Lenders’ Liability To Consumers For Secret Commissions On Vehicle Financing Paid To Car Dealers

HOPCRAFT V CLOSE BROS; JOHNSON V FIRSTRAND BANK; WRENCH V FIRSTRAND BANK  

[2025] UKSC 33

Last year, we reported on the Court of Appeal’s decision in three cases heard together, in which it was held that both car dealers and lenders engaged in vehicle finance had been breaching the civil law, by, amongst other matters, failing to disclose commissions to buyers.  

The motivation for pursuing the lenders was to establish liability against parties with deeper pockets than the car dealers.  

In relation to the claims against the lenders, the Supreme Court (“SC”) has now given judgment restricting the Court of Appeal’s findings.  The SC concluded that the legal routes by which the claimants were seeking to make the lenders liable under the common law or in equity were not available in the circumstances of the case.  That meant that two of the claimants had no claim.  However, the third claimant was successful on the basis that, in breach of the Consumer Credit Act 1974, the relationship between the lender and the claimant as a consumer had been unfair.

The underlying facts

The structure of each transaction was that, once the claimant had agreed a price for the vehicle, the dealer would approach a prospective lender, or a panel of lenders, for terms of credit.  The dealer then put forward a single proposal to the claimant for the financing. Once the terms of the loan were agreed, the dealer sold the car to the lender and the claimant then entered into a hire purchase or other credit agreement with the lender.  

Separately from this transaction, the lender also had a side agreement to pay a commission to the car dealer, funded from the interest payments made by the claimant. 

In the first of the three cases, Hopcraft, the commissions were not disclosed to the claimant at the time of the transaction.  

In the second case, Wrench, the hire purchase agreement provided amongst other matters that the lender “may” pay a commission to “the broker” who had introduced the transaction.  The standard terms did not explain how this commission would be calculated, or who “the broker” might be. 

In the third case, Johnson, the claimant was given what he described as “an enormous amount of paperwork” and asked to sign the agreement then and there.  The hire purchase agreement he signed incorporated standard terms in substantially the same form as Wrench, above.  However, in addition, the claimant signed a “Suitability Document” which stated amongst other matters that the dealer may receive a commission from the product provider, and that the option offered would be the one appearing most suited to the customer’s requirements. 

In all three cases, the claimants assumed that the dealer was deriving its income from the sale of the vehicle.  The claimants were in fact unaware of the commissions and said that, if they had known about them, they would have shopped around, rather than proceed with the transaction. 

The fact that the lenders had paid commission to the dealers subsequently came to light.  On discovering the true position, the claimants sued the lenders, seeking return of the commissions paid to the dealers.  They argued that the dealers had owed them duties as a fiduciary and/or pursuant to a duty to act in a disinterested manner (akin to the duty owed by a professional valuer) when selecting a finance package for the claimant.  The claimants said that the dealers had a duty to avoid any conflict between their duties to the claimants and their own interest.

The Supreme Court’s decision

Starting from first principles, in a situation where there is a “principal” type of person (here, the customer) and an “agent” type of intermediary (here, the dealer arranging finance for the vehicle purchase), there is a remedy for the principal if a third party (here, the lender) intermeddles in the relationship by making a payment to the intermediary.  The rationale is that the payment cuts across the duty owed by the intermediary to the principal.  

Relying on equitable principles, the claimants contended that the lenders were liable as accessories because they had provided dishonest assistance to the intermediary (in the form of the commissions), who was breaching his duty to the customer by not making full disclosure of the commission he was receiving.

Relying on the common law, the claimants contended that the lenders were liable to the customer for the tort of bribery, because they had given the intermediary a payment that was not disclosed to the customer. 

The SC accepted that the tort of bribery can be committed even where the payment has been partly disclosed: the question is whether the claimant gave his fully informed consent.  

However, the SC ultimately rejected both of the claimant’s contentions.  The SC concluded that, for the lender to be liable to the customer, both legal avenues required the intermediary to whom they had made the payment to come within the legal classification of a fiduciary, that is, a person who owes his principal single minded or undivided loyalty in the performance of his duties and who has taken on the role of acting in the interests of his principal to the exclusion of his own personal interest. It is not a question of whether the principal trusts the intermediary or is commercially vulnerable: the duty arises where the intermediary takes on the role of fiduciary. 

Thus the SC held that, in the present case, and even where the dealer had said that it would seek out the most suitable financial package, it was commercially unrealistic to regard the dealer as providing credit brokerage as a separate service. Each of the customer, lender and dealer were pursuing separate commercial objectives in a three-way commercial transaction and this was not the type of case in which a fiduciary relationship arose.

Consumer Credit Act 1974 (“the CCA”)

Section 140A(a) of the CCA is in broad terms and provides that the court may order a remedy in connection with a credit agreement if it determines that the relationship between the creditor and the debtor arising out of the agreement is unfair because of any of the terms of the agreement or any related agreement. 

Under the CCA, the car dealer was to be regarded as the agent of the lender.  The SC held that the relationship between  Mr Johnson and the lender was unfair and also a breach of the FCA handbook rules, firstly because the dealer did not disclose that, on one way of calculating it, commission (which was to be paid to the dealer out of interest received by the lender) amounted to 55% of the total charge for credit.  Secondly, it was not disclosed to Mr Johnson that the dealer had agreed that FirstRand would have a right of first refusal for any financing arranged by the dealer, this being contrary to the impression given by the dealer in its Suitability Document.

Lovetts’ comment

The Supreme Court has made clear that the route for claiming compensation from a lender in this type of case is under the Consumer Credit Act 1974, rather than the general law.  

The many claims of a similar nature will be swept up into a redress scheme, on which the FCA will be consulting later in 2025.  This is the second car finance mis-selling enquiry currently being looked at by the FCA, the other one concerning Discretionary Commission Arrangements.  The aim is that consumers will start receiving compensation early in 2026.  Issues of limitation and also levels of compensation will require careful consideration.

Meanwhile, the judgment appears relevant to consumers in other areas, over and above vehicle finance, an example being residential mortgages arranged by financial advisers.

For further information, please contact Wendy Miles, Chris Earl-Anderson or William Sturge at Lovetts.