Johnson v FirstRand Bank Limited, Wrench v FirstRand Bank Limited and Hopcraft v Close Brothers [2024] EWCA Civ 1106
- On the 25th October 2024, the Court of Appeal handed down its judgment in the cases of Johnson v FirstRand Bank Limited, Wrench v FirstRand Bank Limited and Hopcraft v Close Brothers. The single judgment was handed down by Lady Justice Andrews and Lords Justice Birss and Edis.
Background
- All three cases shared a similar scenario; each claimant had visited a motor dealership to purchase a vehicle. Each dealership assisted the claimants in obtaining finance to fund the purchase. The claimants entered into the credit agreements arranged by the dealerships and provided by the defendants. The dealerships received commission from the defendant lenders. The commission structure in all cases permitted the dealer a level of discretion to fix the interest rate. The higher the interest rate, the higher the commission[1].
- In Hopcraft, there was no mention of commission in the paperwork provided. In Wrench the terms and conditions disclosed that commission may be paid in a sub-clause under the heading ‘General’. In Johnson the terms and conditions similarly disclosed the possibility of a commission, and, in addition, the possibility was also disclosed within a ‘Suitability Document’.
Legal framework
- In order to be successful in a fully secret commission claim, claimants need to show that:
- no disclosure as to commission was made; and
- the dealer owed them a duty to provide information, advice and recommendation on an impartial and disinterested basis (the ‘disinterested duty’[2]).
The payer of the commission is then automatically liable.
- In order to be successful for a half-secret commission claim against a lender who has paid the commission, claimants need to show that:
- the dealer owed a fiduciary duty to them;
- there was disclosure in relation to commission but this was insufficient to obtain their informed consent to the potential conflict of interest; and
- the lender acted dishonestly in paying the commission.
- In order to be successful for an unfair relationship claim pursuant to s.140A-B CCA 1974, the claimant must establish the facts upon which they rely to assert that the relationship was unfair. The burden then shifts to the Defendant to prove on balance that the relationship was not unfair. The Court must take into account all matters it considers relevant including actions on the part of the debtor and creditor. If the relationship is found to be unfair, the Court has a wide discretion as to the remedy it can impose.
Analysis provided by Ann-Marie O’Neil
Secret and half-secret commission claims
Do brokers owe a disinterested and fiduciary duty to consumers?
- According to the Court of Appeal, yes [87-88].
- The Court puts to bed the untenable argument that the ‘disinterested duty’ applies to claims of half-secret commission [78]. However, the Court then proceeds to find that the dealerships owed both the disinterested and fiduciaries duties.
- The Court determined “As in McWilliam, irrespective of whether they provided advice or made recommendations, it was part of the credit broker’s role in these cases to provide information to the lenders on the customer’s behalf, and to the customer about the available finance. The very nature of the duties which the credit broker undertook gave rise to a “disinterested duty” unless the broker made it clear to the consumer that they could not act impartially because they had a financial incentive to put forward an offer from a particular lender or lenders.” The analysis of why such a duty is owed is absent.
- The Court continued to find that the dealerships were also under fiduciary duties, stating “In all three of the present cases, just as the court decided on the fiduciary duty issue in Wood, there was an ad hoc fiduciary duty running in tandem with the disinterested duty, arising from the nature of the relationship, the tasks with which the brokers were entrusted, and the obligation of loyalty which is inherent in the disinterested duty.” As with the conclusion that the dealerships owed disinterested duties, the analysis is lacking.
- In my view, there are four difficulties with the Court’s reasoning.
- First, whilst the Court correctly noted [101] that the absence of a fee for the brokerage service does not negate a fiduciary duty, in the absence of a fee or a contractual obligation to act with disinterest, a court must find another basis upon which to found a fiduciary and/or disinterested duty. The Court seeks to impose a ‘disinterested duty’ on a motor dealer merely because they have provided information to a consumer but whether a legal duty exists is not solely dependent on the services provided. In this case, the Court’s explanation of why such a duty arises is entirely absent.
- Secondly, the Court divided the sale of a vehicle on credit into two distinct and unrelated transactions. The first relating to the motor vehicle itself (which does not attract a disinterested or fiduciary duty) and the second relating to the finance (which does attract a disinterested and fiduciary duty). In both transactions, the dealership is providing information to the consumer, but the Court has failed to explain why the provision of information (and more likely advice and recommendation) when discussing the vehicle does not give rise to the relevant duties whereas those duties immediately arise once the threshold to the back office is passed and the presentation of the finance occurs. It appears that the Court has imposed such a duty because it is concerned about the understanding of a typical consumer. Namely, that consumers believe that dealerships only make money off the sale of the vehicle [84]. If this is the case, then the Court has failed to turn its mind to the fact that a typical consumer rarely considers the sale of the vehicle and the entering into the related finance agreement as two distinct transactions.
- In addition, the Court, made the assertion [114] that a financially unsophisticated consumer would not understand that the expression ‘the Broker’ means the dealership, but then also concludes that the same consumer would be sufficiently circumspect to appreciate that the dealership is not acting in their best interests when selling the vehicle but that a fiduciary duty is triggered once discussion of the finance commences [103, 133]. A reasonable claimant typically understands the sale of the goods and the finance agreement as one transaction. Claimants rarely ever maintain that they thought the dealer was acting in their best interests at any point. The separation of these transactions by the Court is artificial and selective about the consumer’s understanding.
- Thirdly, in the same breath as finding that motor dealers owe a disinterested and fiduciary duty to consumers, the Court also found that the broker is the deemed agent of the lender pursuant to s.56 CCA 1974. The Court gives no explanation as to how this position arises. Whilst legally possible, it is highly surprising that a Court has found that a dealer must act with single minded loyalty to a consumer where Parliament has already deemed it the agent of the counterparty who is on the opposite end of a transaction. The Court’s reasoning in this respect is absent.
- Finally, in finding that, in a typical hire purchase transaction, the dealer owes duties to the consumer in tandem with acting as agent for the lender, the Court of Appeal reverses the position set out in Branwhite v Worcester Works Finance Ltd [1969] 1 AC 552 where the House of Lords stated that “In a typical hire-purchase transaction the dealer is a party in his own right, selling his car to the finance company, and he is acting primarily on his own behalf and not as general agent for either of the other two parties. There is no need to attribute to him an agency in order to account for his participation in the transaction.” There was no explanation as to why the Court believes this position is incorrect. Whilst there is acknowledgement that the Court is bound by other Court of Appeal decisions [54], there is no explanation of how the Court found that it is not bound by the decision of a higher court. Branwhite is entirely absent from the judgment. As such, it is arguable that the starting point remains that Branwhite is the higher authority, and a motor dealer is not ordinarily an agent for either party.
Does disclosure of the possibility of commission negate secrecy?
- According to the Court of Appeal, not necessarily.
- The Court found as a starting point that no disclosure of commission naturally resulted in a fully secret commission (as in Hopcraft) but, if there is disclosure, whether that disclosure negates secrecy needs to be considered on a case-by-case basis [105]. The Court acknowledged that documents provided to the consumer are of significance [49]. In Wrench, the Court found that even though disclosure as to the possibility of commission had been given, it was “hidden in plain sight” [113] within the terms and conditions document under a heading ‘General’. The Court determined that “the prospect that the borrower would read those terms was negligible”. There is no explanation given as to why the Court has deviated from trite law that one must be taken to have read a contract which has been signed. In any event, the Court found that this disclosure was insufficient to negate secrecy. Conversely a concession had been made in Johnson that the Suitability Document (which explained that the dealer was a broker and may receive commission) was sufficient to negate secrecy. The Court of Appeal did not provide an opinion on whether the disclosures in Johnson were sufficient to negate secrecy.
Does the claimant need to bring specific evidence of dishonesty for the payer of a half-secret commission be liable by accessory?
- According to the Court of Appeal, no.
- The Court of Appeal acknowledged that for there to be an accessory liability in equity for assisting in a breach of fiduciary duty, the lender must act dishonestly [127] (Twinsectra Ltd v Yardley and others [2002] UKHL 12, [2002] 2 AC 164). The claimant has the burden of establishing this. There is no suggestion in the judgment that the claimants brought any such evidence, instead the Court made two assumptions which led it to find that the lenders acted dishonestly.
- The first assumption was that the lenders must have known that the dealers were acting as credit brokers [128] and that credit brokers are fiduciaries. There was no evidence that the lenders knew of the fiduciary duties in each of these cases. In addition, it is clear from the CONC Rules relating to commission provided by the Financial Conduct Authority (‘FCA’) that it did not anticipate that a fiduciary duty would exist in these circumstances. The FCA historically required disclosure of the existence of the commission. On 28 January 2021, the FCA extended this to disclosure of the nature of commission but at no point did they require the broker or lender to obtain informed consent (which would automatically be necessary if the brokers were fiduciaries). In an instance where the industry regulator clearly didn’t perceive the existence of a fiduciary duty, the judgment lacks any explanation as to how the Court has ascribed such knowledge to lenders.
- The second assumption made by the Court was that the lender (in the knowledge of the fiduciary duty) must effectively assume that the dealership will breach its obligations. The Court makes it clear that this is so even if the lender placed a contractual obligation on the dealer. At [128] the Court notes “The lender cannot assume that there has been full disclosure of the commission simply because the lender (or even the regulator) requires the broker to make such disclosure. If the lender does not take it upon itself to give full disclosure to the consumer, it deliberately takes the risk that the broker will not do so…” It will be a shock to the industry, and presumably the industry regulator, that parties who interact with a regulated credit broker must assume that the broker will breach their regulatory, contractual and fiduciary duties.
Unfair relationship
- The decision in relation to unfair relationships (addressed in Johnson) is less surprising. It is the second[3] recent confirmation from the Court of Appeal that claims for unfair relationship must be determined on the merits of each individual case [169]. Consequently, the Court made clear [170] that the payment of commission of which the consumer is unaware will not necessarily make a relationship automatically unfair but confirmed that “If the commission is very high in relation to the sum borrowed that may, in itself, be enough to make the relationship unfair where nothing, or nothing of substance, has been done to disclose the relationship between the lender and the broker.” [emphasis added].
- Notably, the Court assessed the percentages of commission in relation to the total sum borrowed [50, 169]. This throws the non-binding County Court decision in Young v Santander Consumer (UK) Plc (in which HHJ Gosnell suggested that the correct denominator for the percentage of commission for the purposes of assessing a relationship was the total charge for credit) into doubt.
Conclusion – what next?
- This judgment is of seismic impact. It is not restricted to discretionary commission models, regulated agreements or even the motor finance industry.
- Perhaps the only unsurprising outcome of the judgment is that permission to appeal has been sought. The last paragraph of the judgment reads as a concession from the Court that the decision is likely ripe for appeal. Should permission ultimately be granted, as I expect it will be, it may be that the Supreme Court fast tracks the appeal such that we may have a final decision within a year.
- In the meantime, there are two fundamental questions for the motor finance industry. First, how to write business going forwards. Secondly, how to proceed with what will no doubt be a tidal wave of claims.
- In relation to how to write business going forwards, it appears that there are two options left open by the Court. The first requires disclosure of (and consent to) all material facts [118] which seem to include the rate of commission, the calculation methodology and details about the ‘tie’ between the dealer and the lender [123]. The second requires the dealer to make it expressly known to the consumer that they are not acting in the best interests of the consumer and are not impartial [105]. The former has the effect of obtaining informed consent. The latter has the effect of extinguishing the relevant duties. Until the Supreme Court looks at the case, it may be that lenders decide to take one or both steps.
- In relation to how to proceed with cases on an ongoing basis, it is important to keep in mind that the decision may well be reversed if and when considered by the Supreme Court. In any event, lenders still have good prospects in a large proportion of cases. Limitation is a powerful defence for lenders and should be pleaded wherever available (an amendment to pleadings may be necessary). Cases that are pleaded solely under s.140A CCA 1974 can also be fought successfully with careful cross-examination. Additionally, claims in which the claimant appears not to be financially unsophisticated or vulnerable may be distinguished from the Court of Appeal’s findings. Any claims with disclosure similar to or better than that in Johnson may also proceed on the argument that there is sufficient disclosure to negate secrecy. Many lenders have disclosure of the possibility of commission with Adequate Explanation Documents or in sections of the terms and conditions to the credit agreement marked “Commission”. Finally, cases in which a consumer has used a third-party broker and from whom they did not purchase the vehicle nor pay a fee may run the argument that there is no other way the consumer could have thought the broker was being remunerated.
- For those claims which do not feature the criteria above, a stay may be the most appropriate route pending any appeal decision. Many court centres across the country stayed hearings pending the Court of Appeal decision and there is good reason to expect the District Bench to adopt a similar approach pending a decision from the Supreme Court.
- Further, there is an ongoing judicial review with the Financial Ombudsman Service and the Financial Conduct Authority is conducting a s.166 FMSA 2000 review. It remains to be seen how the Financial Ombudsman Service and the Financial Conduct Authority respond to this change in landscape. In the meantime, the next battle ground is how rescission should be approached once there is a finding of secret commission.
Update: The Court of Appeal refused permission to appeal on 28 October 2024. The parties may now petition the Supreme Court for permission to appeal
Article by Ann-Marie O’Neil
Simon Popplewell of Gough Square is acting for FirstRand.
Nothing in the above article is intended as legal advice. If legal advice is required, please contact the clerks.
[1] Albeit in Wrench, a second vehicle purchase was made in respect of which commission was paid as a fixed percentage of the amount advanced.
[2] Wood v Commercial First Business Ltd [2021] EWCA Civ 471.
[3] See the joined judgment of Self v Santander and Harrop v Skipton Building Society [2024] EWCA Civ 1106