Motor Finance Judgment has major implications for Lenders & Brokers

Introduction

A recent Court of Appeal case has major implications for the motor industry, and potentially for the wider consumer finance industry. This article explores the case and its implications.

Background

1. The Court of Appeal has issued judgment in relation to three cases ([2024] EWCA Civ 1282).

2. The cases related to three appeals which were heard together in the Court of Appeal.

3. They all concerned a common situation in which a consumer sought to buy a car from a motor dealer, and the motor dealer offered and broked finance. The dealer received a commission from the lender for introducing the business to them, financed by the interest charged under the credit agreement. The dealer therefore performed two roles: the seller of the cars, and also the credit broker.

4. The commission was paid under a side arrangement made between the lender and the dealer to which the consumer was not party. In one of the cases (Hopcraft), the commission was kept secret from the consumer claimant. In the other two cases (Wrench and Johnson), there was a partial disclosure hidden in the lender’s standard terms and conditions, but it did not explain all the details. The claimants in all three cases believed that the dealers would make their money from the profit on the sales, not commission from the finance arrangements.

5. Up until 28 January 2021, the commission was based on a “difference in charge” (“DIC”) model, whereby the lender would permit the dealer to set the total charge of credit, including the interest rate, and pay the dealer commission calculated as a percentage of the difference between the lowest rate of interest in the permitted range and the agreement rate. This incentivised the dealer to fix the rate of interest as high as possible, and so was banned by the FCA in 2021. After this, the commission was generally calculated as a fixed percentage of the amount borrowed by the customer – the (Revenue Share of Advance or “RSA” model).

6. All three claimants contended that the brokers owed them a duty to provide information, advice or recommendation on an impartial or disinterested basis, (“the disinterested duty”), which was held in a case called “Wood v Commercial First Business Ltd”. Miss Hopcraft’s case (and Mr Wrench’s primary case) was that the commission paid to the credit broker was secret, that the lenders made payment of the commissions knowing of the “agency” relationship between the borrowers and the brokers, and failed to disclose the payment, and therefore they were entitled to rescission of the credit agreements and to payment of the commission as damages or as money had and received.

7. Mr Johnson’s case, and Mr Wrench’s alternative case, was that even if the lender did not pay a secret commission, the brokers never obtained the claimants’ fully informed consent to the payment, and they had only given “partial disclosure”, which was insufficient.

8. All three claimants also made claims under sections 140A-C of the Consumer Credit Act 1974 on the basis that the relationship between the borrower and the lender arising out of the credit agreements was unfair within the meaning of those provisions because of the lender’s non-disclosure of the amount of the commission and/or because of the payment of the commission in circumstances which rendered the broker in breach of the disinterested duty.

Findings

9. All three appeals were allowed:

   1. The dealers were the sellers of the cars, but they were also acting as credit brokers on behalf of the claimants. In the latter role, their task was to search for and offer the customer a finance deal from their panel of lenders which was suitable for their needs and competitive. In some cases they undertook to find the best deal or the one which was most suitable for the customer. They therefore owed the claimants the “disinterested duty” described in Wood. The relationship was also a fiduciary one. In all three cases there was a conflict of interest and no informed consent by the consumer to the receipt of the commission.

   2. However, that would be insufficient in itself to make the lender a primary wrongdoer. In order to give rise to a primary liability on the part of the lender, the commission must be secret. If there is partial disclosure which suffices to negate secrecy, there is binding authority that the lender can only be held liable in equity as an accessory to the broker’s breach of fiduciary duty.

   3. The Court found that in Hopcroft, there was no disclosure, and insufficient disclosure in Wrench to negate secrecy. The payment of the commission in those cases was secret, and the lenders were therefore liable as primary wrongdoers.

   4. In the third case (Johnson), the Court found that there was sufficient disclosure to negate secrecy, but insufficient disclosure to procure the consumer’s fully informed consent to the payment. The lenders in Johnson were liable as accessories for procuring the brokers’ breach of fiduciary duty by making the commission payment to them in the circumstances in which they did.

   5. In relation to the CCA 1974, the mere fact that there was no disclosure of the commission, or only partial disclosure, will not necessarily suffice to make the relationship between lender and consumer “unfair” for the purposes of the 1974 Act. However on its specific facts, Mr Johnson’s claim under the 1974 Act succeeded.

Consequences

10. Lenders are very concerned about this judgment. It has major implications for the motor finance industry, and may open the floodgates for claims by consumers who have bought vehicles on finance and not received sufficient disclosure that the seller would be paid a commission. Lloyds banking group has scrapped commission payments across its £15bn motor finance arm and Close Brothers has paused all new lending. Lenders are arguing that the bar for disclosure has been set too high.

11. The judgment has consequences for the wider finance industry as well, for any consumer finance arrangements where the seller is also the credit broker:

    1. Going forward, it will be very important for the seller to disclose to the buyer in full any arrangements it has with the lender. Partial disclosure will not be sufficient.

    2. There are also concerns that the judgment could expose lenders to claims that commission payments were not fairly disclosed across other financial products.

12. Two other points to note:

    1. This case was not limited to regulated products: this case concerned common law, not the FCA’s rules.

    2. Given the large number of claims to which this relates, and the significant implications for the industry, it is likely that leave to appeal to the Supreme Court will be granted. Watch this space.