Are the latest decisions on disclosure of commissions today’s equivalent of Lord Denning’s “red hand” principle – Johnson v Firstrand Bank Ltd & Others

On 25 October 2024, the Court of Appeal handed down its decision in three combined appeal cases, being (1) Johnson v Firstrand Bank Ltd ("Johnson") (2) Wrench v Firstrand Bank Ltd ("Wrench") and (3) Hopcraft v Close Brothers Limited ("Hopcraft"), in a judgment which offers valuable guidance on managing consumer credit agreements to enhance consumer protection and promote transparency.

Background

Prior to January 2021 all three claimants engaged car dealers to arrange hire-purchase agreements (and in one case an additional personal loan) to acquire second-hand cars, with each dealership assisting the claimants in obtaining finance to fund the purchase. In each transaction the dealers were not only selling the cars but also acting as the credit broker. The dealerships received a commission from the lenders, with a structure that allowed the dealer discretion to fix the interest rate (the higher the interest rate, the higher the commission they received).  Subsequently, the dealers made a profit from the sale of the vehicle, in addition to commission from the lenders for introducing the business to them, financed by the interest charged under the credit agreement.

This discretionary model is known as a discretionary commission arrangement ("DCA") and was banned by the Financial Conduct Authority (“FCA”) in 2021 in an attempt to enhance transparency and fairness for consumers. Since this point, there has been an influx of complaints and claims made against finance companies, which led to the FCA announcing on 11 January 2024 that there would be a review into whether motor finance consumers had been overcharged due to the past use of DCAs.

Alongside the review, motor finance companies were given time to provide their final responses to complaints, and consumers more time to refer their complaints to the Financial Ombudsman. Due to the high volume of complaints received, the FCA has extended the timeframe for finance companies to respond until 4 December 2025. The FCA has also noted that before deciding its next steps, it wanted to consider relevant recent court decisions, including this Court of Appeal judgment and the judicial review, heard in October 2024, by Barclays Partner Finance of a Financial Ombudsman, on which a judgment is anticipated soon. 

In the case of Hopcraft, the paperwork provided by the dealer failed to disclose the manner in which the commission was to be calculated. Whilst in Wrench and Johnson, the terms and condition indicated that a commission 'may' be paid; however, the claimants were neither made aware nor informed that commission would actually be paid. The claimants issued proceedings against the lenders seeking the return of the commission paid, amongst other relief.  

Legal framework

Central to their claims were the principles put forward in two earlier Court of Appeal judgments relating to the disclosure of commissions:

Wilson & Another v Hurstanger Ltd [2007] EWCA Civ 299

Under common law principles, a broker owes a fiduciary duty to act in the consumer's best interests and not to put themselves in a position of conflict or make a secret profit. In this case, the Court of Appeal established that where details about the commission have been disclosed to an extent that negates secrecy, the lender may be liable in equity as an accessory. This liability arises if the broker owes the consumer a fiduciary duty and the disclosure provided was insufficient to obtain the consumer's informed consent.

Wood v Commercial First Business Ltd [2021] EWCA Civ 471 

The Court of Appeal held that where a commission has been paid without any disclosure of information, it was not necessary for a broker to owe a fiduciary duty to the borrower for there to be liability on the part of the lender paying a commission to a broker. Instead, it was sufficient that the broker owed a duty to provide information, advice, or recommendation on an impartial or disinterested basis ("duty of disinterest").

The implications

As you might expect, this judgment has prompted a significant reaction from the motor finance industry due to the Court's decision on the nature of duties owed by a dealer, when also acting as a credit broker, and the required duty of disclosure. In this ruling, the Court made it clear that lenders are required to disclose clearly and fairly to consumers 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. In practical terms, where there is a clause in the terms and conditions statement, a lender can no longer rely on "partial disclosure", unless there is clear evidence that the borrower has been informed and consented to the commission.

The FCA are already in the process of a review of historical motor finance commission arrangements and sales pursuant to its s166 FSMA powers. However, this decision goes beyond the rules introduced in 2021 on credit broking commission disclosure and will inescapably have an impact on the FCA's current work on the historic use of DCAs. Nikhil Rathi, Chief Executive of the FCA, wrote to Dame Meg Hillier, Chair of the Treasury Select Committee, on 13 November 2024 noting that eleven firms paused motor lending while they made changes to comply with the new standards. Of these, eight firms returned to lending, whilst three switched to a zero-commission model in the short term. The FCA also said that they are carefully monitoring the market and are engaged with lenders and brokers (including speaking to 63 firms) to understand their response to the judgment. Whilst they are still considering the decision, they have noted that "the judges' ruling was rooted, not in the FCA's rules, but the longstanding common law principle of fiduciary duty… the Court of Appeal has made the law clear and, if that is not challenged further, then firms need to handle any complaints in line with that".

In a decision redolent of Thornton v Shoe Lane Parking, in which onerous clauses sufficient notice, one can imagine the closer scrutiny of the circumstances under which a lender may now be held accountable to a consumer for inadequately disclosed commission on either a primary or accessory basis. Lenders are assessing the impact of the decision and the prospects of the likely appeal to the Supreme Court, whilst continuing to respond to other non-discretionary commission complaints and claims (see here).

This judgment is also expected to have ramifications on the wider industry as the principles are not restricted to motor finance transactions or consumer lending.

If you would like to discuss the impact of the decision in more detail, please contact a member of the team below.