Discretionary commission in the motor finance world has been the subject of much public commentary in recent weeks. Today (1 April), the Supreme Court begins a three day hearing of the appeal in Johnson v Firstrand Bank Ltd (t/a Motonovo Finance) [2024] EWCA Civ 1282. The case centres around the disclosure of commissions, with the Court of Appeal ruling in favour of the claimants, who had taken out car loans through a dealership, unaware that the dealer had received a commission from the lender, FirstRand Bank (trading as MotoNovo Finance).
Commission disclosure rules have been on the FCA’s radar for some time, including with the introduction of new rules in January 2021, which banned commission models that allow brokers to influence the level of commission received from the lender by increasing the interest rate paid by the customer.
Case background
The current test case centres around three claimants (described in the case as financially unsophisticated consumers), who purchased second-hand cars from dealerships offering finance.
In one appeal, the commission was not disclosed to the claimant. In the other two, the claimant was not informed about the commission, though the lender’s standard terms mentioned that a commission may be paid.
Court of Appeal judgment and commentary
The case zeros in on the broker’s relationship with the customer and with the lender, with questions being asked about who the broker is acting for.
The Court of Appeal judges (Andrews LJ, Birss LJ and Edis LJ) noted that only “quite sophisticated consumers may be aware that a dealer in this situation is fulfilling two different commercial roles in what the consumer is likely to regard as a single transaction.”
The judgment states that the dealers, acting as both sellers and credit brokers, “owed the claimants the ‘disinterested duty’.” That is, a duty to offer information, advice, or recommendations in an impartial and disinterested manner. Crucially, the Court found that this duty was part of a fiduciary relationship, which arose because of the broker’s obligation to act without bias. A fiduciary duty is usually seen as something borne of a special relationship, such as that between doctor and patient or solicitor and client. It has not historically been applied in a broker/customer relationship in the credit market.
In its reasoning, allowing all three appeals, the Court identified the conflict of interest that exists for the broker. The judgment goes on to state that the conflict is insufficient for a finding of wrongdoing against the lender, which can only be established if the commission is secret. In two of the appeals (Hopcraft and Wrench) the commission payments were found to be secret, with the lenders therefore labelled as “primary wrongdoers”. In the third appeal (Johnson), the payment was not considered to be secret, but the disclosure was still considered “insufficient” (thus the lender being liable as an accessory for procuring the brokers breach of the fiduciary duty through the payment of the commission).
In direct contrast to the fiduciary relationship with the customer, the Court also found the broker to be acting as agent of the lender (in accordance with s. 56 of the Consumer Credit Act 1974), which in our view, raises further questions on the broker obligation to act in the best interests of the customer. The judgment does not provide detail on how both relationships interact.
The inference from the Court of Appeal is that lenders and brokers need to work harder to ensure their practices are transparent, and that customers understand and acknowledge that the transaction will lead to the payment of a commission between the lender and the broker. A conflict undoubtedly arises for the broker as agent of the customer, and brokers and lenders need to ensure that commission arrangements are fully disclosed to a customer and their consent is sought, to provide any relief from that conflict.
As an aside, the Court has also addressed the standing of the customer, indicating that all three claimants, by virtue of their need to pay for a car with a finance product, were vulnerable, thus potentially hugely widening the scope of vulnerability assessments in regulated markets. It added: ‘It is precisely because the brokers were in a position to take advantage of their vulnerable customers and there was a reasonable and understandable expectation that they would act in their best interests, that they owed them fiduciary duties’.Given the FCA’s current focus on the treatment of vulnerable customers, we wait to see if this is addressed further once judgment is handed down.
Public reaction
The Court of Appeal ruling has been seen widely as a landmark decision and a victory for the consumer, with Johnson, one of the three appellants, being entitled to equitable compensation: the £1,650 commission plus interest from the date it was paid, with lender FirstRand held liable as an accessory.
Kevin Durkin, director of HD Law and counsel for claimant Mr Johnson, said: ‘It is no longer enough for lenders to hint at the vague possibility of a commission being paid and deliberately bury it away somewhere in their small print, within their standard terms and conditions. That practice by lenders was clearly designed to keep the customer unaware of the payment of a commission and the Court of Appeal have quite rightly agreed.’
The FCA has also commented, with a statement made shortly after the Court of Appeal judgment, reiterating the need for clarity and to establish whether this will be the Court’s “final word”. With the continuation of the matter in the Supreme Court, all parties eagerly await the final determination.
The Court of Appeal judgment has brought huge uncertainty to the credit market, with lenders and brokers concerned that they face the potential of a redress scheme and uncertainty around the security of commissions earned under long established practices. We wait to see if the Supreme Court will affirm the current decision (in which case we could see ramifications for agency relationships beyond the motor finance industry) or whether there will be a row back on the finding of fiduciary obligations.
Either way, it seems likely that we will see a tightening of the FCA rules on commission disclosure as currently set out in its Consumer Credit Sourcebook, with lenders and brokers obligated to provide more detailed and timely information to customers, on the role of an intermediary, and how the parties stand to benefit (including commission amount and calculation method).
How can we help?
If you are a broker or a lender and wish to understand more around how this judgment may impact your business, please contact our Financial Services team.
