Motor finance: Supreme Court allows lenders’ appeals in part

Introduction

The UK Supreme Court has handed down judgment in three combined cases, all relating to alleged duties owed to customers by car dealers acting as credit intermediaries and the liability of third party lenders which provided the credit. The Court allowed the lenders’ appeals in part but upheld a claim by one of the claimants, Mr Johnson, under section 140A of the Consumer Credit Act 1974 (the “CCA”) but for reasons that differed from those given by the Court of Appeal.

The case marks a key point for the motor finance industry but also a wider issue of undisclosed commissions across various sectors. The initial focus in relation to car dealers was on discretionary commission arrangements (“DCAs”), where dealers were paid a higher commission by the lender where they arranged a loan with a higher interest rate. DCAs were banned by the FCA in 2021 and in 2024 the Financial Ombudsman (“FOS”) decided that historic non-disclosure of a DCA could be unfair under s.140A of the CCA. Other commission arrangements, and the question of whether and how commissions should be disclosed to customers, then came under scrutiny, potentially affecting a huge number of lending arrangements, and not just in the motor finance sector.

Pending a separate appeal relating to DCAs which is expected to be heard Autumn 2025, the position currently is that both DCAs and certain kinds of non-DCA motor finance commissions may give rise to liability under s.140A of the CCA, although determining which credit agreements will be affected (particularly in the case of non-DCAs) will not necessarily be straightforward. We discuss further below some of the challenges this may give rise to. The FCA has also proposed an industry-wide redress scheme which would provide redress in respect of both types of arrangement, although it remains to be seen how the FCA will define which cases are eligible for redress under this scheme.

Background

The three cases, (1) Wrench v FirstRand Bank, (2) Johnson v FirstRand Bank and (3) Hopcraft & Anr v Close Brothers, covered various scenarios arising from the intermediation of finance during the sale of a car by a dealer where the dealer was paid a commission by the lender. In Hopcraft, the fact the dealer would be paid commission was never mentioned. In Wrench, the mention of commission was “buried” in the lender’s standard terms. In Johnson, the commission was “partially disclosed”: it was mentioned in documents provided to the customer, but these did not explain how the commission was calculated, its amount, or the fact the dealer was contractually bound to favour a certain lender.

The Court of Appeal had held that, in all three situations, the dealers owed a “disinterested duty” to the car buyers to provide information, advice or recommendations to them on an impartial basis. Breach of this duty by paying a ‘secret’ commission constituted a bribe under the common law tort of bribery. The Court went further, holding that the relationship was also a fiduciary one, under which the car buyer placed “trust and confidence” in the dealer to arrange the most suitable finance. Failing to obtain the car buyer’s informed consent to the commission constituted a breach of that fiduciary duty by the dealer, with the lender liable as an accessory to this breach. The fact that the dealers were not in a fiduciary relationship with regard to the sale of the car did not prevent them from being so in relation to the arrangement of finance.

Arguments in the Supreme Court

On appeal to the Supreme Court, the lenders argued that the finding of a fiduciary relationship between the customer and the dealer was wrong: it was not an established category of such relationships and no undertaking was given by dealers to act for or on behalf of the customer. The lenders also disputed the finding of a “disinterested duty”, which they argued was not a free floating duty and that no basis for one had been identified by the Court of Appeal. The absence of a fiduciary duty, the lenders argued, meant that the ‘secret’ profit received by the dealers (i.e. the commission) could not be recoverable.

The point was made by some of the lenders that this did not leave car buyers without a remedy in appropriate cases. Section 140A of the CCA allows a credit relationship to be found to be unfair and this had been held to be the case in the Johnson case because of the lack of disclosure about matters including the level of commission paid. However, in the Hopcraft case, a claim under s.140A was dismissed as the commission was very low, there was no evidence the interest rate under the finance agreement was excessive and disclosure of the commission would probably have made no difference. The Hopcrafts did not appeal those findings.

The Supreme Court’s judgment

Four areas of the Supreme Court’s judgment are of interest – the existence or not of a fiduciary relationship between the dealers and the customers, the requirements of the common law tort of bribery, whether or not the dealers owed a disinterested duty to the customers and whether or not the relationship in the Johnson case was unfair under the CCA. Of these, only the last one is of significant interest for the motor finance and consumer credit industries going forward.

Fiduciary duties

The Supreme Court concluded that the motor dealers in this case were not fiduciaries. Fiduciary duties arise where a person consciously assumes (or undertakes) responsibility in circumstances where they know or ought to appreciate that this carries with it the expectation that they will act with “loyalty”, putting the customer’s interests before their own. The Court noted that a relationship of trust and confidence, while frequently the consequence of a fiduciary relationship, is not enough on its own to establish a fiduciary relationship since it is not “an invariable pointer to a fiduciary obligation, still less something which of itself gives rise to a fiduciary duty.” Since the dealers were, in the Court’s view, at all times pursuing their own interests in negotiating both the car sale and the financing for it, they did not undertake to place the interests of the customers before their own and were at all times legitimately pursuing their own interests.

Tort of bribery and “disinterested duty”

The Court confirmed the existence of the common law tort of bribery but held that bribery requires the recipient of the bribe to be a fiduciary. As the dealers were not fiduciaries, the claims based on bribery could not succeed. This meant that the concept of a free-standing “disinterested” duty on the dealer when selecting and negotiating a finance package for the customer was also flawed and falls away.

Unfairness under the CCA

The issue which is going to challenge the industry is unfairness under s.140A of the CCA. The court held that the relationship in the Johnson case was unfair and that Mr Johnson should be entitled to recover the commission paid plus interest from the lender.

In Johnson, there were several factors which the court identified as leading to this conclusion regarding unfairness. First, the undisclosed size of the commission relative to the charge for credit – it was 55% of the total charge for credit. Secondly, the failure to disclose the arrangement between the dealer and the lender which gave the latter a right of first refusal over all newly originated lending, and the false impression given by the documentation that Mr Johnson was being offered the product which best suited his needs from a panel of lenders. Thirdly, Mr Johnson was commercially unsophisticated and the disclosure in the documentation of the fact that a commission would be paid (but not its amount) was not given adequate prominence. Accordingly, the Court’s view was that the disclosure was not in fact given, which constituted a breach of the regulatory requirements in place at the time. The fact that the lender had breached its regulatory obligations was a further factor pointing towards unfairness.

Practical impact

The task for businesses will now be to identify situations in which liability could arise following the Supreme Court’s judgment. The risk of liability most obviously arises under s.140A of the CCA for consumer credit businesses which use intermediaries and pay them commissions. In addition, while less likely to give rise to widespread liability than s.140A of the CCA, businesses which use intermediaries will need to be alive to risk that those intermediaries do assume (or undertake) a responsibility to act with loyalty to the consumer because the nature of their relationship differs from that of the car dealers.

Starting with the s.140A risk for consumer credit businesses, the Supreme Court emphasised that the application of this test is highly fact specific (and a matter of “forensic*” judgment, to use the words of Lord Sumption in *Plevin). The Supreme Court performed this forensic analysis in Mr Johnson’s case, and found the particular circumstances of that relationship made it unfair, but the challenge for the industry now is to apply those same considerations to cases which are, to a greater or lesser degree, factually different to Mr Johnson’s (including hundreds of thousands of historical cases for which records relating to the nature of the relationship are limited or non-existent).

The Supreme Court did helpfully agree with a non-exhaustive list of factors put forward by the FCA, which it said would point towards unfairness. These are:

• the size of the commission relative to the charge for credit;
• the nature of the commission. For example, a discretionary commission may create incentives to charge a higher interest rate;
• the characteristics of the specific consumer;
• the extent and nature of the disclosures made; and
• compliance or not with regulatory rules.

To which the further factor identified by the Supreme Court in Mr Johnson’s case: the undisclosed commercial tie between dealer and lender, may be added.

However, there is likely to be scope for considerable debate regarding how these broad factors ought to be applied to the specific facts of individual cases. For example:

• There may be scope for debate regarding what level of undisclosed commission is “too high”, particularly where the features of the financing differentiate it from the Johnson case and so make a direct numerical comparison inappropriate.
• Given the very broad range of commercial ties which could exist between intermediaries and dealers, there may be debate regarding precisely which kinds of tie ought to be disclosed and what level of disclosure is necessary.
• If Mr Johnson was not deemed to have read the commission disclosure in the documents, because that disclosure was not prominent enough and he was unsophisticated, that begs the question of how prominent is prominent enough and how might this vary according to the particular sophistication of different consumers?

Turning to the residual risk presented by fiduciary duties, businesses which use intermediaries and commissions (not just those in the consumer credit market) will need to keep in mind the Supreme Court’s observation that:

“a purely contractual duty to give disinterested advice is different in its legal nature and consequences from a fiduciary duty of loyalty. Although it may be difficult to conceive of circumstances in which such a contractual duty might arise without there being a concurrent fiduciary duty”

Therefore, an intermediary which (unlike the motor dealers) does owe a contractual duty to give disinterested advice could still owe a fiduciary duty and breach it if they received an undisclosed commission. This might arise, for example, where the intermediary is not involved in the sale of the goods being financed (as the car dealers were) but has a contractual relationship with the consumer to act as their intermediary. For example, an intermediary which is engaged directly by the consumer to arrange finance (or another product) and is remunerated by the consumer for this services could be at risk of owing and breaching a fiduciary if they accepted an undisclosed commission from the finance/product provider.

The FCA’s redress scheme

Following the Supreme Court’s judgment the FCA confirmed that it will be consulting in October 2025 on a redress scheme covering both DCAs and non-DCAs. This reflects the FCA’s desire to provide consumers with a simple route to redress, bypassing the courts and claims management companies, and so reducing the risk of a disorderly mass claims event like PPI.

The FCA has indicated the following regarding the scheme which it will propose:

• It will come into force in 2026, meaning that the FCA will also consult on further extending the current pause on motor finance complaints handing for firms (which currently expires in December 2025), presumably so as to coincide with the introduction of the scheme in 2026.
• The FCA will propose that the scheme will cover agreements entered into as early as 2007, which has caused understandable disquiet in the industry given the limited records which will be available for such historic agreements.
• The factors for identifying an unfair relationship which the FCA will rely on will mirror those referred to above and endorsed by the Supreme Court.
• The FCA will consult on the identification of harm and the calculation of redress (which is likely to be complex in the case of DCAs), but notes that, whichever calculation method it ultimately adopts, it is unlikely to result in redress which exceeds the value of the commission paid. The FCA will also propose that interest is payable at a rate for each year of the scheme based on the average base rate that year plus 1%.

However, the FCA is likely to face considerable difficulty in designing a scheme which satisfies all stakeholders and avoids the risk of a legal challenge to the scheme. The FCA has commented that its proposed redress scheme will be “industry-wide”, suggesting that it will be a statutory redress scheme under s.404 of the Financial Services and Markets Act 2000 (“FSMA”). The FCA’s s.404 power only permits the FCA to impose a redress scheme in circumstances where the consumer concerned would be able to bring legal proceedings and obtain a remedy. In other words, the scheme cannot extend beyond the scope of liability under s.140A of the CCA; meaning that the FCA will have to grapple with the practical issues identified above when applying the factors identified by the Supreme Court and defining what constitutes “unfairness” in a broad range of cases. There are likely to be borderline cases where unfairness is arguable either way and so give rise to litigation, depending upon whether those cases fall inside or outside the scope of the FCA’s redress scheme.

There are, in addition, further pieces of the jigsaw which are yet to fall into place. In particular, the Court of Appeal’s decision in the judicial review of the FOS decision finding unfairness in the context of a DCA arrangements is expected in Autumn 2025 and the decision in Angel v Blackhorse, regarding the use of omnibus claim forms for CCA claims, is expected in the first part of 2026. These decisions may have an impact which further alters the scope of potential liability for lenders.

What happens next

Consumer credit firms which use intermediaries and commissions should now be assessing their back books of business for risk of liability and updating their practices going forward to ensure that any new risk is mitigated. The underlying facts in each case will need to be analysed and tested. Consideration should be given to segmenting books for the purpose of this analysis, given the likely differential status of different customer segments based on evolving businesses practices and regulation over time. This will enable firms to quantify their potential exposure and determine their strategy for managing redress and claims.

Motor finance firms should also consider responding to the FCA’s consultation on the redress scheme in order to ensure that their perspective is taken into account by the FCA in designing its scheme.