UK Supreme Court grants permission to appeal landmark case on motor finance commission payments and disclosure thresholds

Last week the Supreme Court granted permission to appeal the Court of Appeal's decision in a case examining the permissibility of motor finance commission payments, which challenged traditional legal thinking relating to customary commission arrangements across all retail sectors, and which may, if upheld, cause regulators to take a more aggressive approach to historical commission payments in the motor finance industry

On 25 October 2024 the Court of Appeal handed down its decision in three cases concerning the payment of commission to car dealers acting as brokers arranging financing for their customers¹.

Prior regulatory position

The UK Financial Conduct Authority ("FCA") banned discretionary commission arrangements in January 2021 in order to remove the incentive for brokers to increase the interest rate that a customer pays for their motor finance. Since then, motor finance firms have been inundated with complaints claiming compensation for commission arrangements paid prior to the ban. According to the FCA, motor finance firms have rejected most of these claims on the basis that they have not acted unfairly nor caused their customers loss pursuant to the applicable legal and regulatory requirements at the relevant time. However, the Financial Ombudsman Service ("FOS") has recently upheld two of these complaints. In another recent development, on 17 December 2024 the High Court dismissed a legal challenge to the FOS's decision to uphold one of these complaints.

The FCA wrote to motor finance firms in April 2024 to remind them that they must maintain adequate financial resources at all times.

The Court of Appeal Decision – background

The Court of Appeal heard three appeals together on the basis that the cases concern the common situation in which a consumer seeks to buy a car from a motor dealer, and is offered the option of finance which the dealer says it can arrange.

All three claimants were financially unsophisticated consumers on relatively low incomes who, prior to January 2021, engaged car dealers as their credit brokers to arrange hire-purchase agreements on their behalf. On each occasion, only one offer of finance was presented to, and accepted by, the claimant. Each relevant dealer made a profit on the sale of the car, but also received a commission from the lender for introducing the business to them.

Each claimant brought proceedings in the County Court against the defendant lenders seeking, among other things, the return of the commission paid to the credit brokers. All three claimants contended that the brokers owed them a duty to provide information, advice or recommendation on an impartial basis (i.e. a "disinterested duty"), and that they were agents acting on their behalf.

In each case, there was a different level of disclosure given to the customer regarding the payment of a commission to the car dealer for securing their financing arrangement. In Hopcraft, the commission payment was not disclosed to the consumer. In Wrench, the possibility that a commission may be payable to the broker was included in the financier’s standard terms and conditions. In Johnson, the possible payment of commission was disclosed in the financing firm’s standard terms and conditions, but also in a suitability document supplied by the car dealership which created the false impression that the car dealer was exercising its judgment in selecting a finance provider that “may be most appropriate” for the customer’s needs.

Miss Hopcraft's case, and Mr Wrench's primary case, was that the commission paid to the credit broker was secret. They contended that the lenders made the payment of the commission knowing of the "agency" relationship between the borrowers and the brokers and failed to disclose it, and they were therefore entitled to recission of the credit agreements and to payment of the commission as damages or as money had and received.

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. Although the credit agreement indicated that commission might be paid, the claimants were not told that it would be paid, nor the amount nor any other material facts about the commission.

The Decision – key findings

1. Car dealers acting as credit brokers owed their customers a "disinterested duty" and a fiduciary duty, which arises in tandem with and in consequence of there being a disinterested duty.
2. If the payment of commission was secret, the lenders are liable as primary wrongdoers giving rise to primary liability.
3. If there is sufficient disclosure of a commission to negate secrecy, but that disclosure is insufficient to procure the consumer's fully informed consent to the payment, then the lenders are liable as accessories for procuring the brokers' breach of fiduciary duty by making the commission payment in such circumstances.
4. A commission is secret if there has been no disclosure or only partial disclosure. Although in some cases partial disclosure is enough to negate secrecy, burying a statement that commission may or will be paid in the fine print, which the lender knows the borrower is highly unlikely to read, is unlikely to be sufficient to negate secrecy.
5. The standard of disclosure is fully informed consent and, depending on the financial sophistication of the consumer, this extends to telling the consumer all the material facts that might have affected his or her decision to enter into a financial agreement, including the level of commission payable and how it was calculated.

It did not matter on which basis the commission was charged – the level of disclosure, and with respect to the car dealer’s liability, the duty the broker owed to the consumer, were the deciding factors as to liability. In the cases considered by the Court of Appeal, commission was either charged as:

1. a percentage of the difference between the lowest rate of interest in the permitted range agreed with the lender and the agreement rate (this commission structure is now banned by the FCA); or
2. as a fixed percentage of the amount borrowed by the customer.

The remedies available in this context are: (i) rescission of the credit agreement, in which case, the interest on the loan would be repayable to the consumer, but the consumer would not be entitled to the principal of the loan; (ii) payment of the commission as damages or as money had and received.

Permission to appeal granted

After the Court of Appeal denied an initial application for permission to appeal, the motor finance dealers involved requested, and have been granted permission, to appeal the decision directly from the Supreme Court.  The Supreme Court will hear the appeal before the end of March 2025.

Market reaction

The FCA issued a statement on 29 October 2024 calling for clarity on whether this was the court's final word on the issue. The FCA said it was considering what impact the Court of Appeal’s judgment has on its review into historical discretionary commission arrangements in the motor financing industry, including both its timeline and scope.

The FCA further confirmed that it has paused the 8-week deadline that firms ordinarily have to respond to these types of claims until December 2025 and acknowledged that, as it stands, the Court of Appeal has made the law clear, such that if not overturned on appeal, firms will need to handle any complaints in line with its decision.

Implications

The decision has been likened to the payment protection insurance ("PPI") scandal, which lead to £50 billion in compensation payments. Prior to the Supreme Court's recent grant of permission to appeal, it was reported in the press that some banks have projected losses of between £23 to £30 billion and Consumer Rights Solicitors, the firm acting for the claimants, has estimated the potential liability to be as high as £42 billion. It was also reported in the press that some banks were allocating large sums between £300 to £450 million to deal with any potential liability.

The Court of Appeal's decision certainly goes beyond the standard of disclosure established in 2021 by FCA, namely that consumer credit firms and broker firms must disclose the nature and existence of commission in their financial products. Depending on the outcome of the Supreme Court appeal (and in the interim), the decision may result in an increase in the number of complaints motor finance dealers receive and procedures should be put in place to handle these complaints appropriately and pro-actively.

Pending clarification from the Supreme Court, lenders may still consider it prudent to evaluate their standard contractual terms and sales documentation with respect to any references to commission payable and specifically in relation to any potential conflict of interest which may arise in contracting with an intermediary to arrange financing on behalf of a consumer.