Car finance commission – the implications for insurers of Firstrand

We examine the 2024 decision in Johnson & Wrench v Firstrand; Hopcraft v Close Brothers and consider the implications for insurers.

Summary

The Court of Appeal in Firstrand decided that car dealers, when acting as credit brokers arranging car finance, owed a "disinterested duty" and fiduciary duty  which could be breached where the dealers did not disclose (or did not sufficiently disclose) to the borrowers the fact that they received commission from the lender. The lenders could be held liable for this breach and ordered to pay to the buyer the amount of the commission.

Background

The Firstrand decision arose from three conjoined appeals, in cases concerned with car dealers who had received commission payments when arranging hire-purchase finance to help consumers to buy cars.

These commissions were paid under a side arrangement between the finance company (the lender) and the dealer, to which the buyer was not a party. In some instances, the buyer was not aware that any commission was being paid to the dealer. In others, the documents issued referred to the fact that the dealer might receive a commission, but in each case, the amount of the commission was not disclosed, nor was the basis on which it was calculated.

The Court of Appeal decision in Johnson & Wrench v Firstrand; Hopcraft v Close Brothers

The core question for the Court of Appeal in the Firstrand decision was whether the lenders could be held liable to pay to the buyer the amount of the commission retained by the dealer. In short, the Court of Appeal said that the lenders were liable.

The reasoning is as follows:

• In each case, the dealers were acting as credit brokers as well as the vendors of the cars. Their task was to search for, and offer to their customers, finance deals from their panels of lenders that were suitable for their needs and were competitive.

• They therefore owed the buyers what was called the "disinterested" duty unless the dealer had made it clear to the buyer that they could not act impartially.

• The relationship was also, on the facts, a fiduciary one. In this regard, it was unnecessary to conclude that the dealer was the agent of the buyer in the strict sense. It was enough to ask whether the dealer was acting on  behalf of the buyer in a capacity which involved an obligation of loyalty and held a duty of trust and confidence in the dealer. It was also considered relevant that, in each case, the buyer was unsophisticated.

• In all cases, the dealers had a conflict of interest and the buyers had not given informed consent to the payment of the commission. In two of the cases the documents contained reference to the fact that the dealer might be paid commission. This was insufficient to amount to full disclosure and did not give rise to informed consent from the buyer to the dealer retaining the commission.

• If the commissions were secret, the lenders could be primarily liable to the buyers. That was the case in two of the three claims. If there was partial disclosure, the lender could not be primarily liable. They could be liable as an accessory to breach of fiduciary duty where such a duty was owed by the dealer. There is no accessory duty owed where the "only" duty is the disinterested duty and there is no fiduciary duty. However, in the third case the dealer was held to owe fiduciary duties to the buyer.

• In terms of the lender's knowledge, it is sufficient to show that lender knew that the dealer was acting in a fiduciary capacity and was receiving a commission. The lender cannot assume that there was full disclosure of the commission because the lender (or even a regulator) required the fiduciary to make such disclosure. This means that a lender cannot simply include a term in its agreement with the dealer requiring the dealer to make full disclosure of the commission, and rely on that term as a defence to a claim that it was an accessory to a breach of fiduciary duty where the dealer did not in fact disclose the commission arrangement to the buyer.

• The mere failure to disclose (at all or at least fully) the commission did not automatically render the relationship between lender and buyer unfair under the Consumer Credit Act 1974. But on the specific facts, in the claim to which it was relevant, the relationship was considered to be unfair.

Leave to appeal to the Supreme Court has been granted. The hearing will take place on 1 April 2025.

Analysis

The Court here drew a clear parallel between the payment and receipt of secret commissions and of bribes. Where there is conduct falling short of a secret commission, such as where there is partial disclosure of commissions which is insufficient to elicit informed consent, that can also give rise to liability (albeit accessory liability) on the part of the lender, as opposed to the liability resting solely with the fiduciary.

The Court did, however, stress some limits. One particularly important restriction relates to "...situations in which a broker is acting purely as an intermediary, and has no other means of remuneration", where "one of the parties to whom he provides his services might reasonably assume (or be expected to assume) that if they do not remunerate him, the other party will".

In the present case, however, "the purchaser/borrower would view the procuring of the finance as an adjunct to the sale transaction, and would not expect the dealer to receive a commission from the lender for the introduction of the business, until he tells them. Indeed, the claimants in these three cases believed that the dealers would make their money from the profit on the sales."

Perceived customer vulnerability was also clearly an issue. Amongst other things, the Court of Appeal said that 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 interest, that they owed them fiduciary duties...".

The decision here that disclosure in standard terms and conditions that a commission might be paid was insufficient to generate informed consent is hugely significant. The Court noted that:

"Lenders should not assume that they can escape primary liability for the payment of a secret commission merely by making a general reference to the possibility of such payment in a carefully concealed sub-clause of their standard terms, especially when there is an attempt to divert attention from it in the manner which occurred here..."

In the financial services sector, absent a regulatory requirement, the view has often been taken that the precise amounts and apportionment of commissions need not be disclosed, provided the fact that a commission may be paid was disclosed. That is, at least in this context, insufficient.

It is no defence for the lender to say that it required the customer-facing dealer to make full disclosure, but the dealer did not. The Court of Appeal appear to have treated the responsibility to disclose the commission to the buyer as being the lender's direct responsibility. They also appear to have concluded that failing to ensure that the dealer disclosed the commission levels to the buyer amounted to turning a blind eye to the breach of fiduciary duty, sufficient to create accessory liability.

"Once it is aware that the dealer is acting as credit broker for the consumer, the lender knows that the broker cannot receive payment of a commission or fee from the lender unless there has been full disclosure and the consumer/borrower has consented. The lender cannot assume that there has been full disclosure of the commission simply because the lender (or even the regulator) requires the broker to make such disclosure. If the lender does not take it upon itself to give full disclosure to the consumer, it deliberately takes the risk that the broker will not do so..."

Impact for Insurers

The question then arises - what does this mean for insurers?

The Court of Appeal's decision in Firstrand has potentially wide application to a range of other business models involving intermediation where the intermediaries are paid commission. Although the Court noted the distinction between: (i) an intermediary acting purely in that capacity and where it is reasonable to expect the customer to appreciate that the intermediary would be paid; versus (ii) the present case where the dealers were acting in multiple capacities, the judgment does not provide a clear basis for distinguishing other intermediated relationships.

One example of the judgment's wider application is where premium finance is concerned. An intermediary receiving commission for a premium financing arrangement, to fund premium in circumstances where insurers have agreed that the policyholder can pay by instalments, might fall within the scope of the judgment.

Similarly, where the policies are sold through non-broker agents (such as motor policies by dealers or travel insurance sold by travel agents), and commission is paid, that is more likely to be in scope.

Finally, the potential exposure under FI and PI/E&O policies will increase where an insurer insures either (or both) intermediaries or lenders or other exposed principals. Potential coverage defences include:

i. Whether the commission payments would be considered intentional acts and therefore not covered under an insurance policy, which is a contract of fortuity;

ii. Whether there is a public policy basis for declining claims. If the analogy is with payment of bribes, it may be that for public policy reasons these secret, or partially disclosed, commissions are not insured; and

iii. Whether the payments amount to "damages" or "compensatory damages". Where, for example, the lender (or equivalent principal) or intermediary is repaying fees, those may be considered restitutionary rather than compensatory (although note the breadth of the definition of damages following RSA v Tughans).

iv. More specific exclusions may apply.

Irrespective of potential coverage arguments, there will undoubtedly be claims made to FI and PI/E&O policies as a consequence of this decision.