Court of Appeal ruling raises questions for UK credit brokers on disinterested duty and informed consent

A Court of Appeal decision in Johnson v Firstrand Bank Limited t/a Motonovo Finance has muddied the waters on fiduciary, agency relationships and disclosure of commissions in the motor finance industry – and driven a "coach and horses" through Financial Conduct Authority (FCA) rules and market understanding.

The Johnson v Firstrand Bank ruling addressed combined appeals of three cases – Johnson, Wrench and Hopcraft. As is often the way with the purchase of an expensive item, the customers had obtained finance for a car purchase at "point of sale" through their car dealership, which had, therefore, acted as a credit broker.

Receipt of commission

The Court of Appeal looked at the duties owed not only by a motor dealership acting as a credit broker but also by a finance provider financing a deal through a motor dealership. The key issue considered was the reach of the duty to obtain the customer's consent to the receipt of commission by the broker. This issue is complex, as it is deeply intertwined with common law and equitable principles relating to the roles of agents and fiduciaries.

The Court of Appeal's main findings are significant in the broad context of credit introduced by third-party brokers in receipt of commission.

'Disinterested duty'

A credit broker only has to be "in a position to influence or affect the borrower's decision on finance" to be treated as both an agent and a fiduciary of the borrower (encapsulated in the concept of a "disinterested duty"). In other words, a fiduciary duty exists in a wider range of circumstances than previously understood. It would appear that a broker could have a disinterested duty not only if it works with a panel of lenders but also if it has a "tied" relationship with a single lender. It could also have a disinterested duty not only if it tells the borrower that it will find them the best deal but also if it simply obtains a quotation and makes and introduction. This is the case irrespective of whether the customer is a consumer or a business and whether the finance is regulated or unregulated – although in the case of sophisticated individuals or businesses, the scope of the fiduciary duty is likely to be less wide.

'Secret' commission

A credit broker may have received "secret" commission from a lender if it (or the lender) has not obtained specific pre-contract acknowledgement from the borrower as to both the nature and amount or method of calculation of commission being paid. This will depend on the sophistication and vulnerability of the borrower, the market in question and what the borrower knew, or ought to have known, about how the market operates. A pre-contractual or contractual disclosure that commission may be paid to the broker is highly unlikely to be sufficient in the case of unsophisticated borrowers in the motor industry. 

Equitable remedies

Where there is a breach of a disinterested duty through receipt of secret commission, equitable remedies are available to the borrower including rescission (meaning the finance contract can be undone) and compensation. In circumstances where it is found that a commission payment was fully secret, the borrower may also have a claim against the lender on the basis that the lender has paid a "bribe" to the broker and/or by way of accessory liability.

Why does this matter?

This decision has rendered existing FCA rules in this area if not wrong then, at least, insufficient. The regulator's rules in the Consumer Credit sourcebook only require the broker – and not the lender – to disclose commissions, and then only in certain circumstances.

There is certainly no FCA requirement to get the borrower's "informed consent". This has created a headache for the entire intermediated credit market, with lenders and brokers across the spectrum of introduced credit having to consider if they have to disclose detailed information about commission to customers even in the simplest of referral scenarios. The potential financial impact of mass claims management company complaints and claims for refunds of commission is huge and risks increasing financial exclusion and causing firms to fold.

For the FCA, the decision comes at a time when there are already over 2,000 motor finance commission complaints on hold at the Financial Ombudsman Service while the regulator reviews its approach to the historical use of discretionary commission arrangements. It had hoped to decide on next steps before the end of the year, but may now wait until the outcome of an appeal against the Court of Appeal decision.

The FCA will no doubt recognise that the financial risk for the market of retrospective complaints and claims following this judgment are considerable. The UK regulator has stated that it is "carefully considering" the decision and whether to extend a pause on the deadline that firms have had to respond to complaints. It is currently in close contact with the firms involved, the wider sector and the government to monitor the UK market, analyse the impact on industry and consumers, and identify what actions it thinks are required.

What next?

It has been reported that permission to appeal the judgment to the Supreme Court was refused by the Court of Appeal, but as yet it is unclear on what grounds. Given comments in the judgment that suggest this is an area ripe for appeal to the Supreme Court, the lenders in Johnson, Wrench and Hopcraft are now expected to seek leave to appeal directly from the Supreme Court – which the FCA has also confirmed.

Nikhil Rathi, chief executive of the FCA, in a speech to the Investment Association Annual at Mansion House on 29 October, seems to have lent the regulator's support to an appeal, stating: "it is in everyone's interest that when they do [seek leave to appeal], the Supreme Court decides quickly whether it will take the appeal and, if it does, whether it agrees with the Court of Appeal", as the regulator needs a final judgment.

In the meantime, in order to mitigate risk going forwards, lenders and brokers must work together to find ways to satisfy the "informed consent" requirement by introducing additional steps into customer journeys.

Osborne Clarke comment

Unfortunately, the Court of Appeal has left many uncertainties in this complex area of law unresolved and has opened up new ones, including:

• What exactly is "commission"? Does it include any kind of remuneration such as a profit share?
• Is it possible to be a credit broker and not have a "disinterested duty"?
• Is a consumer always "vulnerable" such that their "informed consent" to receipt of commission must always be obtained?
• What are the ramifications for consumer law generally if, as a matter of law, a supplier cannot rely on a provision in its terms and conditions as evidence that the customer has been notified of something?
• Was this always the law or is this new law?
• What are the ramifications for commission previously paid on the understanding that it was done lawfully and in accordance with FCA rules?
• How does the judgment apply to longer broker chains where the finance provider is more remote from the customer?
• Are broker and price comparison websites caught and, if so, how does the FCA propose to deal with the impact on competition in the market if how they are paid becomes (effectively) public?
• Does this decision apply to the sale of other products through brokers to consumers, such as insurance policies?

At the end of the judgment, the Court of Appeal acknowledged tensions in the lines of authority – the cases Wood v Commercial First Business Ltd and Hurstanger Ltd v Wilson. The Court of Appeal suggested that it may be desirable that these are considered in greater depth and for a definitive pronouncement to be made by the Supreme Court about the circumstances in which the payment of a commission by a third party to another person’s agent or fiduciary will give rise to a liability (whether as principal wrongdoer or an accessory) on the part of the payer.

We agree, and hope that this "postscript" is an indication that leave to appeal will be granted quickly.

This Insight was updated on 31 October 2024.