Industry claims victory as Supreme Court finds in favour of motor finance companies

The long-anticipated judgment from the Supreme Court in three cases relating to failures in commission disclosures has come down firmly on the side of the auto finance lenders, with the judges rejecting the view that dealer/brokers owe a fiduciary duty to their customers, saying the Court of Appeal’s finding in this respect “contained mistakes”.

However, in one case which involved Johnson and MotoNovo, and where the claim was based on the argument that the relationship between Johnson and the finance company was “unfair” under the Consumer Credit Act 1974, the court sustained the Court of Appeal’s decision, and agreed that compensation was due.

Delivering the Supreme Court’s ruling, Lord Reed said the court allowed the appeals brought by the finance companies, which were FirstRand trading as MotoNovo and Close Brothers, and which rested on legal arguments about potential bribery and whether or not a fiduciary relationship existed.

In his explanation of how the three cases came to the Supreme Court, and of the issues involved, Lord Reed drew attention to what he termed the “three cornered arrangements” between the dealer, the finance company and the customer buying the car.

In describing how a hire purchase or PCP agreement is reached, Lord Reed said: “An important point is that the car dealer has a commercial interest in negotiating with the customer over the financial package until the transaction is entered into.”

He went on to stress: “The dealer is not the agent of the customer or negotiating for the customer as that would undermine his own commercial interest.”

Bribery and fiduciary duty

In explaining how the Supreme Court had come to its decision, Lord Reed said that for the payment of commission to be considered a bribe under civil law, any such payment would have to be made by a fiduciary, that is someone who owed a single-minded duty to the customer and was not bound by personal interest.

Since, as Lord Reed put it, the dealer “plainly and purposefully” has a personal interest and motivation throughout the car buying process, with the intent of selling the car at a profit, it followed that no such fiduciary duty existed.

“Each party to the three-cornered arrangement is at arms’ length to the other parties,” he said, so what he termed the Court of Appeal’s “theory” that a fiduciary duty existed was wrong and the car dealer was at all times pursing his own commercial interest.  In the Supreme Court’s view, the Court of Appeal decision “mistakenly treated dealers as acting solely for customers.”

Lord Reed also pointed out that the Court of Appeal gave significant weight to the concept that customers put their trust in dealers and also that they were vulnerable.

“Fiduciary duty is not generated by feelings of trust or vulnerability and it is not consumer protection. Fiduciary duty is ultimately acting in someone’s interest without regard to your own which is not the case with the dealer who had an interest throughout the discussions,” he said.

Unfair relationship

Lord Reed noted that a claim based on and “unfair relationship” between a customer and dealer raised different questions, based on a broad range of factors and being highly fact-sensitive.

Potential factors included the size of the commission relative to the amount of credit; the nature of the commission and whether it included an incentive to use a higher rate; the character of the customer; and the extent and manner of disclosure of any commission and compliance with regulatory rules.

In Johnson’s case the commission was 55% of the total charge for credit, with Lord Reed noting “the fact it was so high is a powerful indication the relationship between Johnson and the finance company was unfair.”

The documentation provided did not disclose the existence of a commercial tie between the finance company and the dealer which created a “false impression”. This included the suggestion the dealer was offering products from a selected panel and recommending the product which best met the individual’s requirements, when in fact it was a choice from a single funder.

Lord Reed did allude to Johnson’s own failure to read any of the documents provided, but pointed out that he could fairly be viewed as a “commercially unsophisticated” customer, and said it was unreasonable to expect people to understand the finance company’s documents in their entirely particularly since “no prominence was given to the relevant statements”.

Thus, the Supreme Court upheld the relationship between Johnson and the finance company was unfair. Compensation in this particular case is set at repayment by the lender to Johnson equivalent to the commission paid to the dealer, plus interest at the commercial rate, from the date the agreement was entered into.

Industry comment

“It properly reflects the role and responsibilities of dealers, lenders and customers, and it has restored certainty and clarity to the largest point-of-sale consumer credit market in the UK. In addition, it has also restored confidence to the sector, confirming that it remains a solid investable option – which in turn means the supply of affordable motor finance will continue for customers.

 “Cars are an essential part of UK life – and for many people, relying on a car means relying on motor finance. It’s a product that’s trusted and valued by our customers – just over 80% of new cars are bought on finance, as is a large percentage of used cars.

“The FCA now has the legal clarity to continue its work to establish if a redress scheme is needed, and of course the thousands of unfounded complaints submitted to lenders by claimant law firms and CMCs can now be removed from the system.”  

AFC/Shoosmiths webcast

Don’t miss your chance to join the AFC/Shoosmiths webcast, sponsored by Odessa, for the first in-depth and independent analysis of the Supreme Court’s landmark ruling on commission disclosure in auto finance.

The 90-minute session begins at 9am on Monday 4^th August and will feature expert insight from leading industry figures and legal professionals. Stay informed with a forensic breakdown of the judgment, its implications for compliance and redress, and what the industry should expect next. Secure your place now by registering here.

Any readers who have questions they would like to put to our panel of experts about the judgment should email edwardpeck@finance-connect.com. All questions need to be submitted by end of day on Sunday.

This is a developing story. Updates will follow.