It has been widely reported in the press that many motor finance lenders have paused lending to customers planning to buy a vehicle via credit agreements, such as personal contract purchase (PCP) or hire purchase (HP) agreements. Consequently, some car manufacturers have suspended deliveries of new vehicles to dealerships across the UK.

This is while lenders review and, in some cases, revise the terms and conditions of their credit agreements with borrowers following a recent Court of Appeal decision, which ran as a test case for claims concerning the payment of undisclosed commissions by lenders to motor dealers arranging finance for customers. 

The background

The Court of Appeal decision concerned three cases involving three consumer claimants who had each purchased a vehicle under a HP agreement being:

(i) (Marcus) Johnson v FirstRand Bank Ltd.

(ii) (Andrew) Wrench v FirstRand Bank Ltd.

(iii) (Louise) Hopcraft v Close Brothers Ltd.

Johnson, Wrench and Hopcraft are the claimants. FirstRand Bank Ltd and Close Brothers Ltd are the defendant lenders of motor finance.

The facts of each case are broadly similar:

(i) Mr Johnson, Mr Wrench and Mr and Mrs Hopcraft had each visited a motor dealership to purchase a vehicle. They were all on relatively low incomes and financially unsophisticated. 

(ii) Each motor dealer assisted each claimant in obtaining finance to fund the purchase on the basis that the dealer had found an offer of finance which was competitive and suitable for their needs.

(iii) The motor dealer therefore acted both as the seller of the vehicle and also as a credit broker between the consumer and the lender.

(iv) Each motor dealer received a commission from the defendant lender under a side arrangement, often known as an introducer agreement. The commission structure in all cases permitted the dealer a level of discretion to fix the interest rate on the HP agreement. The higher the interest rate, the higher the commission payment from the lender to the dealer.

(v) In Wrench and Johnson, the terms and conditions of each HP agreement made reference to the fact that a commission may be payable by the lender to the motor dealer. In the Hopcraft case, the commission was not mentioned in any of the paperwork and was kept secret from the claimant. 

The law

Secret commission

A lender, as the payer of the commission, is automatically liable if it can be shown that.

(i) No disclosure of the commission paid by the lender to the motor dealer was made.

(ii) The motor dealer owed the consumer a duty to provide information, advice and recommendation on an impartial and disinterested basis (known as the “disinterested duty”).

Half-secret commission

To be successful in a half-secret commission claim against a lender who has paid the commission, a claimant must show that:

(i) The motor dealer owed a fiduciary duty to them. Determining the scope of a party’s fiduciary duty is a very fact sensitive exercise and depends on the circumstances of each individual case. 

(ii) The existence of the commission was disclosed to the claimant, but it was insufficient to obtain their informed consent to the potential conflict of interest.

(iii) Where the lender has not satisfied itself that a borrower has given fully informed consent, this will give rise to “accessory liability” on the part of the lender. The lender is therefore an accessory to the motor dealer’s breach of fiduciary duty and has acted dishonestly in paying the commission.

The decision

In all three cases, the lender was found liable to repay the commission:

(i) In Hopcraft, there was no dispute that the commission had been kept secret from the claimant.

(ii) In Wrench, even though disclosure as to the possibility of commission had been provided, it was “hidden in plain sight” within the lender’s terms and conditions. The commission was therefore secret. 

(iii) In Johnson, the commission was found to be half-secret (i.e., partially disclosed). Whilst there had been some, but not complete disclosure of the facts relating to the commission, Mr Johnson did not give his fully informed consent to it. However, as the Court also determined that the relationship between Mr Johnson and FirstRand Bank Ltd was unfair for the purposes of section 140A-C of the Consumer Credit Act 1974, he was entitled to repayment of the commission. 

The Court of Appeal also found in all three cases that the motor dealers owed both disinterested and fiduciary duties to the consumer claimants. The parallel fiduciary duty was sufficient to establish the claim against each lender for accessory liability.

The outcome

This judgment is being described as being of “seismic impact” and will likely give rise to a spate of motor finance commission claims against lenders. 

Going forward, lenders and credit brokers will need to disclose clearly and fairly to consumers, especially those that are deemed “unsophisticated” when it comes to financial products, the amount of commission paid, the basis on which it is calculated and details about the ‘tie’ between the motor dealer and the lender, so the consumer can make a fully informed decision. 

The payment and receipt of commissions has been a long-standing business. In recent times, they have come under attack in the energy, property management and now car finance industries. No doubt other sectors are not immune and need to be prepared.