Lenders Must Compensate Buyers For Secret Commissions On Vehicle Financing Paid To Card Dealers

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

[2024] EWCA Civ 1282

These three appeals, which were heard together, concerned the common situation of buying a car from a motor dealer who also arranges finance for the purchase.

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 claimants. 

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 that the claimant signed did incorporate standard terms, albeit in “very small print”.  These 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 made no charge for handling his application for consumer credit, but may receive a commission from the product provider. 

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.  For example, in Johnson, the commission paid to the dealer was some 25% of the total amount advanced by the lender, FirstRand, to the claimant.  It further emerged that FirstRand required its dealers to give FirstRand first refusal in every case where finance was required.  This was not disclosed to Mr Wrench or Mr Johnson.

On discovering the true position, the claimants sued the lenders, seeking the return of the commissions paid to the dealers.

The decision

The Court of Appeal held in favour of the claimants, who were found to be financially unsophisticated “consumers”.  

The court held that, in each of these cases, the dealer had two roles, first as seller of the car and second as a credit broker acting as the consumer’s agent for the purpose of finding a potential lender who could offer a deal suitable for the consumer’s requirements. Pursuant to the nature of this role, the dealer owed the consumer a duty to provide information, advice and recommendation on an impartial and disinterested basis.  Separately, the dealer owed the consumer a fiduciary duty, that is, a duty of loyalty in the performance of its duty to find financing on competitive and suitable terms, reflecting the repose of trust and confidence by the consumer in the dealer in relation to the transaction.  The dealers were in breach of both these duties, as a result of receiving the commission.

Lenders’ liability for paying a secret commission – The court held further that the lenders were under a primary liability to compensate the consumers for the consequences of the brokers’ breaches of duty.  Primary liability arose in this situation because the payer of a secret commission is regarded in the same way as the payer of a bribe, such conduct being actionable in its own right.  

As stated above, in Hopcraft, the commission was found to have been secret.  In Wrench, the court held that the disclosure had been insufficient to negate secrecy. Therefore, in these two cases, the lender was held liable to pay compensation as a primary wrongdoer.

Lenders’ liability as accessories to the brokers’ breach of fiduciary duty – Turning to Johnson, here the consumer accepted that the possibility that the dealer might receive a commission from the lender had been sufficiently drawn to his attention, so as to negate secrecy.  

However, the very limited information (referred to above) provided at the time of the transaction had constituted only a partial disclosure.  The court held that the dealer, who was the consumer’s agent, had breached its fiduciary duty to the consumer by receiving a commission from the lender, without obtaining the consumer’s consent after making full disclosure of all material facts.  

From there, the court held that the lender was liable on equitable principles as an accessory because it had paid the commission, thus giving the dealer a conflict of interests, whilst aware of, but turning a blind eye to, the failure to obtain consent, thus procuring the dealer’s breach of fiduciary duty.  In this sense, the lender had been dishonest.  The lender was accordingly liable to compensate Mr Johnson for the full amount of the commission paid to the dealer, plus interest.

The court also found that the relationship between Johnson and his lender was unfair for the purposes of sections 140A-C of the Consumer Credit Act 1974.

Lovetts comment

Subject to any appeal, the effect of this decision is that both dealers and lenders in the huge motor  finance sector have been breaching the civil law by keeping commissions hidden from buyers. Some large figures may be involved in compensation.  The decision comes on top of the Financial Conduct Authority’s ban of discretionary commission arrangements in 2021 and their announcement in January 2024 of a review into potentially unfair motor finance commissions going back to 2007.  The FCA aim to publish their findings in 2025.

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