When consumers are in the driving seat: key takeaways from the recent motor finance appeals

From PPI to mortgage broker commission, the mis-selling of finance is often in the news headlines.

Most recently, there has been significant attention relating to car finance: the Court of Appeal (CoA) upheld the appeal of three cases regarding discretionary commission agreements made to car dealerships.

Susan Howe, partner and team head, and Chloe Squire, trainee solicitor, both in our dispute resolution team, examine the judgment and consider its ramifications.

Background

On 25 October, the Court of Appeal considered three linked cases – Johnson v FirstRand Bank Limited, Wrench v FirstRand Bank Limited, and Hopcraft v Close Brothers – and ruled in favour of the customers in all three.

All cases began in the same way; all claimants approached a dealership looking for a vehicle, subsequently purchased one via financing, and entered into a credit agreement with the lender.

Each customer was provided with only one lender offer, which they accepted, and then entered into a finance agreement with the lender. The broker received a commission from the lender in addition to making a profit on the sale of the car.

However, none of the customers were aware of this arrangement, which was incorporated into their ongoing interest payments to the lender.

The judgment

The nature of the claims was slightly different. In the cases of Johnson and Wrench, the terms and conditions of the contracts vaguely referenced commission being paid (but this was neither clear nor brought to the claimants’ attention), whereas commission was not disclosed at all in the Hopcraft case.

This was a key factor in the ruling, and the CoA highlighted the necessity for brokers to fully disclose any commission they receive to their customers. 

The CoA also noted that the dealers had multiple roles: as well as being sellers of the cars, they were also acting as credit brokers on behalf of the claimants, whilst being agents to the lender.

Whilst it is common for individuals or organisations to have multiple roles in finance transactions, the CoA determined that the dealers, acting as credit brokers, should have provided a ‘disinterested duty’ to the customers: in other words, providing impartial or ‘disinterested’ information/advice.

In tandem to this ‘disinterested duty’, the CoA found that the dealers had a fiduciary duty to their customers, in which they essentially should have sought to obtain the best possible deal for their customers.

Who is liable? 

As a secret commission case, the lender in the Hopcraft case was determined as the primary wrongdoer and, therefore, has the primary liability to repay the commission to the claimant.

However, as partial disclosure claims, the cases of Johnson and Wrench were more complex.

In partial disclosure claims, the claimant must prove that the lender assisted the dealer in breaching their fiduciary duty. This involves showing dishonesty, and CoA stated that turning a blind eye can satisfy the requirement that there was dishonesty. If proven, the lender will be held responsible for assisting in the broker’s breach of fiduciary duty.

Additionally, to hold a lender liable in partial disclosure cases, it must be shown that the lender knew about the relationship between the customer and the broker and knew that the broker was getting a commission. The lender must also have failed to ensure that the customer fully understood and agreed to the commission payment.

The CoA stated that for consent to be fully informed, the customer must be told all important details, including the amount of commission and how it is calculated.

What’s down the road?

This decision could lead to a rapid increase in claims alongside the claims the County Courts are already dealing with. This is because this decision states that finding a disinterested duty can go some way to establishing a fiduciary duty; a requirement for this type of claim.

The CoA findings also show that a case involving nonmeaningful disclosure should be subject to the less demanding legal test for fully secret commissions, which could make it easier for claimants.

The decision also demonstrates that it is not enough for the commission to be simply referenced in the terms and conditions, even if these terms have been incorporated and signed against. This will not be enough to defend claims especially when dealing with consumers.

Steer away from legal trouble

Although it is early days, there is discussion that this decision could impact areas beyond the motor finance industry. As a result, any lenders or brokers may find it prudent to seek legal advice in reviewing their terms and conditions for both previous and future loan agreements.

To discuss your business terms and conditions, or if you have any questions about potential business disputes, please contact Susan Howe using [email protected].