Motor finance claims – Supreme Court decision brings relief to lenders and credit brokers but the FCA is consulting on a redress scheme

On Friday 1 August, the Supreme Court reversed the Court of Appeal’s judgment in the cases of Johnson v FirstRand Bank Ltd, Wrench v FirstRand Bank Ltd and Hopcraft v Close Brothers Ltd, in very good news for lenders and credit brokers.

It found that the car dealers in these three cases did not owe a fiduciary duty to their customers. Whilst it upheld the decision that there was an unfair relationship between one of the claimants and the finance company, this was based on a very specific set of circumstances that will not necessarily be widely applicable.

Facts

These appeals involved the commission paid by lenders to car dealers who arranged finance for consumers to assist them in the purchase of their vehicles. Commission paid varied but was as high as 55% of the total charge for credit in once case.

In one of the cases, the commission arrangement between the lender and car dealer was concealed from the consumer entirely. This was referred to as “fully secret”.

In the other two cases, reference to the commission appeared in the lender’s standard terms and conditions for the loan. This was referred to by the Court as “partial disclosure”.

Court of Appeal decision

Where the commission was fully secret (no disclosure at all) – the Court of Appeal ruled the lender had primary liability and the credit agreement could be rescinded. It considered that the commissions amounted to bribes and found liability in the tort of bribery.

Where there was partial disclosure, the lenders were not primarily liable. Instead, they were held liable in equity as an accessory to the credit broker’s (i.e. the car dealer’s) breach of fiduciary duty. This was on the basis of the Court of Appeal’s view that the car dealers, acting in their capacity as credit brokers, owed their customers a “disinterested duty” (i.e. a duty to provide information, advice or recommendation on an impartial or disinterested basis); and an “ad hoc fiduciary duty”, requiring them to act with loyalty and avoid conflicts of interest.

The Court of Appeal considered that the lenders must have known that the dealers had a fiduciary duty to consumers and that the dealers would breach those obligations. The lenders therefore dishonestly assisted in the dealer’s breach of fiduciary duty.

In addition, in one case (Johnson) it was found that there was an unfair relationship for the purposes of section 140A Consumer Credit Act 1974 (the CCA) because of the (i) high commission and (ii) lack of disclosure regarding the relationship between the lender and broker. This was the basis of the commission refunds for PPI under the Supreme Court’s decision in Plevin v Paragon Personal Finance [2014].

Supreme Court decision

Fiduciary relationship

The Supreme Court disagreed with the Court of Appeal and reversed its finding that the car dealerships had a fiduciary relationship with the consumer, which the Supreme Court referred to as a “single-minded loyalty to the person for whom they act”. As a consequence, the lenders cannot be found to have committed civil bribery and owed no accessory liability. The Supreme Court noted that a fiduciary relationship is not created merely because there is trust, dependence or vulnerability.

Contrary to the Court of Appeal, the Supreme Court considered:

"No reasonable onlooker would think that, by offering to find a suitable finance package to enable the customer to obtain the car, the dealer was thereby giving up, rather than continuing to pursue, its own commercial objective of securing a profitable sale of the car."

Unfair relationship

The Court was prepared to approve Mr Johnson’s claim under section 140A of the CCA. Whether a relationship was unfair is a fact sensitive test. The Supreme Court noted that the size of the commission and the existence of an undisclosed commercial tie between the car dealership and the lender were some of the factors to be taken into account, as well as the prominence of certain terms in the dealer’s hire purchase documents and customer sophistication.

However, the mere fact that commission was not disclosed will not necessarily make a relationship unfair. Not all consumers will find that their transaction had the quality of an unfair relationship.

Comment

This will be welcome news to many sectors, including lending institutions, car dealerships and vehicle manufacturers – as well as lenders and credit brokers more generally, who had feared a ‘floodgate’ of claims in relation to other products and services.

However, whilst the decision is a very positive outcome, the industry will quickly try to assess the cost of CCA claims. The Treasury had been considering retrospective legislation had the ruling resulted in significant lender compensation, but that has now fallen away.

The FCA is now considering whether it will implement a sector wide redress scheme in the light of the Supreme Court judgment, which appears likely in relation to discretionary commission agreements (banned by the FCA in 2021) and to deal with claims under the CCA, where there has been unfairness.

In a statement issued on 3 August, the FCA confirmed it will consult on a redress scheme considering credit agreements dating back to 2007. The consultation will launch by early October and will last six weeks. The FCA will propose rules on how lenders should ‘consistently, efficiently and fairly’ decide whether someone is owed compensation and how much. It will monitor if firms are following the rules and act where they are not.

If the compensation scheme goes ahead, the first payments should be made in 2026. The FCA currently estimates that most individuals will probably receive less than £950 in compensation per agreement and the total cost of any compensation scheme will be between £9 – £18 billion, much less than PPI which cost around £50 billion. The FCA has warned consumers do not need to use a claims management company or law firm as doing so could cost them around 30% of any compensation paid.

It remains to be seen whether this judgment will have an impact on how the Financial Ombudsman Service (FOS) deal with complaints about motor finance. The FOS is not bound by legal precedent and is not obliged to follow legal principles when reaching a decision. It may therefore take an entirely different view to the Supreme Court when considering whether consumers who availed themselves of the benefits of motor finance deserve to be compensated.

Kennedys partner Nicola Pangbourne was quoted in the below publications discussing the decision: