Vehicle Finance claims drive forward with a key Court of Appeal Judgment – but what are the implications?

A Court of Appeal judgment exploring the payment of commissions in the vehicle finance industry has been handed down by the Court of Appeal, finding in favour of the claimants and ordering repayment of the commission plus interest to the claimants. This decision comes amid the backdrop of the hotly discussed FCA investigation into vehicle finance complaints involving discretionary commission arrangements ("DCA") and a number of complaints sat at FOS and before the County Courts. We explore the key takeaways from the judgment.

On 25 October 2024, the Court of Appeal handed down a single judgment in three joint appeal cases of (1) Johnson v FirstRand Bank Limited, (2) Wrench v FirstRand Bank Limited and (3) Hopcraft v Close Brothers. Click here for more information. 

In each case the claimants had visited a motor dealership and purchased a vehicle using vehicle finance.  The car dealer had assisted the claimants with obtaining finance via a provider (the defendant lenders in the case) to purchase the vehicle. Commission was paid to the broker/dealers by the defendant lenders for introducing the claimants to the lender. 

The issues before the Court of Appeal

 In each instance, the claimants brought proceedings against the lenders (not the broker/dealers) on the basis that they were unaware of the payment of any commission by the lender to the broker/dealer. 

The court assessed whether the commission was disclosed to the claimants and in doing so whether it was a secret commission or partially disclosed and in turn, what that meant in relation to the legal steps needed to establish a claim against a lender.

Secret Commission Cases

 If a commission is secret then that is enough to establish liability against the lender as a primary wrongdoer where the broker/dealer owes a so-called disinterested duty. A disinterested duty was defined as one where the car dealer, acting as a broker, owed a duty to provide any information, advice or recommendation on a disinterested and impartial basis.  It is not the same as a fiduciary duty and it was not necessary for the claimant to establish that the dealer/broker owed them a fiduciary duty.

The broker/dealer owed a disinterested duty in the three cases and that duty would arise unless the broker/dealer said something that was sufficient to bring home to the customer the fact that the broker/dealer was free to promote their own self-interest at the customer's expense.  In such cases the direct claim against the lender would be for: (1) the secret commission and (2) rescission of the transaction as of right subject to counter-restitution.

In all three cases, the broker/dealer owed a disinterested duty to the claimant.  In one case, it was admitted that the commission was secret and so that was enough for the appeal to succeed.  That left the other two cases.  In one case it was conceded that a partial disclosure had been made (and so the court went on to consider partial disclosure cases).  The Court of Appeal notably doubted whether the concession should have been made (and seems to have been inclined to find the commission was in fact secret) but was bound by the concession.

For the one remaining case, the Court of Appeal found the commission was secret.  Despite the lender's standard terms which included a statement that commission "may" be payable to the car dealer, this was insufficient to amount to a disclosure of the commission.  The Court of Appeal said there was a distinction between the possibility that commission may be paid and telling someone it will be paid.  The Court of Appeal also said that in general terms a claimant/customer cannot claim information was kept secret if the information in question "would be clearly and openly conveyed to any reader in a document that they deliberately do not read especially if that document is designed for that purpose, they were directed to read it carefully and they signed it".  That said, putting an unsophisticated customer on inquiry does not constitute disclosure.

Whether a disclosure is made depends on the facts of the case.  In the case before the Court of Appeal, the court found that disclosure had not been made referring to the fact that – the possibility of commission was buried in the small print, there was no obligation on the broker/dealer to say anything about the commission, there was no expectation the customer would read the documents and the documents were themselves misleading. 

For future cases, the reference in documents to the possibility of commission being paid is not itself fatal to a finding that the commission was secret – the question will come down to whether enough was done to bring the salient facts to the attention of the borrower in a way which made their significance apparent. 

Patrial Disclosure Cases

 If there was a partial disclosure (i.e. sufficient disclosure to negate secrecy), the lender may be liable as an accessory where (1) the relationship between the customer and broker/dealer is a fiduciary one (and it appears likely this will be the case for all vehicle finance cases) and (2) payment of a commission to the fiduciary (i.e. the broker/dealer) puts them in a position of conflict unless full disclosure and consent of the customer is obtained before the payment is received (and the latter is a defence to the claim for breach of duty – so it's up to the defendant to establish informed consent).  Further, for the lender to be liable as an accessory the lender must know it has procured a wrongful act or deliberately turned a blind eye to it.

The issue of disclosure (i.e. whether a commission is secret or not in the first place) and informed consent are likely to come down to consideration of the same documents and the Court of Appeal itself noted that "… the fact there is no informed consent follows automatically from the finding that there was only partial disclosure…".

The Court of Appeal found that the relationship between the broker/dealer in each case was a fiduciary one as the claimants relied on the dealer to find them an offer that met their needs and was at the very least competitive with other readily available sources of finance. 

Further, there was an obligation to tell the claimants the amount of commission and there could be no informed consent if the claimants did not know how much the commission was.  The Court of Appeal said "… It was not good enough for the lenders to tell the claimants that the amount would be available from the brokers on request…".  As a result, in the one case involving a partial disclosure, there was a failure to obtain informed consent. 

On the final issue of whether the lender knew about the wrongful act – the Court of Appeal said "… It should be relatively easy to establish the requisite knowledge of the essential facts" noting that the lender was aware of the agency relationship between the broker/dealer and the claimant/customer, the customer was financially unsophisticated, and the customer would expect the broker to act in their best interests – the lender knew all of this.  The lender also knew about the fact of the commission as it is paying it.  As a result, the lender was liable as an accessory and had to pay the customer the commission plus interest.

What about the Consumer Credit Act 1974?

 One of the claimants, Johnson, also asserted claims under sections 140A-C of the Consumer Credit Act 1974 based on the relationship between the borrower and the lender arising out of the credit agreements being an "unfair" relationship given the non-disclosure of the amount of the commission and/or because of the circumstances which rendered the broker in breach of the disinterested duty. 

The Court of Appeal found that the relationship arising out of the agreement between the claimant and the lender was unfair for reasons including the failure to disclose the commission.  The Court of Appeal noted that the fact a broker receives commission which a borrower is unaware of, does not automatically lead to the relationship between the borrower and lender being unfair and factors such as the level of commission compared to the sum borrowed are relevant.

Implications for the motor finance industry and beyond

 Commissions are common in the FCA regulated world.  For brokers and product providers (whether its lenders or others), the case emphasises a striking need for clear and accessible disclosure practices on commissions.  If a commission is secret it leaves the position arguably difficult to defend.  For partial disclosure cases, the position is not as straight-forward but the findings of the Court of Appeal arguably assist claimants more than they do entities paying or receiving commissions.

In response to the judgment, the FCA has shared that they are "carefully considering the decision". This follows the extended pause to the time firms must provide a final response to customers advancing motor finance complaints involving a DCA. The FCA is due to set out the next steps in its review in May 2025.  Outside of the motor finance market, the FCA is already looking at commissions in the life protection market under the auspice of the Consumer Duty and fair value – and it appears unlikely the FCA's intervention when it comes to commission will stop at the motor finance market.

Both FirstRand and Close Brothers have since confirmed that they will be seeking permission to appeal to the Supreme Court and given the Court of Appeal's comments that clarity from the Supreme Court would be helpful, it appears likely that permission will be granted – so not the end of the road yet.