The UK Supreme Court on Friday (1 August) ruled that banks won’t have to pay compensation to motorists who took out car loans, reversing an earlier Court of Appeal decision that found commissions paid by lenders to motor dealerships were unlawful.
Banks had made considerable contingencies against an unfavourable ruling, with the Financial Times reporting that Lloyds – the UK’s biggest car finance provider – had set aside £1.2bn. According to the BBC, around nine in 10 new cars are bought on finance.
The lenders denied liability, leading to litigation that required clarity from the Supreme Court, given the broader implications for businesses using intermediated credit models and for the motor finance trade.
The Supreme Court, comprising Lord Reed, Lord Hodge, Lord Lloyd-Jones, Lord Briggs and Lord Hamblen, was asked to determine whether car dealers who receive commissions from lenders owe a duty to buyers — potentially giving rise to claims against the lenders for bribery or dishonourable assistance under the Consumer Credit Act 1974. Did the dealers owe a fiduciary duty to their clients, and if so, did they breach it by not fully disclosing the commission?
Three linked appeals focused on cars bought on credit to which a single finance offer was made to the buyer, with dealers receiving an undisclosed commission from the lender related to that offer.
In one case, Hopcraft and another v Close Brothers, the commission was unknown to the buyer. In two others, Johnson and Wrench, both involving MotoNovo Finance, a subsidiary of First Rand Bank’s London branch, the buyers were unaware that a commission would be paid, despite terms and conditions permitting one.
The Court of Appeal had previously ruled that the commissions were unlawful because they were paid without consumers having sufficient information or giving their informed consent, and so were a form of bribery. The judges stated that dealers, as brokers for the loans, should have represented the interests of buyers rather than the lenders.
However, the banks’ appeals in the motor finance case were mostly upheld, with the Supreme Court concluding that no fiduciary duty was owed. The court dismissed any claim of breach of fiduciary duty, nor did it incorporate any notion of consumer responsibility into the fiduciary relationship.
It held that “the dealers in the present cases were not subject to any fiduciary duty towards their customers. It follows that the customers’ claims against the lenders in equity and bribery cannot succeed. The lenders’ appeals in the Hopcraft and Wrench cases, and in the Johnson case, so far as it was based on bribery or on equity, are therefore allowed”.
However, the Supreme Court held that, in the Johnson case, the relationship between consumers and lenders was unfair “within the meaning of section 140A [of the Consumer Credit Act], by reason in particular of the size of the commission, the failure to disclose the commission and the concealment of the commercial tie between the dealer and First Rand”.
The court observed that the undisclosed commission, which constituted 55% of the total credit charge, created an unfair relationship. The nature of the commission, coupled with the claimant being commercially inexperienced, also worked in Johnson’s favour. Although non-disclosure was not automatically deemed unfair, the finance contract was misleading, leading the court to rule in Johnson’s favour.
Guy Wilkes, head of Mishcon de Reya’s financial services investigations and enforcement practice, said that while “the most dramatic and potentially far-reaching elements” of the Court of Appeal’s ruling had been rejected, the Supreme Court’s ruling “wasn’t a clean sweep” for lenders.
“We may have seen the end of claims that undisclosed commissions in the motor finance industry constituted bribes or that their acceptance amounts to a breach of fiduciary duty, but we haven’t seen the end of claims arising out of undisclosed commissions completely,” he said. “In particular, the Supreme Court agreed with the FCA that discretionary commission agreements may create incentives to charge a higher interest rate and is a relevant factor pointing to unfairness.”
Before the ruling, the Solicitors Regulation Authority (SRA) and the Financial Conduct Authority (FCA) issued a joint statement warning lawyers and claims management companies that the FCA was likely to offer a free redress scheme, which lawyers should draw to the attention of their clients “where there is a realistic prospect of one being introduced”.
Sheree Howard, executive director at the FCA, said: “We’ve seen law firms and CMCs advertising highly speculative figures, so we are warning them of our expectations when it comes to drumming up clients for motor finance commission claims. We will take action if we see evidence of poor practice.”
The FCA responded to the ruling by saying it would provide further details about redress within six weeks. However, substantive proposals may await a pending judicial review of the Financial Ombudsman’s approach to redress, due in September.
Paul Philip, SRA chief executive, said: “Law firms have a regulatory duty to act in the best interests of their clients, but if they mislead clients, fail to get their explicit consent, do not explain cost information clearly or do not share the required information on free alternative routes before signing them up, they are failing to meet their obligations.”
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