Court of Appeal decision on commission disclosure opens door to more consumer claims

In allowing three appeals (Johnson v FirstRand Bank, Wrench v FirstRand Bank and Hopcraft v Close Brothers Limited) the Court of Appeal has delivered claimant-friendly guidance to lower courts dealing with a substantial volume of borrowers’ claims relating to commission disclosures in the context of motor finance lending. The decision may have implications for credit broking outside the motor finance context, potentially affecting other intermediated credit products where a commission is paid to the broker and the customer is not told the exact amount of the commission and explicitly consents to it being paid. 

The Court of Appeal found that where car dealers also act as credit brokers to arrange finance for their customers they will owe those customers both a disinterested duty and a fiduciary duty in the credit broker role. The decision confirmed that a lender would be liable as principal where secret commission was paid to the broker in breach of the disinterested duty the broker owed to the borrower; and liable as an accessory to breach of the fiduciary duty owed by the broker to the borrower where partial disclosure was made. The then market standard practice of including a statement that commission may be payable within the loan documentation was not necessarily sufficient to negate secrecy; relevant would be the steps taken to draw that to the borrower’s attention.  The Court of Appeal’s conclusion on what should be disclosed and how goes beyond the FCA’s current rules on commission disclosure. 

Both lenders have publicly stated their disagreement with the decision and their intention to seek permission to appeal from the Supreme Court. They may find some comfort in the Court of Appeal’s concluding paragraph, which notes that it may be desirable for the tensions between currently binding authorities to be resolved by the Supreme Court. 

Background

The claimants each obtained finance to buy a second-hand car, with the motor dealer selling the car also acting as credit broker to source finance in each case. In one case (Hopcraft) neither the lender nor broker disclosed that commission was payable by the lender to the broker; in the other two cases the possibility of commission being paid was disclosed in the lenders’ documentation but not the amount, nor was there any evidence that the claimants were made aware of or consented to the commission. The claimants brought various unsuccessful claims in the County Courts against the lenders. Before the Court of Appeal the three cases were joined and the Court required to consider in the context of the case law on secret and half secret commissions the nature of the duty owed by the borrower to the lender, the adequacy of the commission disclosures made to the borrowers, and the consequential liability of the lenders to the borrowers. In the case of Johnson the Court also considered whether the resulting credit agreement amounted to an unfair relationship under the Consumer Credit Act 1974 (the CCA). 

The key findings of the Court of Appeal

• To negate secrecy regarding payment of a commission, it is not necessarily sufficient to include a statement in the terms and conditions of the credit agreement that commission “may” or “will” be paid.  Instead, whether the borrower has been informed turns on the facts of each case, including the steps taken to bring the matter to the borrower’s attention, the sophistication of the borrower (and therefore the extent of their reliance on the broker). The Court said that “burying such a statement in the small print which the lender knows the borrower is highly unlikely to read will not suffice”. The borrower should be made aware of “all the salient facts pertaining to the payment of the commission”; such salient facts are likely on the Court of Appeal’s analysis to include the amount and basis of commission.
• The Court of Appeal found that the dealers, in their role as credit brokers, owed both a disinterested duty and a fiduciary duty to the borrowers when arranging finance: the fiduciary duty arises in tandem with and in consequence of there being a disinterested duty, which was implicit in the regulated activity of credit broking.  The Court of Appeal had no difficulty with finding that the dealers owed a fiduciary duty in respect of their credit broking role while owing no such duty in negotiating the underlying sale. The fact that the broker is deemed to be an agent of the lender under the CCA was also held not to conflict with fiduciary duty being owed to the customer in relation to the same transaction. 
• Payment of secret commission is a breach of the broker’s disinterested duty for which lenders are liable as principal. The remedy at common law is rescission, subject to the availability of counter restitution – which will be fact specific and may be complex particularly in historic credit agreements. If counter-restitution is no longer possible an alternative remedy, e.g. compensation by way of refund of the commission plus interest, may instead be appropriate. 
• Payment of partially disclosed or half secret commission is a breach of the broker’s fiduciary duty for which lenders will be liable as an accessory, provided that the lender is aware of the existence of the fiduciary duty and the payment of commission and has not satisfied itself that the borrower has given fully informed consent. A lack of informed consent will inevitably follow where there has been only partial disclosure, meaning the accessory liability of the lender will arise.
• For the CCA unfair relationship claim, the Court found that the mere fact of secrecy or partial disclosure is not enough to make the relationship between lender and borrower unfair. On the facts before it, the Court of Appeal found that an unfair relationship was clearly made out, notably that the claimant paid substantially more than the car was worth, the commission (at 25% of the amount borrowed) was “very high”, and the contract between the lender and broker gave the lender right of “first refusal” whereas the broker told the claimant that the broker offered finance from a “select panel of lenders” and would find the product that “best suits your individual requirements…”.

To be continued…

FirstRand and Close Brothers both issued public statements shortly after the decision was released, indicating their disagreement with the decision. FirstRand stated that it had immediately sought permission to appeal to the Supreme Court on the following grounds (amongst others):

• Motor dealers do not owe customers fiduciary duties or any other duty around providing advice, recommendations, or information on an impartial basis.
• When lenders make disclosures regarding the possibility of payment of commission in the terms and conditions of their finance agreements signed by the customer, it cannot be said that the commission has been hidden or kept secret.

Based on its public statements, it is likely Close Brothers will follow suit. The FLA has also noted its concern regarding the decision. 

The Court of Appeal’s decision is notable in that it goes further than the FCA’s current rules on commission disclosure in the credit broking context, which require prominent disclosure of the existence and nature of a commission where it could affect impartiality or have a material impact on the customer’s decision to transact, and disclosure of the amount of commission only on a customer’s request.

FCA statement

The FCA published a short statement following the judgment stating that it is carefully considering the decision. With its focus on disclosure of commission the Court of Appeal decision is different to the scope of the FCA’s current work on the historic use of discretionary commission arrangements in the motor finance market, where is has paused complaints while it considers its next steps including whether to implement a redress scheme (see our earlier blog post), but the FCA may be considering how best to deliver certainty and clarity for consumers and market participants in light of this unexpected decision. 

Johnson v Firstrand Bank, Wrench v Firstrand Bank and Hopcraft v Close Brothers Ltd [2024] EWCA Civ 1282, 25 October 2024. The judgment is available here.

Close Brothers Finance plc has issued a press release on the judgment here.

Firstrand Limited has issued a press release on the judgment here.