Court of Appeal judgment in motor finance commission cases widely impacts UK credit brokers and lenders

On Friday 25 October 2024, the Court of Appeal handed down in its significant judgment in 3 conjoined motor finance commission claims, allowing the customers' appeals: (1) Johnson v FirstRand Bank Limited (London Branch) T/A Motonovo Finance (2) Wrench v FirstRand Bank Limited (3) Hopcraft v Close Brothers Ltd [2024] EWCA Civ 1282. The timing of the judgment is crucial, with the motor finance sector already in the spotlight while the FCA undertakes a review of discretionary commission arrangements, with customer complaints on hold pending the outcome of the review.

The CoA made several unexpected findings, which will have substantial ramifications for brokers and lenders of motor finance and will potentially impact any business which relies upon the use of credit brokering intermediaries to introduce finance to personal or business customers. We have examined the decision and its implications in detail in the attached note, which we summarise below. It is clear that pending an appeal of the decision, lenders and brokers will need to take action to review of all aspects of customer communication in brokered deals, including examination of their customer journey, ensuring transparency in commission arrangements with details set out clearly in contractual documents.

The key findings from the judgment

• The car dealers who the sold motor finance hire-purchase agreements were credit brokers.
• It was part of the credit broker's role to provide information to the lenders on the customer's behalf, and to the customers about the available finance. The Court found that the very nature of these obligations gave rise to a duty to provide information, advice or recommendation on an impartial or disinterested basis to the customer (as borrower) in relation to the credit available (the 'disinterested duty');
• The dealers, as brokers, also owed a fiduciary duty, when locating finance for the customers. The duty arose as the brokers were in a position of trust and confidence for unsophisticated borrowers to source lenders. A conflict of interest would arise unless the borrower provided informed consent for the receipt of commission.
• These duties would apply unless it was made clear to the customers that they did not apply or that the brokers were not able to act impartially.
• If the commission is kept entirely secret from the customer, the lenders (and brokers) will have primary liability to the customers for breach of the disinterested duty as payer of the commission. Mere disclosure in the T&Cs of the fact that a commission may be paid was not sufficient to negate secrecy.
• Even where the fact of the commission was not secret (and therefore not a breach of the disinterested duty), in order for the credit brokers to receive the commission in compliance with their fiduciary duties the borrowers must have provided their fully informed consent to it. For the borrower to be able to provide fully informed consent, the brokers were required to disclose all material facts that might have influenced a borrower's decision to enter into the credit / hire-purchase agreement; this could include the amount of the commission / all remuneration provided by the lender to the credit broker, and other relevant details. No such disclosures were provided.
• In such a case, the credit broker will have primary liability to the customer for breach of fiduciary duty, and the lender will be an accessory to the breach by paying commission when it knew fully informed consent had not been obtained. The lender will be deemed to have acted dishonestly by either knowing about lack of consent or deliberately turning a blind eye to breach of the broker's fiduciary duty. The CoA said the test for dishonesty would be met by the lender failing to check if there has been full disclosure and taking a deliberate risk. The CoA took into account that the lender has a direct contractual relationship with the borrower and could spell out the position regarding commission.
• The relationship between the customer and the broker was not necessarily unfair, for the purposes of the Consumer Credit Act, just because the broker receives the commission. This is a fact sensitive issue and in Johnson the relationship was deemed unfair due to provision of a misleading suitability statement and the amount of commission being excessively high compared to the loan amount.
• The CoA based its decision on the lines of authority which the court admitted are not easy to reconcile. The CoA therefore recommended that the Supreme Court review the issue and it is understood that the lenders are appealing.

The implications, industry reaction and anticipated next steps

These are reviewed in detail in the attached, and can be summarised as follows:

• The finding of a fiduciary duty owed by brokers is much wider than previously understood.
• We are aware that claimant and claims management firms are already using the breadth of the judgment to recruit new claims.
• The decision potentially covers all intermediary/broker-lead business/products where commission is paid, including in business to business markets for both regulated and unregulated products. This wider impact is not addressed in the judgment.
• The CoA suggested that all material facts would need to be disclosed to a borrower, which could cover all remuneration received by a broker, such as fees and volume-linked payments. In light of the judgment, the Finance & Leasing Association (FLA) has published an updated briefing note on commission disclosure and consent, which is reviewed in the attached.
• To obtain informed consent, any disclosures about commission should not be 'buried in the small print' but prominent, timely and clear. Terms and conditions and pre-contract documents will therefore need to be reviewed.
• Given the potential for accessory liability, lenders may need to put in place checks for the broker's disclosures or implement their own clear disclosures in the lending documentation.
• The CoA said that customers in a non-status lending market are likely to be considered not only unsophisticated but also vulnerable. This assessment has a wide impact for the motor finance lending market with ramifications for lenders to examine the 'customer journey'.
• The disclosure required by the decision goes beyond the FCA's consumer credit disclosure requirements at CONC 4.5.3R, which provide that an intermediary must prominently disclose the nature and extent of the commission arrangements if there is a risk to impartiality. However, the judgment suggests the amount of commission must be disclosed as well as placing obligations on the lender to also disclose the commission arrangements, if the broker has not done so.
• The FCA's review into the motor finance sector is now due to end 11 January 2025 – query whether this will have to be extended pending an appeal to the Supreme Court. The attached note reviews the points that we consider are vulnerable to appeal, including whether it is reasonable to impose a fiduciary duty on a broker and how the scope of that duty can go beyond the CONC rules set out above.
• The FCA is understood to be under pressure to make an announcement and has said it is reviewing the CoA decision, so we await further statements that may be made to quell further court claims and settle the market.

Where next in the courts

1. Supreme Court – intervention: some lenders are considering direct intervention into the leave to appeal application process to the Supreme Court (with leave already having been refused by the Court of Appeal). Others are considering an intervention alongside industry bodies, principally the FLA.
2. Claims and distress –prospective contractual claims with supply chain counterparties and notifications to insurers to maximise the prospects of PI and other coverage. Managing the risk of supply chain distress and failure in light of exposures to customer claims and redress.
3. Contagion risk –there will be affected FS and non-FS products which are offered through a range of indirect sales channels such as brokers, but also including comparison sites and other 3rd party distributors.
4. Small claims and FOS –volume claims (bulk and omnibus) and complaints similar to other commissions, emissions and PPI including implications of stays and other case management orders.