Supreme Court narrows scope of secret commission claims in motor finance cases

On 1 August, the Supreme Court handed down its highly anticipated judgment in the three linked cases (1) Johnson v Firstrand Bank Ltd ("Johnson") (2) Wrench v Firstrand Bank Ltd ("Wrench") and (3) Hopcraft v Close Brothers Limited ("Hopcraft"). Allowing the lenders' appeal, save for in respect of Mr Johnson's claim under section 140A of the Consumer Credit Act 1974 (the "CCA"), the Supreme Court held that the dealers were not fiduciaries and the payment of commission by the lenders to the dealers was not a bribe.

Background

By way of brief background, prior to January 2021 the claimants in each of the cases engaged car dealers to arrange hire-purchase agreements (and in one case an additional personal loan) to acquire second-hand cars, with each dealership assisting the claimants in obtaining finance to fund the purchase. In each transaction the dealers were not only selling the cars, but also acting as the credit broker, and received a commission from the lender for introducing the business to them. Subsequently, the dealers made a profit from the sale of the vehicle, in addition to the commission from the lenders.

Prior to 2021, under such arrangements dealers could receive a commission from the lenders based on a structure that allowed the dealer discretion to fix the interest rate charged to the customer under the credit agreement (the higher the interest rate, the higher the commission they received).  This discretionary model is known as a discretionary commission arrangement ("DCA") and has since been banned by the Financial Conduct Authority (“FCA”). For further details of the FCA's review of historical motor finance commission arrangements please see our previous article here.

In the case of Hopcraft, the paperwork provided by the dealer failed to disclose the manner in which the commission was to be calculated. Whilst in Wrench and Johnson, the lender’s standard terms and conditions made reference to the payment of a commission, the claimants were neither made aware nor informed that commission would actually be paid. The claimants issued proceedings against the lenders seeking the return of the commission paid, amongst other relief.  

The Journey so far

At first instance all three claimants contended that the brokers owed them a duty to provide information, advice or recommendation on a “disinterested” basis. In relation to Hopcraft and Wrench it was argued by the claimants that the commission paid to the credit broker was secret. In relation to Johnson (as well as on an alternative case basis in Wrench), it was argued that even if the lender did not pay a secret commission, the brokers never obtained the claimants’ fully informed consent to the payment.

Whilst the claimant in Wrench was successful at first instance, a circuit judge later allowed the lender's appeal. The claimant in Hopcraft was unsuccessful at first instance, as was the claimant in Johnson (the latter also being unsuccessful on first appeal).

The Court of Appeal subsequently allowed all three of the claimants’ appeals handing down a joint judgment which, amongst other things, (1) held all three lenders liable for the repayment of the commission and (2) confirmed that lenders are required to disclose clearly and fairly to consumers the amount of any commission which may be paid and the basis in which it is calculated so that the consumer can make a fully informed decision. For further details of the Court of Appeal's please see our previous article here.

The Supreme Court decision

In respect of each of the issues considered by the Supreme Court:

Fiduciary duty

The Supreme Court held that the features of the transactions, including "the continuous status of the dealer as an arm’s length party to a commercial negotiation pursuing its own separate interests", were incompatible with the recognition of a fiduciary duty. In particular:

• The dealer's interest in running a profitable business is a separate objective to that of the customer's objective of acquiring a car at an affordable price. Up until the conclusion of a transaction, those objectives are in potential conflict and either party could abandon negotiations.

• The contract between the lender and the dealer is separate to, but dependant on, the conclusion of the contract between the customer and the lender. It is a tripartite relationship.

• The dealer's position as an intermediary between customer and lender is ancillary to the sale of the car and not a distinct and separate service in its own right. There was also no agency relationship in these transactions, noting that the dealer did not have authority to enter into legal arrangements with the lender on the customer's behalf.

• At no time in the negotiation of the transactions did the dealer give any kind of express undertaking or assurance to the customer that it was putting aside its own commercial interests.

• Customers are free to arrange their own finance packages if they wish to do so, or compare against packages offered by other dealers.

Bribery

Fully undisclosed commissions (ie. secret commissions) are treated by law as a 'special class' of fraud or bribe giving rise to remedies including recovery of the sum equal to the amount of the secret commission, damages for fraud relating to any loss suffered, or recission. Whilst the Supreme Court rejected the lenders' submission that the tort of bribery should be abolished, it found that liability for bribery was dependent upon the recipient of the bribe owing a fiduciary duty to the customer. As the dealers in these cases were not subject to any fiduciary duty, they could not be found liable for the claims against them in equity and bribery

Unfairness under the CCA

The Supreme Court held that the relationship between Mr Johnson and FirstRand was unfair within the meaning of section 140A of the CCA, being careful to note however that the lack of disclosure (or only a partial disclosure) of a commission, whilst a factor, was not the only factor considered in reaching this conclusion. In Mr Johnson's case:

• The Supreme Court found that the size of the commission (being a particularly high sum) was "a powerful indication that the relationship between Mr Johnson and FirstRand was unfair", and that the lack of disclosure around the amount of the commission meant that Mr Johnson did not have an opportunity to question this.

• The non-disclosure of the commercial tie between the dealer and the lender to Mr Johnson was also "highly material" to the issue of unfairness and a "suppression of the truth" giving rise to the false impression that the dealer would recommend to Mr Johnson the best finance product for his needs.

• Finally, whilst Mr Johnson's failure to read the documents provided to him prior to entering into the transaction is a consideration, it is also relevant that he was an unsophisticated customer and no prominence was given to the relevant statements.

Impact of the decision

The Court of Appeal sent shockwaves through the motor finance, and lending industry more generally, by stating that insufficient disclosure of any type of commission arrangement could give grounds for a claim by a consumer against a broker or lender. Though the cases focus on motor finance, the legal principles were broadly applicable to intermediary relationships in consumer and home finance lending more generally.

The Supreme Court has significantly limited the scope for secret commission claims (i.e. on the basis of a bribery claim or in equity) against brokers/lenders by focussing on the centrality of a fiduciary relationship to such claims, rejecting the potentially very broad definition of disinterested duty introduced by the Court of Appeal, and rejecting the notion that a motor finance dealer is a fiduciary.

Although the bribery claims and claims in equity may have failed, the cases have shone a light on historic conduct in the motor finance sector. 

Mr Johnson's success in his claim under section 140A of the CCA shows that large, concealed commissions could show unfairness within the meaning of section 140A of the CCA. This successful claim, and the consultation on the redress scheme announced by the FCA (considered further below), show that fairness in the motor finance market will continue to occupy headlines for some time to come. Consumers who have taken out finance where there is a DCA may be eligible for redress. The FCA also allude to a redress scheme for non-DCA arrangements as well.

Focus on fiduciary duty

The Court of Appeal's reasoning could have meant that a wide range of intermediaries with a role to be impartial and to give disinterested advice, information or recommendations could have faced claims from customers for breach of duty by receiving commissions without fully informed consent– impacting both the motor finance sector and beyond.

The Supreme Court will have reassured many by concluding that secret commission claim (based on bribery or in equity) arises only where the intermediary recipient of the commission is a fiduciary and the payment breaches the no conflict rule.

A fiduciary duty is characterised by an obligation owed by a person to act with single-minded or undivided loyalty and who gives an undertaking to subordinate their interests to those of the recipient – for example a company director who owes a duty to act in the interests of the company. The Supreme Court held that the relationship between a motor dealer and customer does not have these characteristics, even though the customer may have relied on the dealer to find them a good or suitable finance deal:

"No reasonable onlooker would think that, by offering to find a suitable finance package to enable the customer to obtain the car, the dealer was thereby giving up, rather than continuing to pursue, its own commercial objective of securing a profitable sale of the car." (227)

This helpfully limits the scope for normal commercial intermediary relationships to be considered fiduciary relationships. As a consequence two major points of debate in the Court of Appeal judgment were also rendered insignificant:

• The Court of Appeal had set hares running by suggesting that lenders in a consumer credit context following non or partial disclosure of commission by a broker risked liability as accessories unless they too obtained fully informed consent from the customer to the payment of the commission. The Supreme Court concluded that as no fiduciary duty was owed by the motor dealers, there was also no accessory liability.

• The Court of Appeal held, for the first time, that a lesser requirement of disclosure applied for the purposes of the common law of bribery than in equity. In its view, it was sufficient to exclude liability at common law that there be disclosure of the possibility that a commission might be paid. Where that possibility had been disclosed, the payment could not be regarded as secret, so as to engage common law liability; but there would not be fully informed consent, so that equitable remedies remained available. The Supreme Court dismissed this line of reasoning and the notion that different causes of action are available depending on whether there is a secret and 'half-secret' commission. The adequacy of disclosure of the commission and consent is relevant but only where there is a fiduciary relationship, so there is a no-profit and no-conflict obligation owed by the fiduciary to the principal. 

The Supreme Court's ruling does however leave scope for risk and questions for intermediaries outside of the motor finance space who receive commissions and the payers of these commissions. The Supreme Court's discussion related to the motor finance sector and the structure of the tripartite customer / dealer / lender relationship.

There is potentially a significant distinction to be drawn between 'pure' intermediaries such a mortgage brokers and brokers such as motor dealers who also sell products (i.e. vehicles in this case). The Supreme Court considered a range of characteristics of the relationship between motor dealer and customer in determining whether it was a fiduciary relationship. In applying the Supreme Court's reasoning to other commercial intermediary relationships, the nature of the relationship and its features will need to be applied to the factors considered by the Supreme Court. Commercial intermediary relationships where the intermediary or broker is not broking finance as an ancillary activity to selling a product may well be considered differently by the courts: for example, one factor considered by the Supreme Court among several was that motor dealers do not enter into lending documents on behalf of customers as an agent.

This added weight to the conclusion that motor dealers are not fiduciaries (unlike some types of agent who are fiduciaries). Some brokers however may carry out this function. When applying the Supreme Court's conclusions beyond motor finance each intermediary or broker relationship will need to analyse specifically in the round to consider if there is a risk of the intermediary being deemed to owe fiduciary duties to a customer.

FCA redress scheme

Following the Supreme Court's ruling the FCA has announced that it will consult on a motor finance compensation scheme, with the likely cost of the scheme estimated at between £9 billion and £18 billion (including redress and admin costs).

The FCA aims to publish the consultation by early October and for it be open for 6 weeks, with the view that the scheme will be finalised in time for eligible customers to start receiving compensation next year.

It is proposed that the scheme will cover DCA and non-DCA agreements. When non-DCA agreements in particular are covered by the redress scheme is likely to be complicated, and will consider a number of factors. This potentially includes factors such as the sophistication of the customer.

The FCA says that the new scheme will mean customers should not have to go through the courts (or via claims managers) and that it should cover agreements dating back to 2007 (to be consistent with complaints that the Financial Ombudsman can consider). The FCA have indicated that they are discussing with the Government how any redress scheme can go back that far, as existing legislation may not fully provide for that outcome.

Going back to 2007 is also likely to create practical challenges, as it is entirely feasible that both customers and dealers/lenders won't have any records for transactions dating back that far. This gives rise to the question: how will the redress scheme fairly determine whether or not redress is due if there is no real evidence of what happened at the time?

It appears that the scheme will cover commission arrangements which breached the law (now a much more difficult test/higher bar following the Supreme Court's decision) and/or FCA Rules (including the ban on DCAs). Breaching the law includes when a relationship is deemed unfair under the CCA, which requires a nuanced consideration. Further, the unfair credit relationship test has not been the subject of a significant amount of case law to date, so it will be interesting to see how this operates in practice.

Redress schemes work best when they are simple and objective so it remains to be seen (in the FCA's consultation) how they will tackle these difficult issues.

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