In a significant decision for the motor finance industry, with potentially broader read across to other lender-broker-consumer relationships, the Court of Appeal has unanimously held that, in the commonly encountered scenario of a motor dealer who also acts as credit broker, the lender can owe liability to the customer for insufficient (or non) disclosure of the payment of commission to the dealer.

Noting that the court also determined a claim under the unfair relationship provisions of the Consumer Credit Act 1974 which is of lesser interest, this update focuses on the court's findings in respect of undisclosed (or partially disclosed) commission.

Background

Three appeals were brought by individuals who had in each case sought to buy a second-hand car from a dealer and had also engaged the dealer to broker a finance arrangement to fund the purchase. Each customer was provided with only one lender offer which they accepted and the broker received commission from the lender in addition to making a profit on the sale of the car.

The customers claimed against the lender banks (Close Brothers Ltd and FirstRand Bank Ltd (trading as MotoNovo Finance)) seeking the return of the commission among other relief. Central to their claims were the principles put forward in two earlier Court of Appeal decisions about disclosure of commission:

• Secret commission: Where commission has been paid in the absence of any disclosure, the lender will be liable where the broker owes a duty to provide impartial information and advice to the customer (the Disinterested Duty). In these cases, there is no need to show a fiduciary relationship: Wood v. Commercial First Business Ltd.¹ On the basis that a fully secret commission should be treated in the same way as a bribe, the payer of the commission is liable as primary wrongdoer and remedies are available at common law and in equity.
• Half-secret commission: Where information relating to the commission has been disclosed and this is sufficient to negate secrecy, the lender may be liable in equity as an accessory where the broker owes the customer a fiduciary duty and there was insufficient disclosure to obtain the customer's informed consent: Hurstanger Ltd v. Wilson.² In these cases, if a fiduciary duty exists, liability depends on the information disclosed and the customer's circumstances and sophistication.

In one of the three appeals (Hopcraft), no reference was made to the commission paid to the broker in any of the documentation provided. This was therefore a claim for secret commission.

In the two other appeals (Wrench, Johnson), the lender's standard terms and conditions (Standard T&Cs) stated that "[a] commission may be payable by us to the broker" although the evidence was that no attempts were made to draw this to the customers' attention. In Johnson, the customer also received a Suitability Document from the broker which provided that "we may receive a commission from the product provider".

In Johnson, it was common ground that the Suitability Document was sufficient to negate secrecy, although the Court of Appeal noted that they may not have agreed with this had it remained open for argument.

In Wrench, there was an issue as to whether the disclosure in the Standard T&Cs was sufficient to negate secrecy or whether it should be characterised as a secret commission claim.

The decision

The court allowed all three appeals and required the lender to repay the commission in each case.

• Disinterested Duty

At the outset, the court considered that the very fact that the dealer had also assumed the role of credit broker in each case, and was responsible in that capacity for providing information to the lender on the customer's behalf and to the customer about the available finance, was sufficient to give rise to a Disinterested Duty. That duty applied regardless of whether the customer in fact relied on the broker for information and, while the duty could be disapplied by informing the customer in clear terms that the broker was not acting impartially, no such communication was made on the facts.

The existence of the duty was sufficient to establish liability in Hopcraft given there had been no disclosure of the commission.

• Fiduciary duty

The court also found that the nature of the relationship between broker and customer, the broker's responsibilities in the context of that relationship and the obligation of loyalty which is inherent in the Disinterested Duty, together gave rise to "an ad hoc fiduciary duty running in tandem with the disinterested duty" in all three cases. The broker was entrusted to approach lenders on the customer's behalf on the understanding that it would exercise its judgment to obtain a financial offer which was advantageous to the customer, and so this gave rise to a relationship of trust and confidence between principal and agent. The court also referred to the fact that the claimants were "relatively financially unsophisticated" and needed the finance to be able to acquire the car, which made them "more vulnerable" than (for example) an individual purchasing PPI, which was an unnecessary adjunct to the loan.

In the court's view, the lack of a fiduciary duty owed to the customer in the context of the sale of the vehicle was not a bar to such a duty existing in relation to the financing – these were two different commercial roles which should be viewed independently.

• Sufficiency of disclosure to negate secrecy in Wrench

The Court of Appeal found that there was no disclosure of the commission in any meaningful sense in Wrench. This was on the basis that the reference to the possibility of commission was inconspicuously contained in a sub-clause of the Standard T&Cs which themselves were not expressly incorporated into the hire purchase agreement, with the lender instead relying on the broker to share a copy with the customer.

The court therefore treated this as an example of a fully secret commission and found liability on this basis.

• Sufficiency of disclosure to obtain informed consent in Johnson

The question of whether there was sufficient disclosure necessary to obtain informed consent will depend on the facts of each case and the steps taken to draw the customer's attention to that disclosure. The court emphasised that this will be more onerous in the case of an unsophisticated consumer, as here, and it is not enough to include the disclosure "in small print which the lender knows the borrower is highly unlikely to read".

As noted above, the customer in Johnson received an additional Suitability Document which also referred to the possibility of commission. The court held the information given to Mr Johnson was still not enough to inform him of all the material facts – for example, whether commission would in fact be paid, the amount or its method of calculation and, in this case, the fact that the dealer was obliged to give FirstRand first refusal in respect of any financing provided to the dealer's customers (and so was not, as might have been thought, necessarily providing the best offer from a panel of lenders) – and so the customer could not have given informed consent to the commission payment.

• Accessory liability of the lender in Johnson

In order for there to be accessory liability in equity for assisting in a breach of fiduciary duty, the lender must act dishonestly (per Twinsectra³). In this regard, the Court of Appeal found that dishonesty means knowing about, or deliberately turning a blind eye to, the facts that make the act unlawful, relying on the recent Supreme Court decision in Lifestyle Equities.⁴

The facts that make the receipt of commission a breach of fiduciary duty are: (i) the fiduciary relationship between the credit broker and the consumer; and (ii) the payment of a commission to the fiduciary, unless there is full disclosure.

The Court of Appeal found that it was "relatively easy" to establish the requisite knowledge of these facts: the lender would know (i) that the credit broker was acting for and on behalf of a financially unsophisticated customer seeking to obtain suitable finance; (ii) that the consumer would naturally expect and trust the broker to act in their best interests in doing so; (iii) that the payment of commission by the lender would put the credit broker in a conflict of interest; and (iv) the fact and amount of commission paid.

The Court of Appeal therefore concluded that the lender knew of (i) the existence of the fiduciary relationship; and (ii) the fact that the payment of commission would be made in circumstances where the lender had not satisfied itself that the customer had given fully informed consent. In the court's view, this limb (ii) will inevitably be satisfied in cases of partial disclosure. Accessory liability was found on this basis in Johnson.

Implications

The court drew attention in a postscript to the inherent tensions between the principles in Hurstanger and Wood (including expressing doubts as to whether the language of bribery accurately encapsulates these scenarios) and the value of a decisive ruling on this area of law by the Supreme Court, though it refused permission to appeal the decision on 28 October 2024. It remains open for the lenders to apply for permission directly from the Supreme Court and they have indicated they will do so, so we may see a further decision on this issue in due course.

Pending any appeal, we consider the implications of this judgment in relation to other motor finance claims, the FCA regime and the securitisation market.

Other claims

The decision has substantial and immediate implications for the high volume of similar motor finance commission claims which are pending before the courts, particularly in the County Courts. In this regard, the court's determination that a finding of a Disinterested Duty can itself go some way to establishing the existence of a fiduciary duty, and its willingness to find that a case involving some disclosure (but which is not found to be meaningful) should be subject to the less demanding test for fully secret commissions, will undoubtedly encourage the further proliferation of claims.

Several banks have already indicated that they are actively assessing the impact of the decision – a key task will inevitably be revisiting relevant finance agreements to ensure disclosures as to the payment of commission are appropriately explained and processes to ensure the necessary information reaches the customer are robust.

Interaction with FCA regime

The Court of Appeal decision goes beyond the FCA's rules introduced in 2021 on credit broking commission disclosure. These rules require prominent disclosure of the existence and nature of commission where it could affect impartiality or have a material impact on a customer's decision to proceed and then to disclose the amount of that commission only where a customer requests it.

The FCA has published a short statement indicating that it is carefully considering the decision. A key issue is the interaction of the decision with the FCA's current work on historic use of discretionary commission arrangements (DCAs) in motor finance. Complaints concerning such historic arrangements are currently subject to a pause pending clarification from the FCA next Spring on its expectations of firms.

Following the judgment, many lenders and brokers are swiftly reviewing and amending current sales processes. Those amendments are being made at pace and in due course these will likely need closer scrutiny for wider considerations, for example whether disclosures meet consumer duty standards.

There is also consideration going into gearing up for a potential influx of new claims and complaints. The FCA DCA pause on complaints will not necessarily apply to all of these and so consideration as to how to deal with such complaints in a way which is compliant with DISP pending a Supreme Court decision is a key point.

It remains to be seen what further action the FCA will deem appropriate. In a recent speech, FCA CEO Nikhil Rati confirmed that the FCA is considering expanding the pause to cover complaints relating to other types of commission in motor finance. This would seem a sensible and welcome step in the circumstances.

Impact on securitisation market

The auto loan securitisation market is considerable in size. Any widespread redress or remediation exercises which may be ordered by the FCA may in turn affect the issuers of asset-backed notes secured on auto loan portfolios and therefore the investors. If the originators of the securitised loans do not make sufficient and timely redress payments to issuers and investors, a widespread downrating of the notes issued could ensue.

It will also be relevant to consider whether the failure to fully disclose commissions to the customers amount to a breach of the warranties given by the lenders when the loans were first sold to the issuers. Breaches may trigger a widescale buyback or indemnification exercise to compensate investors for losses arising. Similar effects resulted from the mis-selling of payment protection insurance (PPI) to mortgage borrowers, which triggered originators of securitised mortgage loans needing to provide significant financial support to securitisation issuers and investors through remediation exercises.

The decision can be accessed here.

1. [1] [2001] EWCA Civ 471↩
2. [2] [2007] EWCA Civ 299.↩
3. [3] [2002] UKHL 12.↩
4. [4] [2024] UKSC 17.↩