The Court of Appeal has given its views on disclosure and fiduciary relationships in the context of motor finance commission, in a decision that has caused consternation in the market.
Background
In its judgment in the conjoined appeals of (1) Johnson v FirstRand Bank Limited (London Branch) T/A Motonovo Finance (2) Wrench v FirstRand Bank Limited, and (3) Hopcraft v Close Brothers Ltd[1], the Court of Appeal has delivered its views on a number of grounds on which commission payments received by motor dealers may be challenged.
Underlying each of the appeals were the circumstances in which a consumer had purchased a car from a motor dealer, and that dealer had also arranged finance to enable the consumer to purchase the vehicle. In each case, the (financially unsophisticated) claimant argued that they had not been aware that the dealer would receive commission from the lender for arranging finance, in addition to what they made from the sale of the car, and that they would have acted differently if they had been aware.
The key questions for the Court were:
- Whether the dealer owed a fiduciary duty to the customer, or at least a duty to act in a disinterested manner, when acting as a credit broker?
- If so, whether there had been any, or sufficient, disclosure by the dealer in relation to the commission they would receive for arranging credit?
- Whether the lender was liable for the repayment of the commission?
Considerable surprise has been expressed at the high bar set by the Court for dealers and lenders to get over in order to avoid a finding that one or both is required to account to the customer for the commission. A number of lenders are understood to have suspended new business activity following the Court of Appeal’s judgment, described by the Finance and Leasing Association as “significant and unexpected”.
The Court’s findings
The Court upheld the appeals of the claimants, finding that the brokers owed them a duty to provide information, advice or recommendation on an impartial or disinterested basis, and that the relationship was also a fiduciary one.
The Court concluded that:
“It is precisely because the brokers were in a position to take advantage of their vulnerable customers and there was a reasonable and understandable expectation that they would act in their best interests, that they owed them fiduciary duties”.
The liability of the lender depended on whether the commission was secret; if it was, the lender owed a primary liability to the customer to repay the commission. If there was sufficient disclosure, the lender could only be held liable in equity as an accessory to the broker’s breach of fiduciary duty.
In summary, the Court found that:
- It is not sufficient simply to include a statement somewhere in the terms and conditions to the effect that the dealer will or may receive commission. If the lender knows the borrower is highly unlikely to read the statement, that will not be sufficient to negate a finding of secrecy, meaning that the lender has a primary liability to account to the borrower for the commission.
“Lenders should not assume that they can escape primary liability for the payment of a secret commission merely by making a general reference to the possibility of such payment in a carefully concealed sub-clause of their standard terms”.[2]
- Even where there is no secrecy, where the dealer owes a fiduciary duty and/or a duty to act in a disinterested manner, the lender will have accessory liability to the borrower unless the lender has satisfied itself that the borrower has given their “fully informed consent” to the payment. This will inevitably be the case where the disclosure has only been partial, particularly if the lender has encouraged partial disclosure. In order for there to be fully informed consent, where borrowers are financially unsophisticated they must be told “all material facts” that might affect their decision to enter into the credit agreement.
- The existence of a fiduciary duty does not automatically mean that the amount of commission paid has to be disclosed. The Court contrasted the previously-decided case of Medsted, in which the borrowers were found to be sophisticated and knew that commission was paid to the brokers, although did not know how much. In Medsted, “the fiduciary duty did not extend to expressly informing the clients how much commission the broker would be paid. They could be expected to have asked, if they wished to know.”
Commentary
This judgment has caused significant consternation, not least because it imposes requirements on regulated parties that go significantly beyond the regulatory obligations imposed on lenders, or indeed intermediaries generally, by the Financial Conduct Authority in its rules. It is notable that this regulatory context, and in particular the relevant FCA rules, were given relatively limited consideration by the Court in this instance. The case serves as a reminder that compliance with the FCA’s rules does not mean that in doing so a firm will have discharged its wider legal obligations.
Following the judgement, the FCA has said :
“We are encouraging firms to engage with us as they consider the impact the Court judgment has on their products and services, and we are grateful for the way firms have acted responsibly so far. We are working closely with the financial services sector, the Financial Ombudsman Service and the Government to understand any wider consequences and further steps needed”.
The Court in this case was required to follow two previous Court of Appeal judgments (Hurstanger and Wood) which it acknowledged it had found difficult to reconcile. It also contemplated the Supreme Court at some point in the future making a definitive pronouncement on the question of when the payment of a commission by a third party to another person’s agent or fiduciary will give rise to a liability (whether as principal wrongdoer or an accessory) on the part of the payer. It is understood that the two lenders in this case intend to appeal, so it may be that such a definitive pronouncement will be made in this case.
The Court also acknowledged the difficulty a lender might face in notifying borrowers of the payment of a commission and to obtain their consent to it, but where it is found not to have done quite enough. However, the Court’s judgment leaves some degree of uncertainty over what is required in order to demonstrate “fully informed consent”, as well as practical challenges in ensuring that such consent is obtained in each case.
This is particularly challenging given the conclusion of the Court that what amounts to “informed consent” may vary depending on the facts of each case, including the presumed sophistication of the customer. What might be considered sufficient disclosure in one set of circumstances might be considered insufficient where the fact pattern is slightly different. However, it is not clear what measure of financial sophistication brokers or lenders need to use in order to assess how to discharge their obligation to obtain informed consent from borrowers.
[1] [2024] EWCA Civ 1282
[2] Paragraph 119 of the judgment.
