Court of Appeal Ruling on Secret Commissions in Motor Finance Arrangements

On October 25, the Court of Appeal handed down a landmark judgment in three conjoined motor finance commission claims. The ruling followed appeals made by three individuals who purchased second-hand vehicles through dealer-arranged finance agreements.

In each case, the dealer acted as a broker, arranging finance with a single lender, whose offer the customer accepted without being aware of commissions paid to the dealer. Close Brothers Ltd and FirstRand Bank Limited (trading as MotoNovo Finance) were the lenders involved in these appeals and were who the appellants were seeking to claim the undisclosed commissions from, arguing that it impacted the impartiality of the advice by the brokers.

The Court of Appeal deemed it unlawful for lenders to pay ‘secret commissions’ to brokers without the customer’s knowledge. The ruling addresses critical transparency issues within the motor finance industry and, if not appealed to the Supreme Court, could set a precedent for consumer rights across other sectors that rely on the use of credit brokering intermediaries to introduce financial products to customers. This may include sectors such as retail, consumer goods and property-secured loans where finance agreements are often handled in a similar manner.

Additionally, this ruling places a renewed pressure on the Financial Conduct Authority (FCA) to address their ongoing investigation into motor finance arrangements. In 2019, the FCA published their ‘final findings’ in which they reviewed whether lender-broker commission arrangements in motor finance were leading to customers being overcharged on their finance agreements. Following their earlier work, and their ban on DCAs in 2021, they have since announced a potential redress scheme at the start of this year which is subject to the outcome of their investigation. In September, the FCA extended its deadline for completing the investigation so they could, in part, account for the outcome of the case as it would be relevant to their review.

In response to the Judgment FCA chief executive, Nikhil Rathi, said, “The judges’ ruling was rooted, not in the FCA’s rules, but the longstanding common law principle of fiduciary duty which meant that the broker – the car dealer here – must act in the best interests of the customer and not put themselves in a position of conflict. 

“Since the Judgment was issued, we have been in close contact with the firms involved, the wider sector and the government to monitor the market, analyse the impact on industry and consumers and identify what action is required. 

“First and foremost, we need clarity on whether this is the courts’ final word on the issue.”

While the regulatory body has acknowledged the Court of Appeal’s judgment, their stance at requiring further clarity stems from the two lenders intending to appeal the decision. The defendants are currently seeking permission to appeal, and the Supreme Court will first determine whether they have that permission to appeal. Meanwhile, their priority remains on ensuring customers are treated fairly under the law. They are encouraging firms to engage with them to assess the ruling’s impact on their products and services and are working closely with the financial services sector, the Financial Ombudsman Service, and the government to understand any further consequences. The Appeals concern both DCA and non-DCA commissions meaning the analysis of the commission arrangements will assist the FCA with their ongoing efforts to determine whether motor finance customers have been overcharged.

As for the motor finance industry, companies are now taking measures to try to limit the fallout that could result in tens of billions of pounds in compensation and other legal costs being paid out. Close Brothers, one of the defendants in the case, halted new car loans after the ruling, which saw its shares plummet by 37%. Lloyds Banking Group, which owns Black Horse, Britain’s largest car finance provider, suspended commission payments for new motor finance loans and has put aside £450 million for potential payouts, although it has been reported by analysts at RBC Capital that they will need at least £2.5 billion to £3.9bn in the worst-case scenario.

The industry held emergency talks with the Treasury and the FCA to try and come up with a solution as RBC has estimated the industry as a whole could be forced to pay out up to £23 bn in redress.

For claimants pursuing compensation for undisclosed commissions from motor finance providers, such as those who Barings Law represents, the Court of Appeal’s judgment represents a promising shift. Prior to this ruling, no authoritative judgment clearly established that motor finance brokers owed a fiduciary duty to disclose such commissions to their customers. In this landmark case, the Court of Appeal emphasised that brokers had breached their duties by failing to obtain informed consent from customers, who were unaware of the commission amounts involved. Notably, these commission amounts paid for the Appellants in the Appealed claims ranged from modest sums to more than £1600, yet the court held that, even where low-value commission payments were paid, the fact the broker did not disclose this nevertheless breached the duty owed by the broker to their customer.

This finding provides a strong foundation for current and future claims, potentially accelerating negotiations with lenders and encouraging out-of-court settlements. The Judgment not only validates the need for transparency but also bolsters the likelihood of success for claims already in progress, creating a more favourable environment for claimants as they seek redress.

If you believe you have been mis-sold your car finance agreement, there is still time to submit a claim with Barings Law.

Our legal experts specialise in financial mis-selling, and we’re here to help you navigate the complexities of your case.

What’s more, your mis-sold motor finance claim will be carried out on a no-win no-fee basis, meaning there is no financial risk to you for making your claim. If we do not win your case for you, you won’t pay us a penny for our services. However, it is important that you cooperate with us at every stage.

All you need to do is fill in the form by clicking the button below. Our customer service team will obtain the documentation you have gathered, most importantly your finance agreement, so that our dedicated legal team can get to work investigating your case.

Pursue Legal Action with Barings Law

If negotiations with the lender or dealership prove unsuccessful, Barings Law will not hesitate to pursue further legal action on your behalf. Our experienced solicitors are well versed in handling cases related to mis-selling, and we will work tirelessly to fight for your best interests in court.

With Barings Law by your side, you can trust that your case will be handled with the highest level of expertise and professionalism, giving you the best possible chance of securing a favourable outcome.