£21bn Payout for Motor Finance Mis-Selling Victims following a Landmark Court of Appeal Ruling?

The Court of Appeal has handed down its decision in three combined appeal cases, in a judgment which has attempted to provide clarity in cases of “undisclosed commission” paid in motor consumer finance cases.

The three cases are.

• Johnson v Firstrand Bank Ltd =
• Wrench v Firstrand Bank Ltd and
• Hopcraft v Close Brothers Limited,

The decision noted tensions between the two authorities most often cited in such cases, the cases of Wood and Hurstanger (citations below), which were both binding on the Court of Appeal in this decision. However, the decision sought to provide an authoritative ruling to assist Judges dealing with a large number of cases in the County Court.

The general position of “undisclosed commission” cases

The facts of each case in the Appeal (and those making their way through the County Courts) tend to be similar. Generally, the cases involve:

1. A consumer is seeking to purchase a car from a motor dealer;
2. The motor dealer may present an offer of finance from a lender to the consumer to purchase the vehicle on the basis that it is an offer which is competitive and suitable;
3. The motor dealer is not only in the position of the seller of the vehicle to the consumer but also the credit broker between the consumer and the lender;
4. The lender may pay the motor dealer a commission under a side agreement, and the fact that commission may be paid (although not usually the amount or how it is calculated) is sometimes disclosed in the terms and conditions of the finance agreement and/or other documents given to the consumer.

The commission could be paid on either a “fixed” amount basis or on a “difference in charge” model in which the motor dealer had the ability to set the interest rate in a range of rates, with the higher interest rate providing for, the higher commission to be paid.

The Law – Pre-Appeal

• Before these appeals, the courts had primarily dealt with these cases using the principles arising from Wood if the commission had been termed a “fully secret commission” or from Hurstanger if the commission had been what had been termed a “half secret commission”.
• For an entirely secret commission, the situation described in Wood was akin to a bribe in which the payer is the “primary wrongdoer”, and the remedy would be actionable in common law and equity, including the rescission of the transaction. In Wood, the court found that the brokers owed the borrowers both a fiduciary duty and a duty to provide information, advice, or recommendations on an impartial or disinterested basis.
• For a half-secret commission, the binding authority in Hurstanger was that a partial disclosure, which sufficed to negate secrecy, meant that a lender could only be liable in equity as an accessory to the broker’s breach of fiduciary duty.
• A point to note is that in this Appeal, the court decided that the term “half secret” was inappropriate, as something is either secret or not. The Court of Appeal made clear that the correct test is whether there had been a disclosure of the commission and, if so, whether that was “partial disclosure” (i.e. the fact of commission being paid but not the amount or how it is calculated) or “full disclosure” (i.e. the amount of commission and how calculated).
• In the Appeal of Johnson v Firstrand Bank Ltd, the court was also required to decide whether or not there was an “unfair relationship” between Mr Johnson and the lender under s.140A-C of the Consumer Credit Act 1974 (“CCA”).

The Appeal Judgment

The appeal judgment, at 47 pages, is a must-read for all those dealing with cases involving commission between a lender and credit broker, especially in cases involving motor finance.

However, the judgment helpfully summarises at paragraphs 173(1) to 173(5) and 174(1) to 174(3) its key takeaway points, which are:

1. A statement in the terms and conditions of the credit agreement that commission may or will be paid, even when a borrower has neither read the statement nor been directed to it, does not necessarily have the effect of negating secrecy. “Burying a statement in small print which the lender knows the borrower is highly unlikely to read will not suffice”. Each case will need to be assessed on its facts.
2. For a “partial disclosure case”, it is necessary for a fiduciary duty from the broker to the borrower to exist to establish “accessory liability” on the payer of the commission. However, a fiduciary duty arises in tandem with and as a consequence of a disinterested duty.
3. If a fiduciary relationship arose in a partial disclosure case, then knowledge of the existence of the relationship and payment of the commission to the broker in a situation where the lender has not satisfied itself that a borrower has given fully informed consent will give rise to accessory liability on the part of the lender. It is not sufficient for a lender to rely on separate documents stating that a credit broker will bring the relevant information to the attention of the borrower if they are aware that this is not obvious to the borrower in the paperwork and when the lender knows there is a conflict of interest with the credit broker in receiving payment.
4. In all three Appeals, the Court of Appeal found that there was a disinterested duty sufficient to establish primary liability in the cases of Hopcraft and Wrench, which were secret commission cases. In all three cases, there was also a parallel fiduciary duty sufficient to establish the claim for accessory liability.
5. The lender was liable to repay the commission in all three cases.
6. In the case of Johnson, the relationship between Mr Johnson and Firstrand Bank Limited was unfair for s.140A-C of the CCA, which would entitle Mr Johnson to repayment of the commission.
7. Although unfairness would be a case-specific issue, in the Johnson Appeal, the amount of commission being so high compared to the amount of finance obtained (25%) was a critical factor in this finding of unfairness, as was a failure by the motor dealer/lender to disclose that there was a separate contractual duty from the motor dealer to give “first refusal” to Firstrand Bank Limited for finance. In contrast, Mr Johnson had been informed that the finance offer was from a “range of lenders”.

Conclusion

• The Court of Appeal has laid down a clear marker that lenders and brokers are expected to disclose clearly and fairly to consumers (especially consumers deemed “unsophisticated” when it comes to financial products) the amount of any commission which may be paid and the basis in which it is calculated so that the consumer can make a fully informed decision.
• The lender can no longer rely on the “partial disclosure” by way of a clause in its terms and conditions unless there is clear evidence that this has been brought to the borrower's attention. Whilst there is at the time of writing an indication that an appeal may be pursued to the Supreme Court, for now, lenders will need to review any finance agreements with borrowers, any introducer agreements with motor dealers and any lending policies to ensure that appropriate practices are implemented to mitigate accessory liability risks.
• For consumers, the decision will be welcomed, as cases underway in the County Courts in England and Wales (some of which had been pending this Appeal decision) will now be determined with a clear framework for District Judges to work with.
• Cases typically plead for relief, including both (1) recission of the finance agreement and/or (2) repayment of the commission.
• Given that the cases may be from finance agreements from some years ago where the vehicle has long since been sold (and therefore counter restitution is not available), it is anticipated that the most common remedy if the Claimant is successful will be repayment of the commission with appropriate interest at a “commercial rate”.

 References:

• Johnson v Firstrand Bank Limited [2024] EWCA Civ 1282 https://www.bailii.org/ew/cases/EWCA/Civ/2024/1282.html
• Wood v Commercial First Business Ltd [2021] EWCA Civ 471; [2022] Ch 123 https://www.bailii.org/ew/cases/EWCA/Civ/2021/471.html
• Hurstanger Ltd v Wilson [2007] EWCA Civ 299; [2007] 1 WLR 2351 https://www.bailii.org/ew/cases/EWCA/Civ/2007/299.html

Source:  

1. Landmark Court of Appeal ruling on car finance was 'very unexpected .... https://cardealermagazine.co.uk/publish/landmark-court-of-appeal-ruling-on-car-finance-was-very-unexpected-but-welcome/309398.
2. Lloyds weighs options after shock motor finance court ruling. https://www.thisismoney.co.uk/money/markets/article-14010281/Lloyds-weighs-options-shock-motor-finance-court-ruling.html.
3. UK car finance industry faces significant disruption as lenders halt deals .... https://bmmagazine.co.uk/news/uk-car-finance-industry-faces-major-disruption-as-lenders-halt-deals-over-commission-ruling/.
4. Dealers must reveal the commission earned on car finance deals. https://www.autoexpress.co.uk/consumer-news/364820/court-decision-car-finance-commission-threatens-huge-compensation-bills.
5. The Court of Appeal ruling opens the door to motor finance claims. https://www.financial-news.co.uk/court-of-appeal-ruling-opens-door-to-motor-finance-claims/.