this judgment may be felt beyond the motor finance industry. It may have repercussions for any goods or services acquired through credit arranged by credit brokers and may even extend to business lending.
The scope of application of the judgment should not be underestimated. Following the ruling, forecasts for the cost of the motor finance industry's compensation and legal costs had reached the tens of billions according to some analysts with analogies being made to the PPI misselling scandal.

Legal framework and concepts

The Court's judgment relies heavily on two earlier authorities (Wood v Commercial First Business Ltd [2021] EWCA Civ 471 and Hurstanger Ltd v Wilson [2007] EWCA Civ 299) and centres around the following core concepts:

Disinterested duty: a duty to provide information, advice or recommendation on an impartial or disinterested basis.

Fiduciary duty: a fiduciary duty typically arises where A acts for, and on behalf of, B in circumstances where there is a relationship of trust and confidence. In addition to established categories of fiduciary relationship (such as between a trustee and beneficiary), a fiduciary relationship may arise on an ad hoc basis. The core obligation is loyalty, which has a number of facets to it, including the duty to act only in the other person's interests and the duty not to act where there may be a conflict of interest.

Commission – fully secret or half-secret?

A commission can be "fully secret", where there is no disclosure, or "half-secret" / "half-way house", where the existence of a commission has been disclosed but not the amount.

For a customer to successfully claim directly against the lender for the payment of a fully secret commission to the broker, there must be a disinterested duty between the broker and the customer; it is not necessary for there to be a fiduciary relationship as well.

Claims relating to half-way house commission, on the other hand, require a fiduciary relationship to be in place. In such a claim, the lender will only be liable if it can be established that it was an "accessory" to the broker's breach of its fiduciary relationship.

The Court of Appeal's decision

The claimants sought to argue that the commission paid by the lenders to the dealers was secret commission. In Johnson, there was also a claim under the unfair relationship provisions of the Consumer Credit Act 1974 (CCA).

We summarise below the principal legal questions considered and the court's findings.

Questions considered	Court's finding
Did the brokers in each case owe the relevant duty to the customer?	The dealers/brokers owed the customers a disinterested duty as a result of "the very nature of the duties which the credit broker undertook." This duty ran in parallel with an ad hoc fiduciary duty, which arose from the nature of the relationship, the tasks the broker was responsible for, and an obligation of loyalty, which is an essential feature of the disinterested duty.
How was the commission in Hopcraft treated?	As there was no disclosure in Hopcraft, the commission was fully secret. To succeed in a fully secret commission claim against the lender, the customer needed to show that the dealer owed them a disinterested duty. This was established in the case of Hopcraft.
Did a reference in the terms and conditions to the possibility of a commission payment mean that the commission in Wrench could not be characterised as secret even if the customer had not read nor been instructed to read it?	In Wrench, a statement in the terms and conditions of a credit agreement that a commission payment may be made did not automatically take the payment outside of the definition of a secret commission. It was necessary to assess the facts of each case and what steps were taken to bring this to the customer's attention. As the judgment noted, "[b]urying such a statement in the small print…" was not sufficient. Accordingly, in the case of Wrench, the commission was also considered to be fully secret.
In the case of a "half secret" commission, for the lender to have an accessory liability, what needs to be shown?	In Johnson, it was conceded that the commission was not fully secret but a half-way house scenario. To succeed in a half-way house commission claim and to establish that the lender had accessory liability, the customer needed to show that: (a) the dealer owed a fiduciary duty to them, (b) the disclosure of the commission was not sufficient to obtain informed consent from the customer to a potential conflict of interest, and (c) the lender acted dishonestly in paying the commission when it should have been aware that there was likely to have been a breach of the broker's fiduciary duty. All three elements were established in the case of Johnson.
What is meant by "informed consent"?	To obtain the customer's informed consent required the customer to be told all material facts, including the amount of the commission and how it would be calculated.
Was the relationship between Johnson and FirstRand an unfair relationship under the Consumer Credit Act 1974 (CCA)?	Although on the facts the claim for an unfair relationship was successful (here because (i) the commission was 25% of the amount advanced to Johnson; (ii) and the sum borrowed and paid to the dealer was much more than what the car was worth), non-disclosure or partial disclosure of commission was not in and of itself sufficient to render the relationship between a lender and a consumer unfair for the purposes of the CCA.

Our observations on the judgment

While it is the law for now, the Supreme Court may well decide to reverse parts or all of the judgment. Indeed, the judgment itself recognises the value in a "definitive pronouncement" from the Supreme Court on the underlying legal issues.

Some aspects strike us as ripe for clarification:

All three individuals were described by the Court as vulnerable customers. Clarity is needed as to what level of disclosure is considered sufficient for more sophisticated customers.
While the decision touches on aspects of the FCA's rules, it goes well beyond its current disclosure requirements and creates a gap between law and regulation, which leads to uncertainty for both firms and their customers.
The Court seems to pay no attention to how material the payment of commission was to the customer's decision.
The Court noted that where a broker is acting purely as an intermediary and has no other means of remuneration (by contrast a dealer makes money on the sale of the car too), a customer may be expected to assume that if they do not remunerate the broker, the lender will. Greater clarity is needed on how the disinterested duty and fiduciary duty concepts would play out in this type of scenario, as well as more generally as to their scope outside motor finance.

Great emphasis is put on the fiduciary duty being "ad hoc" and being owed in relation to the specific tasks the brokers undertook. While some general principles can be gathered from the Court's analysis of the particular facts, there is a need for clearer overarching principles on when a broker owes fiduciary duty and why.
In Wrench, the approach the judges adopted to the review of terms and conditions of the credit agreement (applying a fact-dependent assessment taking into account what steps were taken to bring the fact that a commission may be paid to the customer's attention) would benefit from further amplification and guidance.
Johnson was conceded as a half-way house commission case. Further judicial probing of whether this is an appropriate designation would be welcome given the level of disclosure and the significance of the findings relating to Johnson.
As much of the judgment hinges on attributing to the dealer/broker both a disinterested duty and a fiduciary duty, further clarity is needed on how this flows from the role that the regulatory framework envisages for a credit broker. In a call with market analysts, the FCA said that if had considered there had been a fiduciary duty in the motor market, it would most likely have articulated this when it banned discretionary motor finance commissions in 2021.

It is hard to reconcile the position where a broker is said to have both a disinterested duty and fiduciary duty to the customer, with the broker being deemed to be the lender's agent where s.56 of the CCA applies.
Each of the customers interacted with the dealer in person. Would the same conclusion have been reached had the sale of the car and finance arrangements all been concluded online?

Industry and regulatory response

Following the judgment, there has been a deluge of announcements from key industry stakeholders and extensive engagement between the FCA, industry and government

Lenders and brokers are coming to terms with the financial impact of potential redress costs, which according to the ratings agency Moody's could reach as much as £30 billion pounds in a worst-case scenario.

The lenders in the judgment, Close Brothers and FirstRand Bank, both issued statements (here and here) that they intended to appeal to the Supreme Court. The Court of Appeal has refused permission to appeal despite its acknowledgment of the benefit of guidance from the Supreme Court. This means the lenders need to petition the Supreme Court directly.

The FCA announced on 13 November 2024 that it would write to the Supreme Court to ask it to expedite its decision to give permission to an appeal and, if granted, to hear the appeal as soon as possible. The FCA would consider intervening in the case to share its expertise, explain the work it has been doing and wider market issues and impact.

The FCA has also confirmed that it will be consulting on extending the time for motor finance firms to handle complaints regarding a non-discretionary commission payment and for consumers to refer them to the Financial Ombudsman Service (FOS).

For its part, on 5 November FOS updated its website to note that it is carefully considering the impact of the judgment on its approach to complaints about related issues and that it will publish any updates on its website.

Next steps

Lenders and brokers should urgently assess their potential exposure to commission claims and ensure they have adequate financial provisions.
Lenders and brokers would do well to ensure that they take steps now to preserve documents related to their historical lending practices in order to demonstrate the extent to which customers' attention was drawn to the commission arrangements.
Working closely together, lenders and brokers should review customer journeys and assess how arrangements between lenders and brokers are set out and how commissions are disclosed to customers.
Lenders should assess whether their current commission arrangements are compliant with conflicts of interest policies and if such policies need to be amended to reflect the principles of the case.
The motor industry should carefully monitor announcements from the FCA and the FOS.
Lenders and brokers should not lose sight of their overall regulatory obligations. In particular, they should pay attention to ensuring compliance with the FCA's Consumer Duty.