In a landmark decision, the UK Supreme Court resolved three
conjoined appeals concerning the legality of commission payments
made by lenders to motor dealers in hire purchase car finance
arrangements. In this article we review the key points of the
decision, and what it means for the finance industry and affected
consumers.
Summary of the Supreme Court decision
The Supreme Court held that lenders were not liable for common
law bribery as a result of making commission payments to the
dealer-brokers. The dealer-brokers were also found not to owe
fiduciary duties to customers, meaning lenders could not be liable
as accessories to any breach of fiduciary duty. These findings
effectively restore the status quo in the financial services
sector, where commission payments have long been part of standard
commercial practice.
An exception arose in the case of one respondent, Mr Johnson,
where the Supreme Court held that he was entitled to succeed in his
claim under section 140A of the Consumer Credit Act 1974 (CCA). The
Court ruled that the relationship between Mr Johnson and the lender
was unfair because of the size of commission and the failure to
disclose the commission. An order was made for the dealer to pay
the commission to Mr Johnson with interest. This part of the
judgment is likely to set a benchmark for future statutory
claims.
Background to the appeal
In our previous article, Court of Appeal slams brakes on hidden commission
payments in finance agreements we examined three linked claims
concerning motor finance commissions. In each case the customer had
bought a second-hand car via motor finance arranged through a car
dealer. The dealers received a commission from the lender, which
was not disclosed or only partially disclosed to the customer.
The Court of Appeal found that dealers owed customers a duty of
impartiality when recommending finance, creating a fiduciary
relationship. Accepting commission from lenders on concluded
finance arrangements conflicted with that duty and the lenders were
therefore found liable for bribery (in two of the claims) or
dishonest assistance (the third). This article will not examine
this aspect in detail.
As discussed in our follow-up piece, Motor finance face off: predictions on the Supreme
Court’s judgment, the lenders appealed these findings to
the Supreme Court.
Fiduciary duty and how the court applied the law to the
tripartite relationship
The Supreme Court considered whether a fiduciary duty could
arise in a typical car finance deal, involving a customer, dealer
and lender, such that a commission payment would amount to a bribe
at common law or a breach of fiduciary duty. Their key findings
were:
- The arrangement was a standard arm’s length transaction,
with each party acting in pursuit of its own commercial interests.
The dealer’s offer to assist in securing a suitable finance did
not imply any abandonment of its primary objective of selling the
vehicle at a profit. - The dealer’s role in arranging finance was considered as
ancillary to their primary role of selling the car; it was not
provided as a separate service. - The dealers made no commitment to act exclusively in the
customer’s interests. - Dealers did not act as agents for the customers: they could not
bind them in legal relations with the lender, and customers signed
the agreements themselves. Although confidential information was
obtained by the dealer, this did not establish agency. - While customers were generally less informed or vulnerable,
this alone was not sufficient to place fiduciary obligations on the
dealer. - The Court dismissed the idea that the transaction could be
split into two stages (car sale and finance arrangement) with
differing duties. The dealer’s interest persists until
completion of the sale.
On this basis, the Supreme Court concluded that there was no
fiduciary duty and therefore no basis for bribery or equitable
claims relating to undisclosed commissions. As a result, the
lenders’ appeals were upheld.
Unfairness under section 140A of the Consumer Credit Act
1974
The Supreme Court also considered whether the conduct of the car
dealer Mr Johnson’s case created an unfair relationship under
section 140A of the CCA, which allows the courts to
intervene to vary or set aside credit agreements where the
relationship is unfair to the debtor.
The Supreme Court examined if the dealers’ involvement in
sourcing the finance packages created an unfair relationship under
the statute. Key factors included the transparency of commission
payments, the dealer’s role in negotiating finance terms and
whether the customer was placed at a disadvantage as a result of
the dealer’s conduct. The Supreme Court found that:
- The high commission payable in Mr Johnson’s case was a
“powerful indication of unfairness” and because it was
not disclosed, Mr Johnson had no opportunity to question it. - The dealer was contractually obliged to offer all finance
business to one particular lender first, effectively limiting
customer choice. This was not disclosed to Mr Johnson, and the
Suitability Document provided to him misleadingly suggested
impartial advice from a panel of lenders. - The dealer and lender breached several rules in the
FCA‘s Consumer Credit Sourcebook (CONC), including
failing to disclose commission payments (CONC 4.5.3R)
and failing to explain lender relationships (CONC
3.7.3R). - Although Mr Johnson did not read the documents provided, the
Court acknowledged he was commercially unsophisticated and
questioned to what extent a lender could reasonably expect a
customer to have read and understood the detail of the finance
documents, especially when key disclosures, such as the commission
payment were not prominently presented. As a result, Mr Johnson was
unaware of the commission, which contributed to the unfairness of
the relationship under section 140A CCA.
The Supreme Court accordingly ordered the lender to repay the
commission of £1,650.95 to Mr Johnson, with interest from the
date of the agreement (29 July 2017).
Implications for Car Finance Compensation
This decision is significant given the scale and importance of
motor finance arrangements in the UK. According to the
FCA, around two million people each year rely on
finance to buy a car. The widespread nature of such finance, and
the fact that undisclosed commissions were formerly common in the
market, means that the judgment had the potential to impact a very
large number of lenders and individual consumers on historic
finance agreements.
While the Supreme Court’s decision narrows the scope for
large scale payouts, consumers who entered into undisclosed
discretionary commission arrangements between 2007 and January 2021
may still be eligible for compensation, as well as those with
unfair relationship claims under the CCA.
The FCA responded swiftly to the Supreme Court
decision. Before markets reopened after the judgment, it confirmed in a press release that it will now
consult on an industry-wide scheme to compensate motor finance
customers who were treated unfairly.
Recognising the imperatives of quick compensation for consumers
and certainty for investors, it has said the consultation will be
published by early October, and the resulting scheme will be
finalised and launched in time for affected consumers to start
receiving compensation in 2026.
The precise shape of the redress scheme will become apparent in
the coming weeks, with matters to be explored in the consultation
including:
- Principles – how to balance potentially
competing principles, including comprehensiveness, fairness,
simplicity and timeliness. - Unfairness – how to weigh a range of
factors (including disclosure, the nature and size of a commission
and customer sophistication) in deciding whether a commission
relationship was unfair. - Calculation – how to calculate redress
– though it notes there may be a de minimis threshold, and
compensation is likely to be capped at the level of commission. It
will also consider what interest rate should be payable on
compensation. The FCA‘s current estimate is that
most consumers will probably receive less than £950 in
compensation per agreement.
The FCA has also indicated that it wants any
redress scheme to be simple for consumers to use directly, without
necessarily needing to involve a claims management company or law
firm.
While the Supreme Court decision delivers welcome clarity which
will now inform a consumer redress scheme to be implemented
swiftly, many questions remain as to how precisely the redress will
operate. We will report on the consultation in due course.
Read the original article on GowlingWLG.com
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