Introduction

The Court of Appeal delivered its long-awaited judgment on secret commission motor finance claims – and it comprehensively found in favour of consumers. In Johnson v Firstrand Bank Ltd (t/a Motonovo Finance) [2024] EWCA Civ 1282, the Court held:

  • car dealers engaged as credit brokers owed the consumers a duty to provide information, advice or recommendation on an impartial or disinterested basis (the “disinterested duty”);
  • a fiduciary duty arises in tandem with and in consequence of there being a disinterested duty;
  • where there is no disclosure of the secret commission, the lender is liable as the primary wrongdoer; and
  • where there is partial disclosure of the secret commission, but insufficient disclosure to obtain the consumer’s fully informed consent to the commission payment then the lender is liable as an accessory to the broker’s breach of fiduciary duty.

The Court of Appeal’s decision will create a tide of litigation. This note aims to provide a summary of the current state of the law as well as practical tips for legal practitioners bringing and defending motor commission claims.

Factual background

The factual background underlying these appeals will be familiar to any lawyer who has dealt with a secret commission motor finance claim.

In typical secret commission motor finance claims the facts go something like this: Mr Bloggs walks into a car dealership to buy a car on finance. The salesman, as part of the overall deal, presents Mr Bloggs with an offer of finance from a third-party lender. The salesman is wearing two hats: car dealer and credit broker.

Mr Bloggs is often told the finance agreement is a good deal and one that is suitable for his needs. Mr Bloggs accepts, and he is given papers to sign. It is clear enough to him that the hire-purchase contract is between him and the third-party lender, but far less clear is the fact that the dealer is receiving a commission from the lender. Even less clear is the fact that the dealer has a measure of discretion in fixing the interest rate and that they have skin in the game: the higher the interest rate, the higher their commission.

Disclosure is often murky at best. In the commonest scenario, buried somewhere in the paperwork that Mr Bloggs has just signed is a term disclosing that an incentive or commission may be payable by the lenders to the dealers. Mr Bloggs’ attention is not drawn to this term nor the amount in commission. He isn’t told that he may be far better-off going on the open market and finding a more competitive finance deal. He accepts the deal and thereby loses his opportunity to find a better offer.

What duties did the dealership and lender owe Mr Bloggs, and in turn what remedies could Mr Bloggs have against the lenders?

The Court of Appeal’s decision

The following are the main points arising from the judgment.

To begin with, the Court of Appeal decided that the courts should move past the language of “half secret” and “fully secret” commissions because a commission is either secret or it is not. Instead, the Court made clear that the correct test is whether there was a partial disclosure (i.e. disclosure of the fact of commission being paid but not the amount or how it is calculated) or a full disclosure (i.e. the amount of commission and how it was calculated).

As to the question of whether a fiduciary duty is necessary in partial disclosure cases, the answer is in the affirmative, but a fiduciary duty arises in tandem with and as a result of the disinterested duty being established.

The Court accepted that documents provided to the consumer are relevant and of significance, but emphasised that “burying a statement in small print which the lender knows the borrower is highly unlikely to read will not suffice”. While each case was said to turn on its facts, the direction of travel is arguably clear. For example, in Wrench (one of the cases on appeal), even where disclosure as to the possibility of commission was given, it was held to have been “hidden in plain sight” in the T&Cs such that “the prospect that the borrower would read those terms was negligible”.

Nor is it sufficient for a lender to avoid liability by relying on the terms of an agreement with the broker to the effect that the broker will give disclosure: “If the lender does not take it upon itself to give full disclosure to the consumer, it deliberately takes the risk that the broker will not do so…”

In the Johnson appeal, where a breach of s.140A-C of the Consumer Credit Act 1974 was pleaded, the Court held that the mere fact that there had been no disclosure of the commission, or only partial disclosure, will not necessarily suffice to make the relationship between lender and consumer “unfair” for the purposes of the 1974 Act. On the specific facts of Johnson, the Court found that there was an unfair relationship because the commission paid by the lenders was at 25% of the total sum lent, and the fact that there was a contractual obligation to give first refusal to the lenders in circumstances where Mr Johnson had been informed that the offer was from a range of lenders was sufficient to establish unfairness. Once unfairness is established, the Court has a wide discretion as to the remedy it can impose.

Practical tips

The ramifications of the Court of Appeal’s decision will be felt not just in the motor finance industry but all consumer credit finance arrangements.

It has been reported in the press that Firstrand have applied for permission to appeal to the Supreme Court. There are good reasons to think that the Supreme Court may reverse the Court of Appeal decision on several key issues. The Court of Appeal’s decision is expansive in scope, at times scantly reasoned, and often untroubled by a close analysis of authority. In any event, and as the law currently stands, these are our key practical tips for practitioners to heed:

Evidence will be key. Practitioners preparing witness statements should seek to clearly address the manner and circumstances in which disclosure took place, the quality and nature of the disclosure, and all the surrounding circumstances preceding entry into the finance agreement.

It will also be necessary to give full particulars of what arrangements were in place between lenders and brokers to ensure that sufficient disclosure took place, not just in terms of contractual arrangements, but also actual steps undertaken to ensure adequate disclosure was in fact given. It will not do for lenders to effectively contract out of their disclosure obligations to consumers by passing the buck down to brokers.

Cases are likely to be fought on, and liability is likely to follow from, cross-examination. Witness evidence prepared should therefore include in particular: (i) what was the consumer told (ii) what documents were they referred to and what were they told about those documents (iii) what did the consumer actually understand they were being told (iv) what could an average consumer in their position be reasonably expected to have understood in light of what they were told.

It is noteworthy that in all three cases, the court found on the facts that primary liability arose as a result of the breach of the disinterested duty and that secondary liability arose as a result of the existence and breach of the fiduciary duty. It followed that lenders were liable for the repayment of commissions in all three cases. Although there is scope to seek to distinguish future claims from the facts of the cases in the three appeals, such argument is now likely to be practically academic.

Finally, stays should be considered where appropriate if this goes up to the Supreme Court. We’ll know soon enough if permission is granted, so little needs be said there.