Broker duties, lender liability and secret commission: broking bad

The recent decision of the Court of Appeal in the joined cases of Johnson v FirstRand Bank Ltd (London Branch) (t/a MotoNovo Finance) and Johnson v FirstRand Bank Ltd (t/a MotoNovo Finance), Wrench v FirstRand Bank Ltd (t/a MotoNovo Finance) and Hopcraft v Close Brothers Ltd has significant implications for the consumer finance sector ([2024] EWCA Civ 1282).

While specifically concerned with motor finance, the court made notable findings in relation to the fiduciary duties that may be owed by brokers, the liability of lenders that use a broker to facilitate funding and the approach to disclosure of commission paid by those lenders to a broker.

Claims for commission repayment

Three claims were brought by Miss Hopcraft, Mr Wrench and Mr Johnson, with broadly similar facts and their appeals were heard together by the Court of Appeal. Each claimant had bought a vehicle from a motor dealership. The dealerships also acted as credit brokers by assisting the claimants to arrange finance to fund their purchases. The claimants were referred to lending banks and entered into credit agreements.

The dealerships received commissions from the lenders for these referrals. The process was known as a discretionary commission arrangement (DCA), which gave the dealer some discretion to fix the interest rate. Generally, the higher the interest rate, the higher the commission paid to the dealership. This practice was controversial and subsequent to the events in these claims, in January 2021, the Financial Conduct Authority (FCA) banned the practice.

What each claimant knew about the dealership receiving a commission differed. In Hopcraft, no disclosure was made about the commission paid by the lender to the dealership. In Wrench, the dealership’s terms and conditions mentioned the possibility of there being a commission. In Johnson, the dealership provided the customer with a pre-contractual document that said that it would carry out a suitability assessment and suggest financing from one of a panel of lenders.

Each claimant unsuccessfully brought County Court proceedings against the lenders to claim back the commission. The judge transferring the appeal in Hopcraft noted that there was no binding authority on the central issues raised in the cases.

The Court of Appeal’s decision

The court found in favour of the claimants. The court agreed with their submissions that the dealerships owed them either a fiduciary duty or a duty to advise on appropriate financing on a disinterested or impartial basis. In Hopcraft and Wrench, the court held that the lenders were primary wrongdoers for paying the commission. In Johnson, where Mr Johnson had limited knowledge of the commission, the court found that FirstRand Bank was liable as an accessory as it had paid the commission knowing that Mr Johnson had not given informed consent. Each claimant was entitled to recover the commission, with Mr Johnson also entitled to interest under section 140B of the Consumer Credit Act 1974 on the basis of the unfair relationship that arose between him and FirstRand Bank.

Fiduciary duties and duty of disinterest

Johnson is an important ruling on the duties owed to a consumer by a broker. Where dealerships act in a credit broker role, they owe a duty of disinterest, in tandem with a fiduciary duty, to their customers.

The court found that, in each case, as in McWilliam v Norton Finance UK Ltd, the dealers had been acting as a broker ([2015] EWCA Civ 186). It is a broker’s role to provide information to lenders on behalf of the customer and to provide information to the customer about available finance, regardless of whether they provide advice or recommendations.

As a result, the very nature of the duties that the dealerships, in acting as credit brokers, had undertaken gave rise to a “disinterested duty”. This meant that the dealerships had a duty to provide advice, information, or a recommendation on a disinterested basis. The dealership’s receipt of a commission was a clear conflict of interest that breached this duty. To address this, the dealership would have had to inform the customer of the commission, its specific amount, and make it very clear that it had a financial incentive and could not act impartially.

The court also ruled that a fiduciary relationship between the customer and dealership arose in these circumstances. The court applied Wood v Commercial First Business Ltd and found that an ad hoc fiduciary duty arises alongside the duty of disinterest due to:

• The nature of the relationship between the customer and the dealership.
• The dealerships’ role in sourcing and selecting a lender.
• The obligation of loyalty to the customer arising from the duty of disinterest. By acting as a broker, the dealership had a duty to source and select a lender that offered the most advantageous, or at the very least competitive, and suitable terms for the customer. The claimants, who were financially unsophisticated and vulnerable had placed trust and confidence in the dealership to secure them affordable and competitive agreements, and were entitled to expect that the dealership would act in their best interests ([2021] EWCA Civ 471; www.practicallaw.com/w-030-7148).

Secret commissions

The decision provides insight into what constitutes a secret commission and the obligation placed on a credit broker to bring the commission to the customer’s attention.

In Wrench, the terms and conditions between dealership and customer set out the possibility of a commission payable to the dealership when securing finance. However, the court still considered that this was a fully secret commission. The term was hidden in plain sight, located in a sub-clause of the dealership’s terms under the heading “General” and the prospect of the claimant reading all of these terms was minimal.

Not enough had been done by the dealership to draw the claimant’s attention to the specific clause, and indeed the court found it difficult to believe that this was not done deliberately by the dealership. The court stated that whether there has been sufficient disclosure depends on the facts of each case, but relevant steps to put the customer on notice may include requiring the customer to read the specific term and requiring the customer to confirm that they had read it.

Even if the commission is not fully secret, as was the case in Johnson, this would not prevent the lender from being liable as an accessory. Mr Johnson had been provided with a “Suitability Document”, which stated that the lender might receive a commission. However, the court found that this was not enough for him to provide fully informed consent as it did not contain all material facts. The document also implied that the lender would be chosen as the most appropriate from a panel when, in fact, FirstRand Bank had a right of first refusal.

This is a significant finding for lenders. Unless they ensure that the dealership has secured informed consent from the customer, for instance by making sure that the customer is aware of all the facts and by disclosing relevant information in the credit agreement, the lender may be liable as an accessory to the dealership’s breach of duty. This is the case even if the terms between the dealership and the lender oblige the dealership to fully disclose details of the commission.

Impact in practice

Johnson has significantly increased the level of disclosure that brokers and lenders are expected to provide to their customers in relation to commissions. The FCA’s Consumer Credit Sourcebook (CONC) requires a broker only to disclose the amount of the commission at the customer’s request. However, the court found that the amount of the commission and its calculation from the outset was crucial to providing full disclosure. Furthermore, the court placed an obligation on the lender to provide disclosure, which is not within the rules of CONC 4.5.

The decision is likely to increase the volume of mis-selling complaints by consumers to motor finance firms. Since the decision, the FCA has announced that it will consult on extending the time frames that motor firms have to respond to customer complaints where a non-discretionary commission is involved. It expects to publish proposals by the end of November 2024, with a complaint extension in place by mid-December 2024. The outcome of the FCA’s review into misconduct related to DCAs, which started in January 2024, and any proposals for compensation, are expected in December 2025.

The court refused permission to appeal on 28 October 2024. It is expected that the lenders will seek leave to appeal directly from the Supreme Court. Pending the outcome of any appeal, businesses in the consumer finance industry will need to consider how to adapt to the new legal framework. Dealerships and lenders alike must review their approach to the disclosure of commissions, ensuring that customers are aware of all material facts, including the rate of the commission and its calculation, and obtaining informed consent. In order to discharge the duty of disinterest, dealerships must also specifically tell the customer that they are not acting impartially.

Rhys Novak is a partner, Simon Heatley is a knowledge lead, and Rebecca Hollinshead is a trainee, at Charles Russell Speechlys LLP.