Permission to appeal granted in landmark decision on car finance commission

Posted: 12/12/2024

The Court of Appeal’s judgment in the combined cases of Johnson v FirstRand Bank Ltd, Wrench v FirstRand Bank Ltd, and Hopcraft v Close Brothers Ltd [2024] EWCA Civ 1282 is a landmark decision on the payment of discretionary commissions by lenders to car dealers for arranging car finance. In summary, the court held that it is unlawful for a car dealer to receive a commission from the lender, unless it has been sufficiently disclosed and the customer has given informed consent. The lenders have been successful in their application for permission to appeal the Court of Appeal’s decision, which will be heard early next year.

Subject to the outcome of the appeal, this decision has significant ramifications for the car industry as well as other consumer-facing businesses, which could be liable to repay commission plus interest, potentially going back many years. Lenders and car dealers are having to review their current procedures and documents to ensure they provide sufficient disclosure and informed consent for any commission payments. 

This article looks in detail at the Court of Appeal’s judgment and the nature of the current duty owed by a car dealer to the customer when arranging car finance, as well as the level of disclosure required for a customer to have given informed consent to the commission payment.

Key takeaways from the Court of Appeal’s judgment

• It will be a question of fact in each case whether a commission has been sufficiently disclosed to ‘negate secrecy’. A reference to commission in the documents provided to the borrower will not necessarily negate secrecy, particularly where it is not drawn to the attention of the borrower and the evidence indicates it was deliberately ‘buried in the small print’.
• If secrecy is negated by partial disclosure of the commission, a claimant will need to establish that the broker owed them a fiduciary duty. This can arise (and did in this case) in tandem with the disinterested duty. 
• If the commission is fully secret, it is not necessary to establish a fiduciary duty. In that instance, the disinterested duty is sufficient to establish that the lender has primary liability.
• The lender will avoid liability as an accessory if the borrower has given informed consent, but the borrower will not have given informed consent if they were not provided with all the material facts that might affect their decision to enter into the agreement.
• If there is no informed consent, the lender may be liable as an accessory if it is shown they acted dishonestly. However, a requirement imposed by the lender on the dealer to inform the borrower of the commission will not necessarily prevent the accessory liability.
• A very high commission compared to the sum borrowed may be sufficient for the relationship between the borrower and broker to be unfair under the Consumer Credit Act 1974 (CCA 1974).

Background

In all three cases, the claimants were financially unsophisticated individuals who bought second-hand cars from dealerships. Each dealer offered the option of car finance, and in arranging the finance, they acted as credit brokers. The lenders paid the dealers a discretionary commission based on the difference in charge (DIC) model. The DIC model (prohibited by the FCA from 28 January 2021 onwards), allowed the dealer to decide the interest rate from within a range of rates. The lender would then pay a commission calculated as a percentage of the difference between the lowest interest rate in the range and the rate the dealer agreed with the customer. The dealer was therefore incentivised to agree a higher rate with the customer.

The claimants expected the dealer to make a profit on the sale of the car, but they were all unaware that the dealer also received a commission, financed by the interest charged in the finance agreement. In all three cases it was argued that the dealer owed the claimants a duty to provide information, advice or recommendations on an impartial or disinterested basis (‘the disinterested duty’). Following Wood v Commercial First Business Ltd[1], this duty has been held to be sufficient to establish agency and liability to ‘disgorge’ (repay) the secret commission.

The claimants also argued that the lenders were liable as accessories, entitling the claimants to rescind the finance agreement, and to payment of the commission as damages or money had and received. 

The level of disclosure of the discretionary commission was different between the cases. In the Hopcraft case, it was accepted that the commission was ‘fully secret’. By contrast, in Johnson and Wrench the lender’s terms and conditions disclosed the possibility that a commission might be payable to the broker/dealer. In Wrench, the disclosure was in a sub-clause under the heading ‘General’. In Johnson, the claimant also signed a suitability document prepared by the dealer which referenced that a commission might be paid.

A claim was also made in the Johnson case only under the CCA 1974 on the basis that the relationship between the borrower and lender was unfair.

Decision

The Court of Appeal had difficulties reconciling the decision in Wood with the decision of the same court in Hurstanger Ltd v Wilson[2]. Hurstanger concerned a partial disclosure of the commission, which did not include the amount paid. The Court of Appeal in Hurstanger held that the lender owed a fiduciary duty to the customer and the partial disclosure negated secrecy, but the lender could not escape liability to the borrower in equity as an accessory for procuring the brokers breach of fiduciary duty.

Ultimately, however, the Court of Appeal allowed the appeals in all three cases. The court found that the claimants were owed the ‘disinterested duty’ described in Wood and also that the relationship was a fiduciary one. Further, the court found that there was a conflict of interest and no informed consent by the customer to the dealer receiving the commission. However, in order for the lender to be a primary wrongdoer, it was held that the commission must be secret. This was found in Hopcraft as well as in Wrench, despite, in the latter case, the fact that a commission might be paid was referred to in the lender’s terms and conditions.

In the Johnson case, in addition to the commission being referred to in the lender’s terms and conditions, it was referred to in the suitability document signed by the customer. However, it had already been conceded in the lower court that this was not a fully secret type case. Therefore, it was held that there was ‘sufficient disclosure to negate secrecy, but insufficient disclosure to procure the consumer’s fully informed consent to the payment’. The court, therefore, found the lenders in the Johnson case to be liable as accessories for procuring the brokers’ breach of fiduciary duty.

On the facts, Mr Johnson’s claim also succeeded under the CCA 1974 given the very high rate of commission, but the court did not consider that the mere fact that there has been no disclosure or only partial disclosure would necessarily suffice to make the relationship unfair.

The key issues in the case are discussed in more detail below.

What duties were owed by the car dealers to the consumers?

Disinterested duty
In all three cases the dealers were found to be acting as credit brokers and ‘it was part of the credit broker’s role to provide information to the lenders on the customers behalf and to the customer about the available finance’. The nature of these duties ‘gave rise to a “disinterested duty” unless the broker made it clear to the consumer that they could not act impartially because they had a financial incentive to put forward an offer from a particular lender or lenders’.

It was held in all three cases that there was a disinterested duty owed by the dealer to the claimants, which was sufficient in the Hopcraft case for the appeal to succeed, as there was no mention of the commission in any of the contractual documents or orally. This was a fully secret or no disclosure case where the lender had primary liability. The other cases turned on whether sufficient disclosure was made to either deem it still a fully secret case or to require there to be informed consent given by the claimant.

Fiduciary duty
In all three cases, the court found that there was fiduciary duty running in tandem with the disinterested duty which arose out of ‘the nature of the relationship, the tasks with which the brokers were entrusted, and the obligation of loyalty which is inherent in the disinterested duty’[3].

All the claimants were financially unsophisticated and placed trust and confidence in the dealers to secure an affordable and, at the very least, competitive offer. In Hopcraft the dealers had a role in the decision-making process as they selected a lender based on what Mrs Hopcraft said she was looking for. In Wrench and Johnson, the dealer was tied to giving a right of first refusal to the lender and was in a position to determine or, at least, influence the rate of interest. The court noted that since the dealers were in a position to take advantage of the vulnerable customers and it was reasonable and an understandable expectation that they would act in their best interest, they owed a fiduciary duty. 

Were the commissions in Wrench sufficiently disclosed to negate secrecy?

Although in Wrench and Johnson there was reference in the terms and conditions to the possibility of a commission being paid, it was only in the Johnson case that the suitability document referencing commission was provided. Also, in Johnson, it had already been conceded in the lower court that the case was one where there had been partial disclosure.  

In Hurstanger, the court established that putting an unsophisticated consumer on enquiry does not constitute disclosure, and that disclosure will depend on the facts of the case. Express steps were taken in that case to draw the attention of the borrower to the commission which was held to be enough to negate secrecy. 

In Wrench, the reference to commission was described as being ‘hidden in plain sight’ as it was ‘tucked away in a sub-clause of the lender’s standard terms and conditions, under the heading “General” …’. The court held that the chance of the borrower reading it was ‘negligible’ and that there was no disclosure in any meaningful sense sufficient to negate secrecy given that the provision on commission was deliberately buried in the small print.

Where secrecy is negated, was there fully informed consent?

Mr Johnson had not read the documents, including the suitability document he signed. However, the court found that even if he had, it would not have revealed all the material facts that might have affected his decision to enter into the hire-purchase agreement. 

In particular, documents did not disclose that a commission would, as opposed to might, be paid to the dealer.  ‘He was not told how much the commission would be, nor how it was to be calculated. He was unaware that a significant proportion of the inflated price he was paying for the car would be used to finance the payment of the commission... and there was no warning statement to the effect that its payment to the broker might mean that the broker had not been in a position to give unbiased advice[4].’ In fact, the court found that the broker sought to conceal the true position. It also held that the suitability document gave the impression that impartial advice was being provided by the broker and that the lender selected was the most suitable from a panel of lenders. 

Accordingly, it was held that Mr Johnson gave no fully informed consent.

Accessory liability of the lender in Johnson

It was accepted by the parties that for there to be accessory liability in equity for assisting in a breach of fiduciary duty, the lender must act dishonestly[5]. It was argued by the lenders that their requirement for the dealer to disclose that commission may be payable meant that there could be no finding of dishonesty. 

However, the court commented that once the lender is aware that the dealer is acting as a credit broker for the consumer, it is on notice that the dealer cannot receive a commission without full disclosure and consent from the consumer. The lender cannot simply assume that full disclosure has occurred by merely requiring the dealer to make such disclosure

In any event, it was found that the clause in the general terms between the dealer and lender requiring disclosure to the borrower fell ‘a long way short of requiring full disclosure of all material facts…[i]f anything, that provision demonstrates that FirstRand was actively encouraging the broker not to make full disclosure and therefore it neither wanted nor expected full disclosure to be made'[6].

The court found that the lender knew of the agency relationship giving rise to the fiduciary duty and also knew that the customers would trust the broker to act in their best interests. The lender knew the broker was obliged to approach them over other lenders, irrespective of whether they were competitive or had the most suitable or best offers of finance. The broker was not required to provide this other information to the borrower so the lender was ‘effectively turning a blind eye to the dealer painting an entirely misleading picture of its role to the consumer simply by appearing to act as an ordinary credit broker. Most people would regard this as dishonest’[7].

Accordingly, the court was satisfied that the lender knew the payment of commission to the dealer would put them in breach of fiduciary duty unless Mr Johnson gave informed consent, which he had not. Further, the court found that because there had been no informed consent, the lender was liable as an accessory for procuring the breach of fiduciary duty. If it had been necessary to find that the lender deliberately turned a blind eye to the fact that Mr Johnson had not given informed consent, the court held it would have done so. Mr Johnson was entitled to the amount of the commission plus interest from the date it was paid by way of equitable compensation from the lender for its accessory liability. Recission was not appropriate given the time that had elapsed and because he no longer owned the car.  

The Consumer Credit Act 1974 claim – Johnson only

Section 140A of the CCA 1974 provides that the court can grant relief where, in connection with a credit agreement, the relationship between the creditor and the debtor arising out of the agreement is unfair.

In relation to Mr Johnson, the court held that the relationship between him and the dealer was unfair. In reaching this conclusion it was significant that the commission to the broker was 25% of the sum advanced, the sum borrowed was much more than the car was worth, and the bad bargain arose from the relationship between the dealer and lender which was falsified by the broker and not disclosed by the lender. However, a relationship will not necessarily be unfair simply because a broker receives a commission from the lender of which the borrower is not aware, but if the commission is very high in relation to the sum borrowed that may be enough.   

What next?

Appeal
The lenders’ application to the Supreme Court for permission to appeal has been successful. Their appeal will be heard by the Supreme Court early next year during the Hilary term. The FCA has welcomed the swift decision by the Supreme Court and supported the appeal being heard as soon as possible due to the potential impact of any judgment on the motor finance market and the consumers that rely on it. The FCA is considering whether to formally intervene to share its expertise to assist the court.

The lenders seek to appeal on the basis that there is no concept of disinterested duty that is distinct from a fiduciary duty, and that the tort of bribery requires a breach of fiduciary duty. They also appeal on the basis that: the car dealers’ function as a credit broker was not advisory and does not give rise to a disinterested duty or a fiduciary duty to their customers; the lender cannot be liable as a primary wrongdoer where the possible payment of a commission is disclosed in the terms and conditions signed by the customer (Wrench); rescission is not available as of right in the tort of bribery; the lender should not be automatically liable to repay the commission; and the relationship between the lender and Mr Johnson was not unfair under the CCA 1974.

Review of procedures by dealers and lenders
Since the decision of the Court of Appeal, dealers and lenders will have been reviewing their procedures and documentation to be certain that they are compliant with the law as it currently stands, including by making sure that there is adequate disclosure of any commission and that the customer has given informed consent. While this is happening, many car finance lenders have paused writing new policies, leaving car dealers unable to find finance deals and sell cars.

FCA extension to time for responding to complaints
Given the likely high volume of complaints by customers to lenders, the FCA announced on 12 November 2024 that it will consult on extending the time period firms have to respond to consumer complaints about motor finance where a non-discretionary commission was involved, and for consumers to refer them to the Financial Ombudsman Service. The FCA will be publishing its policy statement on the extension by 19 December 2024. The FCA has already extended the time for responding in relation to discretionary commission until 4 December 2025.

FCA review
In January 2024, the FCA launched a review of historical car finance discretionary commission arrangements (DCA) to understand if there has been widespread misconduct in relation to DCAs before they were banned in 2021. Before taking next steps in the review, the FCA wants to take account of relevant court decisions including the Court of Appeal decision in the Hopcraft, Wrench and Johnson cases, and the decision of the Supreme Court. If the FCA ultimately finds that consumers have lost out as a result of breaches of the FCA rules and principles, it will consider the best way to compensate those individuals, which may be a redress scheme similar to the PPI scheme.

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