While the FCA’s 2021 ban on discretionary commission models and the 2023 Consumer Duty were designed to prevent this type of scenario from arising, these regulations were not directly applicable as the agreements in question were entered into before these changes. However, the ruling sets an important precedent for how similar cases will be handled moving forward, given that around 80% of new and used cars purchased use a PCP finance agreement.
In all three cases, the Court held that car dealers brokering finance (i.e acting as a credit broker) owe a duty to give “disinterested” advice as to the available finance (that is a duty to provide information, advice or recommendations on an impartial or disinterested basis). Furthermore, it ruled that the car dealers also owed a fiduciary duty to the consumers, as they were acting in a capacity which involved an obligation of loyalty and to avoid conflicts of interest in relation to the duties they were performing.
A key aspect of the Court’s decision was the distinction between “secret” and “half-secret” commissions. A secret commission occurs when a broker receives a payment from a lender without disclosing it to the consumer. A half-secret commission or, as the Court phrased it, “a partial disclosure” refers to cases where the commission is disclosed but in vague or unclear terms preventing the customer from giving fully informed consent.
In Hopcraft and Wrench, the commission was kept secret. The Court found that, in such a situation, it was not necessary for a fiduciary relationship to exist (though there may be one) for a liability to arise under a disinterested duty. If the lender pays a secret commission to the broker, the borrower will have a claim against the lender as a primary wrongdoer.
Johnson concerned half-secret commission, in that the lender’s standard terms and conditions made reference to the fact that “a commission may be payable”. Where there is a partial disclosure to negate secrecy, the lender can only be held liable in equity as an accessory to the broker’s breach of fiduciary duty. The existence of a fiduciary relationship is, therefore, necessary. The question was then whether enough had been done to bring the salient facts to the Consumer’s attention in a way which made their significance apparent, and whether fully informed consent to the commission payments had been given.
In order for there to be an accessory liability for assisting in a breach of fiduciary duty by failing to obtain the consumer’s informed consent, the lender must have acted dishonestly. The Court found that the lender had acted dishonestly by turning a blind eye to the car dealer’s breach of duty. The lender was, therefore, liable as an accessory to the dealer’s breach of fiduciary duties.
The Court of Appeal also ruled that the mere fact that there had been no disclosure of the commission, or only a partial disclosure, will not necessarily suffice to make the relationship between lender and consumer “unfair” for the purposes of the Consumer Credit Act 1974. Something more is required and is fact specific.
Implications
This ruling impacts the entire lending market, and lenders and purchasers of consumer debt will need to assess the extent of their liability. Lenders will need to review their lending practices and products, both old and new, to ensure that their commission arrangements do not fall foul of this ruling. This will include overseeing and ensuring compliance by credit brokers.
This decision strengthens consumer protections, ensuring that customers have complete transparency in financing agreements.
Our expert Banking and Finance lawyers can assist lenders with ensuring they do not fall foul of their fiduciary duty to consumers, whilst our Dispute Resolution solicitors can help if there is an issue. if you need assistance, please email us or call 03333 231580.
