Lenders may have set aside billions of pounds in expectation of reimbursing motorists who were mis-sold their car finance deals, but a Supreme Court ruling means that fewer drivers will now be eligible for compensation.
On August 1, the Supreme Court delivered its long-awaited, and highly-anticipated, ruling on Discretionary Commission Arrangements (DCAs). The landmark decision in the Johnson, Wrench and Hopcraft appeals clarifies the legal framework for dealer commissions and consumer protection.
Justices declared that vehicle dealerships do not owe a fiduciary duty to their customers, and that undisclosed commissions do not automatically count as bribery.
The ruling was delivered on conjoined appeals on three cases – Johnson v FirstRand Bank Limited, Wrench v FirstRand Bank Limited, and Hopcraft v Close Brothers Limited (Johnson). The three cases centred on whether it was fair for finance lenders to pay commissions to car dealers without telling customers, particularly where those dealers were acting as credit brokers.
The Cases
All three appeals had been heard in the Court of Appeal in October, when the court ruled that any finance agreement without clear, up-front disclosure of commissions paid was unlawful.
Each of the three cases involved a customer who signed up to a hire purchase (HP) agreement, arranged by a motor dealer, who received a commission from the lender.
In each case, the customer was not informed about the size or nature of that commission. The customers argued that the commissions in questions were ‘secret’ bribes and that the dealers breached the fiduciary duty they owed their customer by accepting commissions without informed consent. They further argued that the lenders had an accessory liability or had dishonestly assisted in these breaches.
In the Johnson v FirstRand Bank Limited case, they also argued that the finance was mis-sold as it was ‘unfair’ under the Consumer Credit Act 1974.
The Court of Appeal upheld the claims, ruling that any finance package without full and frank commission disclosure was unlawful. The decision served notice to the finance sector, which prepared en masse to reimburse large numbers of customers with compensation packages.
The Supreme Court Decision
The Supreme Court partially reversed the Court of Appeal outcome, ruling that the court had failed to appreciate that dealers maintained a commercial agenda throughout the transaction, including when arranging finance as they were the vehicles’ sellers. By treating the dealer as if their role shifted to representing the customer once a vehicle had been selected and the price agreed, the court misinterpreted the nature of the dealer’s involvement.
The Justices rules that too much weight was placed by the Court of Appeal on the notion that customers trusted dealers and were in a vulnerable position. However, such circumstances do not, in themselves, establish a fiduciary relationship. Fiduciary duties arise only where one party undertakes to act solely in the interests of another, setting aside any conflicting personal interest.
That standard was not met here. The dealer remained an independent commercial party, engaged in a negotiation at arm’s length and advancing its own financial objectives. This position was fundamentally incompatible with any notion of fiduciary responsibility, which requires undivided loyalty and the absence of self-interest.
Justices’ Findings
Bribery – The Supreme Court affirmed the continued relevance of the tort of bribery but clarified that it only applies where a fiduciary duty exists. In these cases, no such duty arose between car dealers and customers.
Fiduciary Duty – The court also ruled that a relationship between a dealer and customer is a commercial, rather than a fiduciary one.
This means that:
Without the existence of a fiduciary duty, the bribery and breach-of-trust claims failed.
‘Disinterested Duty’ – The Supreme Court rejected the argument that a lessor, duty of “disinterested advice” was required as a pre-condition for remedies in respect of bribes or secret commissions. The Justices ruled that the lessor duty decision which came from the conjoined appeals in Wood v Commercial First Business Ltd & ors and Business Mortgage Finance 4 plc v Pengelly [2021] EWCA Civ 471 (Wood), was incorrectly decided.
In the case of Wood, the Court of Appeal ruled that the payee must owe a duty to provide disinterested advice or recommendations or information. It clarified that bribery and breach-of-trust claims require a fiduciary relationship.
Accessory Liability – Although the accessory claims became uncertain due to there being no fiduciary breach, the court addressed the test for lender liability.
It confirmed that a lender would only be liable for dishonest assistance if it:
This sets a high threshold for future accessory claims.
Unfair Relationship Found in the Johnson Case – The Supreme Court upheld Mr Johnson’s claim that the credit agreement was unfair under section 140A of the Consumer Credit Act 1974, even though it corrected factual errors in the Court of Appeal’s reasoning.
The Supreme Court emphasised that:
In Mr Johnson’s case, the court found:
The Supreme Court ruled that the relationship was unfair, and ordered that Mr Johnson be repaid the commission amount, with interest at a commercial rate from the date of the agreement.
Implications of the Judgment
The landmark ruling means that, for consumers, claims based on the existence of bribery or breaches of fiduciary duty will now face significant legal hurdles. However, claims under the ‘unfair relationship’ provisions of the Consumer Credit Act remain viable, especially where high commissions were not disclosed or the customer was vulnerable or misled. Claims will also remain viable in cases where the dealer appeared to be acting in the best interests of the customer.
For dealers and lenders, the ruling offers legal certainty in that paying commissions to brokers is not inherently unlawful.
However, there is a renewed focus on:
What Next?
The FCA has previously stated that it would consider a redress scheme following the judgment. A consultation is expected within six weeks, by mid-September.
In the meantime:
Our View
This judgment brings much-needed clarity to a contentious area of law:
At Barings Law, we have been closely monitoring developments regarding motor finance commission claims. We will now await the FCA’s proposed redress scheme and share this once published.
If you have a motor finance commission claim with Barings Law, our team will send our updates to you as and when developments happen. We thank you for your continued patience in us.
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