Court of Appeal sides with consumers on Motor Commission Disclosures

Court of Appeal sides with consumers on Motor Finance Commission Disclosures

The widely anticipated Court of Appeal judgment, Johnson v Firstrand, on motor finance commissions (25 October 2024), has potentially significant implications for motor finance providers who will be concerned the judgment widens the scope of the issues they are already dealing with in relation to discretionary commission arrangements ("DCAs"). This judgment could also potentially have wider impacts on other credit agreements involving commission paid to a credit broker where the amount of the commission, the basis for the commission calculation, and other key terms about the agreement between the lender and broker have not been disclosed to the borrower prominently enough.

This judgment concerns three appeals - Johnson, Wrench, and Hopcraft - addressing the duties of motor dealers acting as credit brokers in arranging hire-purchase agreements for car buyers, and whether lenders are liable in cases of undisclosed or "partially disclosed" commissions. In Johnson,although the motor dealer could have received commission under a DCA, the interest rate selected by the motor dealer under the DCA was the lowest rate available (so the motor dealer didn't receive commission under the DCA element of their agreement with the lender). Instead, the broker received a fixed commission of 25% of the credit advanced, being £1,650. In Hopcraft, the commission was £183.26 however it is not known how this was calculated. In Wrench, commission was £179.85 on the first loan and £408.98 on the second loan. Commission on the second loan involved a DCA element and the interest rate selected by the motor dealer was close to the lowest available rate (the rate selected was 4.32% and the lowest available rate was 3.25%).  The Court of Appeal allowed all three appeals, finding that in each case, the dealer owed the claimant a "disinterested duty" and a fiduciary duty, and that the lenders were liable for repayment of the commission.

Dealers owed both "disinterested" and "fiduciary" duties

• The Court held that the dealers in these cases, also acting as credit brokers, were tasked with finding suitable and competitive finance deals for the claimants. They owed the claimants a "disinterested duty" to provide information, advice, or recommendations on an impartial or disinterested basis.
• The relationship was also fiduciary in nature, given the trust and confidence placed in the brokers by the claimants, who relied on them to secure suitable financing. The Court emphasised that dealers play two distinct roles - selling the car and arranging finance - and that the absence of a fiduciary duty in the sale does not preclude the existence of a fiduciary duty in the financing arrangement.

Sufficient disclosure to obtain informed consent

The Court distinguished between cases of "fully secret" commissions and those involving "partial disclosure".

• Hopcraft fell into the former category as the commission was never mentioned to the claimant. In Wrench, the Court found the statement regarding commission was "buried" in the lender's standard terms and conditions, which the Court deemed insufficient to negate secrecy. The lender was therefore primarily liable as the payer of a "secret" commission.
• Johnson involved partial disclosure, as the Hire-Purchase agreement and the Suitability Document mentioned the possibility of commission. However, the Court's view was that the information provided was misleading and did not include crucial information, such as the dealer's obligation to prioritise a particular lender, the commission amount, and the basis for the commission calculation. Therefore, Mr. Johnson did not provide fully informed consent, and the lender was liable as an accessory to the broker's breach of fiduciary duty. The Court's view was that the lender knew of the fiduciary relationship and paid the commission despite the lack of fully informed consent from the borrower. The lender could have made sure the borrower was aware of all the important facts as the lender has a direct contractual relationship with the borrower and could have disclosed relevant information relating to the commission within the agreement. The lender could also have required the borrower to countersign a covering letter which made this information clear.

Unfair Relationship under the Consumer Credit Act 1974

Unlike Plevin v Paragon Finance Ltd where the Supreme Court held that a failure to disclose a large commission on a PPI policy made the relationship between a lender and borrower unfair under section 140A CCA, the main focus of the Johnson judgment is not on the challenge under s140A CCA. Section 140A CCA was considered in Johnson case and the Court also found the relationship between Mr. Johnson and his lender to be unfair under this provision because of the lack of disclosure about the substantial commission, coupled with the high purchase price of the car. The Court stressed that cases will not necessarily be unfair under section 140A because the broker receives a commission and the borrower is not aware of this – the Court is required to consider all the facts of the case and weigh up their importance.

Interaction with the regulatory regime

The judgment contains limited consideration of the regulatory context. The judgment references the disclosure requirements at CONC 4.5.3R (which require brokers to disclose the existence and nature of commission where it could affect the impartiality of the broker in recommending the credit agreement or have a material impact on the customer's decision to enter into the credit agreement) but only to note that this provision is premised on credit brokers having a duty to be impartial.

Notably, the judgment does not also reference CONC 4.5.4R (which requires a broker to disclose the amount of commission at the request of the customer). Johnson involved wording in the contractual documentation between lender and broker which appears designed to reflect CONC 4.5.4R ("If requested to do so by the customer you will inform the customer of the amount of any commission and or other benefits payable by us to you in relation to the prospective or actual regulated"), however the Court was critical of this wording. The Court held that this provision "falls a long way short of requiring full disclosure of all material facts (and, indeed, implies that it would be proper for the broker to withhold information about the amount of the commission unless and until the customer makes a specific request). If anything, that provision demonstrates that FirstRand was actively encouraging the broker not to make full disclosure, and therefore that it neither wanted nor expected full disclosure to be made."

In addition, the judgment made no reference to the (lengthy) information requirements lenders are already subject to under the Consumer Credit Act 1974 in terms of prescribed information that should be included in pre-contractual information disclosures as well as the information lenders are required to include in the financing agreements themselves.

The result is that the level of disclosure required of lenders in relation to commission is now significantly more than that specified by the relevant legislation, regulations and FCA rules/guidance. The judgment implies that lenders are now responsible for disclosing to borrowers: (i) the rate/amount of the commission, (ii) how the commission is calculated, and (iii) any important information about the relationship between the lender and broker, for example whether the lender has a right of first refusal over the broker's business. This information should be sufficiently prominent and drawn to the borrower's attention (and not buried in small print), and the lender cannot rely on the dealer to give full disclosure to the borrower. The judgment also suggests asking the borrower to countersign a document containing this information as a means the lender can use to make sure the information the borrower is aware of this information.

Next steps

This judgment will have significant consequences for lenders who enter into commission arrangements with credit brokers. The judgment widens the scope of the issues regarding commissions from DCA arrangements which have been the focus since the beginning of the year. Although much of the discussion to date has been in relation to the motor finance sector, there are a whole range of goods and services purchased through credit arranged by a credit brokers (from insurance premiums to holidays and kitchens) so the impact of this judgment could have far reaching impacts. The judgment also leaves open questions of potential read across into other areas such as commercial lending, particularly to sole traders and smaller partnerships.

 As well as thinking about impact on their back-books, we expect that lenders will be reviewing their approaches to commission disclosures as well as anticipating an appeal to the Supreme Court. Lenders' systems will not necessarily be set up to provide the level of disclosure expected in this judgment so lenders will be facing tough choices of whether to invest in improving commission disclosures pending any appeal to the Supreme Court.

 This decision - as well as any appeal to the Supreme Court - could also have an impact on the timing of the FCA's on-going work to decide how to respond to motor finance complaints involving DCAs. Over the summer, the FCA said they intended to confirm motor finance next steps by May 2025, but the timelines are likely to be pushed out given the potential wider implications that an appeal to the Supreme Court could have on the FCA's ongoing work.