The Court has found in favour of the Claimants who are entitled to be paid a sum equivalent to secret commission paid by their lenders to the dealerships from which they acquired their cars.
The result will have a significant knock-on effect to the many thousands of similar cases pending before courts across the Country. There are thought to be hundreds of thousands of so-called ‘motor finance commission’ cases awaiting determination, many of which have been stayed pending the handing down of this judgment.
The judgment is available here.
Background
The typical scenario, as happened in each of these three cases, is that a consumer attends a motor dealership to acquire a car. Having agreed on the car and the price, the motor dealer and consumer discuss how the car would be purchased. The consumer does not have the cash/willingness to purchase the car outright, so the car is taken on hire purchase terms. The dealer will typically only work with a limited panel of lenders, or perhaps only one. The dealer introduces the customer to the finance company and enters the figures (cash price of the vehicle, deposit, APR, annual mileage) on the agreement. Alternatively, the dealer will refer the consumer to a credit broker or other intermediary to arrange the finance such that the chain is consumer-dealer-broker-lender.
If the finance company agrees to the proposal, the dealer/broker is paid a commission by the finance company. The existence of the commission is referred to in the paperwork but not the amount (usually the wording is along the lines of “we may pay a commission to an intermediary who introduces you to us”).
In many of these agreements, the dealer/broker had the discretion to set the interest rate, and their commission was linked to the APR. For example, the finance company might stipulate that the APR can be between 5% and 15% and the dealer would earn commission of 10% of the finance amount at 5% APR but the commission would increase incrementally to 15% if the APR was 15% (i.e. they get a bigger slice of a bigger cake). This sort of discretionary model (which has been over-simplified above) is known as a ‘Difference in Charge’ or ‘DiC’. In 2021 the FCA banned the use of DiC models. Claims management companies have launched bulk litigation by suing the finance companies. The volume of these complaints led to the FCA pausing the timeframe in which the finance companies would ordinarily be expected to respond until December 2025 and will produce their own report until May 2025. There is also a related High Court judicial review case brought by Barclays against a decision of the Financial Ombudsman in which a complaint was upheld. The Court of Appeal’s decision is therefore unlikely to be the final word.
The claims management firms representing the consumers turned claimants argued that the dealer/broker, when introducing the consumer to the lender, was acting as the consumer’s agent in order to find them the best finance deal and that the payment of the undisclosed commission taints the relationship as it creates a conflict of interest. If the commission is kept secret and the dealer/broker owed a duty of single-minded loyalty to the consumer, the claimants are entitled as a matter of right to rescind the entire finance agreement, subject to giving counter restitution for the amount loaned and/or benefit through usage of the car. This follows the approach in Wood v Commercial First Business Ltd and others [2021] EWCA Civ 471.
At common law, if the commission is only ‘half secret’, that is to say its existence was disclosed but not its amount, the claimant can ask the court to exercise its equitable discretion to order equitable rescission (subject to counter restitution) providing that the dealer was acting as the claimant’s fiduciary. This follows Hurstanger Ltd v Wilson and another [2007] EWCA Civ 299.
In the vast majority of cases, there is a clause in the hire purchase agreement such that the defendants argue the claims are at most half secret. The defendant lenders argued that that the dealer/broker was not the claimant’s fiduciary. In any event, counter restitution cannot be given as the car is not in the same condition at the inception of the agreement and, in many cases, the vehicle has been sold. The lenders argued in the dealer-as-broker cases that the starting point of the transaction is the dealer selling a car to make profit which the consumer is hoping to acquire at the lowest price such that they have opposing interests, accordingly the dealer cannot also act in the same transaction as the claimant’s agent in accordance with the finding made by HHJ Jarman KC in the case of Johnson v FirstRand.
Many of these cases involve a third limb, being a claim for unfairness per sections 140A-C of the Consumer Credit Act 1974 (building on Plevin and the PPI litigation). These arguments are more fact-specific but typically it is argued that there was an extreme inequality of knowledge between the finance company/dealer on one side and the consumer on the other. Claimants argue the dealer was improperly incentivised to make hidden profits from the undisclosed commission, and the consumer was unable to make an informed decision such that they paid inflated interest rates for the lifetime of the agreement. These claims typically seek to reduce the APR payable to the lowest amount possible in order to reduce the cost of credit, as well as requesting the defendant pay a sum equivalent to the commission to the claimant (even though the claimant did not pay the commission, at least directly.
The Court of Appeal’s decision
The Court resolved each issue in favour of the claimants. The payments were all fully secret, notwithstanding the lenders using contractual terms similar to those in Hurstanger. The clauses were buried in the small print, did not make adequate disclosure and were not sufficiently brought to the Claimants’ attention such that these cases were fully secret.
In each case, a fiduciary duty was owed to the Claimants, in addition to the disinterested duty which they owed following Wood. The claimants did not provide their informed consent for their fiduciary to receive such a payment which amount to a civil bribe. Accordingly, the defendants were liable for procuring the breach of fiduciary duty.
The outcome is that the lenders are “liable for the repayment of the commission”. There is no analysis as to why rescission is not available in the cases of Wrench and Harrop, which were fully secret. In Johnson’s case, in which a concession was made such that it was considered as if it were only half-secret (a concession which the Court of Appeal plainly thought should not have been made), the defendant will have to pay by way of equitable compensation the amount of the commission together with interest. Equitable rescission was not ordered by the Court in his case because of the passage of time and as the relevant vehicle had been sold.
In the cases of Harrop and Wrench, it is not immediately clear why there is no analysis of the available remedies for them as it would appear that rescission would have been available to them as of right,.
Unfairness was only considered in Johnson’s case, and it was found that the relationship was unfair. Mr Johnson is entitled to be paid the sum of the commission together with interest for this claim as well. It is also not stated whether this is in addition to the equitable compensation, though one assumes not.
Looking Forward
It is noteworthy that the judgement ends with a three-paragraph postscript as to the tensions between two earlier Court of Appeal decisions (Hurstanger and Wood) and the possible need for the Supreme Court to provide further guidance.
It is anticipated the lenders will wish to appeal to the Supreme Court. Given that there is no analysis of the claims for rescission, it is possible the Claimants may also appeal.
This decision cannot be summarised in full on the day it is released. Further analysis will follow in due course.
Written by Matthew Gillett.
25 October 2024