On October 25, 2024, the Court of Appeal handed down its judgement in the cases of Johnson v FirstRand Bank Limited, Wrench v FirstRand Bank Limited, and Hopcraft v Close Brothers with major implications for the consumer credit sector in the UK, particularly within motor finance.
All three cases shared a similar scenario, each claimant had visited a motor dealership to purchase a vehicle. Each dealership assisted the claimants in obtaining the finance to fund the purchase. The claimants entered into the credit agreements arranged by the dealerships and provided by the defendants. The dealerships received commission from the defendant lenders. The commission structure in all cases permitted the dealer a level of discretion to fix the interest rate. The higher the interest rate, the higher the commission.
In Hopcraft, there was no mention of commission in the paperwork provided. In Wrench the terms and conditions disclosed that commission “may” be paid in a sub-clause under the heading ‘General’. In Johnson the terms and conditions similarly disclosed the possibility of a commission and in addition, the possibility was also disclosed within a ‘Suitability Document’.
The key findings of the Court of Appeal are that a broker has a “disinterested duty” to their customer, which means brokers owe the customer a duty to provide information, advice or recommendation on an impartial or disinterested basis. If a lender pays commission to a broker and that commission is kept entirely secret from the customer, this would amount to a breach of duty. There can also be a fiduciary duty between broker/motor dealer and customer, in tandem with a disinterested duty. A lender can be held liable as an accessory to a broker’s breach of fiduciary duty where the lender knows about the existence of the fiduciary relationship and about the payment of the commission to the broker, but where the lender has not satisfied itself that the borrower has given their fully informed consent to the payment. A ‘secret commission’ for this purpose includes cases where the customer has been given only partial disclosure of the commission.
A statement in the terms and conditions of the finance agreement that commission may or will be paid will not necessarily be sufficient to negate secrecy and prevent a breach of duty arising. Whether the borrower has been told or informed about the commission will depend on the facts of each case, including the steps that are taken to bring the matter to their attention. The Court was clear that burying such a statement in the small print which the lender knows the borrower is highly unlikely to read will not suffice.
The Court of Appeal found that the broker owed the relevant duty to the claimants in all three of the cases it considered – in two of the cases, there was a disinterested duty that was sufficient to give rise to a primary liability on the lender (these were fully-secret commission cases). In all three cases there was also a parallel fiduciary duty which was sufficient to make the lender liable as an accessory in the third case. The customers in each case will, if successful, be able to demand repayment of all the commission that they paid, plus interest – potentially many hundreds or even thousands of pounds each.
There are two fundamental questions meanwhile for the motor finance industry. First, how to write business going forwards. Secondly, how to proceed with what will no doubt be a tidal wave of claims. In relation to how to write business going forwards, it appears that there are two options left open by the Court. The first requires disclosure of (and consent to) all material facts which seem to include the rate of commission, the calculation methodology and details about the ‘tie’ between the dealer and the lender. The second requires the dealer to make it expressly known to the consumer that they are not acting in the best interests of the consumer and are not impartial. The former has the effect of obtaining informed consent. The latter has the effect of extinguishing the relevant duties. It may be that lenders decide to take one or both steps.
This judgment is of seismic impact, prompting lawyers to warn that the industry could face a costly customer redress scheme. It is not, however, restricted solely to discretionary commission models, regulated agreements or even the motor finance industry, potentially impacting business equipment leasing and other credit-based transactions, prompting questions about the sufficiency of regulation.
The decision led to prominent finance providers such as Close Brothers, Honda Finance Europe and MotoNovo pausing new credit extensions, while others like BMW, Secure Trust Bank, Blue Motor Finance and Zopa are also understood to have paused lending, raising concerns about a potential halt in car transactions across Britain, as they figure out how to comply. Dealerships meanwhile are urgently revising their sales practices to avoid a paralysis in the market. Car salesmen have been left scrambling to draw up new paperwork to cover themselves and limit legal liability. Gary Greenwood, a finance analyst at Shore Capital warned of “a very real risk that the industry comes to a grinding halt” with lenders currently “too wary to provide credit to customers”. With around 5,200 new cars sold daily in Britain – most financed by credit arrangements the potential impact on the automotive sector and the broader economy is severe.
The Finance and Leasing Association (FLA) is urgently engaging with the Treasury and the Financial Conduct Authority (FCA) to address the situation. Stephen Haddrill, director-general of the FLA, expressed disbelief at the ruling, stating: “It makes a nonsense of the claim that Britain is becoming a more investible place to do business” saying it had implications “which stretch far beyond the motor finance sector, making it an issue that demands the immediate attention of the FCA”. The FCA is monitoring the market’s response, assessing the implications for consumers and the industry and has frozen complaints on discretionary commissions until December.
Banks exposed to the ruling’s effects are bracing for further impacts. Analysts predict substantial liabilities, with Santander UK expected to shoulder £1.1 billion in costs, while Lloyds Banking Group already earmarking £450 million in provisions – could face a bill of up to £2.5 billion. Close Brothers, Barclays and Investec have also announced possible repercussions. LLoyds Banking Group, which owns Black Horse, Britain’s largest car finance business, said the ruling set a “higher bar” for the disclosure of and consent to commissions than had been “understood to be required or applied across the motor finance industry prior to the decision”. There could be broader repercussions over the next few months as lenders reassess whether they want to be in the market at all: “If this court ruling holds, what you will get is banks pulling out of the motor finance sector,” says Benjamin Toms, an analyst at Royal Bank of Canada. “If it’s less profitable to do business, for some banks it might not meet the threshold of something they want to do, particularly if there’s an elevated risk.”
The Court of Appeal’s ruling was meant to get the best financial outcomes for customers. Perversely, a credit crunch means customers could end up having to fork out more to finance their vehicles. “Ultimately you will have less providers, that’s less supply, which means that prices will go up,” says Toms.
A primary concern for lenders centres on the fact that, at the time these commissions were paid for car loans, applicable regulations did not mandate the disclosure of commissions. As a result, lenders and car dealers who, for years, believed they were acting within the law and in compliance with regulatory standards have now been confronted by a court ruling that deems these transactions can all be challenged due to non-disclosure of commissions. This development has understandably prompted several lenders such as Close Brothers to appeal the ruling at the Supreme Court, as it complicates business operations when conduct previously considered lawful both by the entities themselves and their regulatory authority, can be subsequently reinterpreted by the courts as inadequate. The regulator for these products – the FCA - is now under scrutiny for potential deficiencies in its oversight of this market. It had already announced a review prior to the judgement, but this ruling has intensified its position, bringing additional pressure to reassess its regulatory approach and standards.
It should be emphasised that the decision may well be reversed if and when appeals are considered by the Supreme Court, indeed lenders retain a strong foundation to contest a substantial portion of claims. The final paragraph of the judgement itself suggests a tacit acknowledgement by the Court of Appeal of the likelihood of further scrutiny on appeal. Should permission be granted – as seems probable – there is a reasonable expectation that the Supreme Court may fast track the appeal, potentially providing a definitive ruling within the next year. As we await the Supreme Court’s decision, the entire motor finance industry braces for a ruling that could reshape the future of consumer credit and regulatory oversight across the UK.
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