On 25 October 2024, and applying common law principles, the Court of Appeal (CoA) delivered a sobering judgment in which it determined that it was unlawful for motor dealers to receive a commission from motor finance lenders without first disclosing full details of the commission to customers and obtaining customers' informed consent to such payments (the Judgment)[1]. In the absence of disclosure, the lender can now be held liable to account to the customer for the commission. In addition, the customer may be able to rescind the finance agreement.

The CoA held that motor dealers arranging finance for prospective customers were found to owe both a 'disinterested duty' and a fiduciary duty to those customers. If brokers breach these duties, lenders are liable as a primary wrongdoer in respect of secret commissions and, in cases of partial disclosure, as an accessory to the dealer's breach.

The Judgment sets a far higher standard in terms of disclosure of commission arrangements than currently exist under the rules of the Financial Conduct Authority (FCA) and has far-reaching implications, potentially capturing commission arrangements outside of the credit sector. In this article, we explore the background and implications of the Judgment and how Gowling WLG can support lenders and intermediaries who may suffer the ramifications.

Context

On 28 January 2021, the FCA introduced new rules banning discretionary commission arrangements (DCAs) in the motor finance sector, whereby dealer brokers were given discretion by the motor finance lender to set the interest rate consumers pay on their financing and where the interest rate was directly linked to the broker's remuneration (the Ban)[2]. This practice effectively incentivised brokers to induce customers to opt for more expensive financing.

At the same time, the FCA introduced new guidance around commission disclosures, requiring brokers to prominently disclose the existence and nature of any financial arrangements with a lender that might impact upon the broker's impartiality in promoting or recommending a credit product, or which might, if disclosed by the broker to the customer, affect the customer's decision as to whether to enter into the finance agreement at all.

In January 2024, following an increasing number of consumer complaints claiming compensation for finance deals based on DCAs prior to the ban, and increasing numbers of court claims, the FCA announced it would be conducting its own review into motor finance sales between 6 April 2007 and 28 January 2021. This was primarily driven by the fact that firms were rejecting most complaints based on their views that they had not acted unfairly nor caused consumers loss based on the applicable legal and regulatory requirements at the time. However, the Financial Ombudsman Service and some County Court judges thought otherwise, finding in favour of some complainants and claimants.

The FCA is currently reviewing whether motor finance customers have been overcharged because of historical DCAs. Importantly, other commission structures, such as flat or fixed fee commission models, or any type of arrangement where the broker did not have any discretion to set a customer's interest rate, are outside of this review. If the FCA finds that there has been widespread misconduct and that consumers have lost out, it will identify how best to ensure people who are owed compensation receive an appropriate settlement in an orderly, consistent and efficient way, possibly using the FCA's statutory powers to implement an industry wide consumer redress scheme. 

At the same time as announcing the review, the FCA issued new temporary complaint handling rules for complaints about motor finance agreements involving DCAs. The FCA initially paused the eight-week deadline, by which regulated firms must provide a final response to customer complaints, for a period of 37 weeks to prevent disorderly, inconsistent and inefficient outcomes for consumers and knock-on effects for firms and the market while the FCA completed its diagnostic work and determined what further action was necessary. This deadline was extended to 4 December 2025 due to difficulties in obtaining historical data going back to 2007. Consumers were also given 15 months to refer their complaint to the Financial Ombudsman Service (FOS), rather than the usual six months.

Despite this pause, lenders continued to face civil action in the County Courts, ultimately leading to the Judgment being handed down by the CoA.

Court of Appeal Judgment

Three appeals were brought by Mr Wrench, Mr Johnson and Miss Hopcraft (the Claimants), all financially unsophisticated consumers on relatively low incomes who, prior to the introduction of the Ban, purchased a used vehicle from dealerships which acted as credit brokers to arrange the vehicle purchase on finance. The dealers made a profit on the sale of the cars but also received a commission from the lender for introducing the business to them. In Mr Wrench's finance arrangements, it transpired that the broker dealer received two lots of commission, one based on a DCA and the other calculated as a fixed percentage of the sum advanced. The Claimants brought proceedings in the County Court against the lenders seeking, among other things, the repayment of the commission paid to the brokers. Each of the three claims were dismissed.

Applying common law principles, the CoA found in favour of the Claimants and held it was unlawful for car dealers (acting as brokers) to receive commission from lenders providing motor finance, without obtaining the customer's informed consent to the commission payment.

Key findings

  • Disinterested Duty: Where dealers act as credit brokers, they assume responsibility for searching for and and offering customers finance deals which are suitable for customers' needs and competitive, and thus owe a disinterested duty to their customers. This means that brokers must provide information, advice or a recommendation on an impartial or disinterested basis, unless the disinterested duty is disapplied by, for example, brokers making it clear to the consumer that they cannot act impartially because they have a financial incentive to put forward an offer from a particular lender or lenders even though that product may not be the best product for the customer.
  • Fiduciary Duty: The dealers also owed an ad hoc fiduciary duty to consumers, arising from the nature of the relationship, the tasks entrusted, and the obligation of loyalty inherent in the disinterested duty. The Claimants were financially unsophisticated and had a reasonable expectation that the broker, in sourcing financing for the customer, would act in their best interests and avoid conflicts of interest. However, conflicts of interest arise where brokers receive commission without consumers' informed consent.
  • Secrecy: If the payment of commission is kept wholly secret from the consumer, this will constitute a breach of the disinterested duty and lenders will be primarily liable given their knowledge of the broker's relationship with the customer and as payer of the secret commission.
  • Sufficient disclosure required to negate secrecy: Sufficient disclosure will negate secrecy but general references to the possibility of a commission being paid which are buried away in fine print will not be regarded as sufficient disclosure.
  • Partial disclosure: Partial disclosure of commission payments which is sufficient to negate secrecy does not give rise to primary liability on the lender, however they could be liable as an accessory to the broker's breach of fiduciary duty.
  • Accessory liability of lenders in partial disclosure cases: By paying the commission, the lender could be liable as an accessory for procuring the broker's breach of fiduciary duty in taking the commission payment without the customer's fully informed consent. Necessary requirements to establish accessory liability on the part of the lender are knowledge of the existence of the fiduciary relationship and payment of the commission to the broker in circumstances in which the lender has not satisfied itself that the borrower has given their fully informed consent to the payment.

In upholding each of the three appeals, the court ordered the commission payments paid to the broker be repaid to the Claimants, together with interest.

We understand that the lenders are currently seeking permission to appeal to the Supreme Court. If that application is successful, then the issues will be considered by the highest court in England and Wales.

Key takeaway points

  • The Judgment extends to all forms of commission payments, whether discretionary or non-discretionary in nature, including fixed/flat-fee models. This is therefore much broader than the FCA's ongoing review into DCAs and potentially opens up the floodgates to a significantly higher volume of claims against both brokers and lenders. Claimants will, no doubt, seek recourse to the party with the deepest pockets which, in the motor sector, is typically the lenders. Moreover, while corporate to corporate lending is not regulated by the FCA, the principles in the Judgment could apply to business lending, posing potentially an even greater threat to lenders.
  • Following the Judgment, the FCA announced that it will consult on extending the complaints period for all complaints relating to motor finance agreements which were not based on DCAs, due to the high volumes of claims it expects firms to receive following the Judgment. The FCA expects the proposed complaint extension to cover at least the period until the Supreme Court decides whether to grant permission to appeal.
  • While the Judgment relates to motor finance, the principles potentially apply to any sector where an intermediary owes a disinterested duty / fiduciary duty to consumers and receives a commission from a third party for an introduction. This could include, for example, online market comparison websites which introduce customers to utility providers, insurers etc.
  • All commission payments to intermediaries should be fully disclosed. The disclosure should be clear, comprehensive and prominently brought to the borrower's attention, covering all material facts that might affect the borrower's decision to enter into a credit arrangement. It should not be buried in the small print and disclosure should include the amount of commission and how it is calculated. Note that this goes beyond the current FCA rules which state that brokers must disclose the nature and extent of any commission arrangements which could impact impartiality.
  • The express and informed consent of borrowers should be sought where commission arrangements are in place. Brokers and lenders should review the customer journey and consider whether any revisions are necessary to marketing material, pre-contract information or customer agreements, alongside any internal policies and procedures.
  • In line with the FCA's Consumer Duty, motor finance lenders will be expected to maintain adequate financial provisions to cover potential redress payments to customers, as well as the ability to service higher volumes of complaints. The FCA has made clear that FCA-authorised firms must meet wider legal requirements as well as regulatory rules and that the interpretation of common law is rightly for the courts. However, given the enormous uncertainty in the market and the pauses on complaints handling, the FCA has announced that it will write to the Supreme Court asking it to decide quickly whether it will give permission to appeal and, if it does, to consider it as soon as possible. If permission to appeal is granted, the FCA will consider intervening to share its experience to assist the Court.

How we can support you

Whether you are a lender or an intermediary, our full-service team has the experience and expertise to provide you with holistic advice on the implications of the Judgment on your business, the key risks associated and next steps you should be taking.

Our specialists can help mitigate any future claims by reviewing and updating current commission disclosures, introducer agreements between lenders and brokers and credit agreements, as well as advising on any changes that may be required to policies and procedures.

If there are concerns around liquidity and the ability to meet redress claims, our restructuring teams are on hand to advise on mitigation and strategy.

Our specialist finance litigators can also help on any disputes which may arise. The Judgment is fact specific and there will likely be nuances, depending on the particular circumstances of each case.

Unsure of who to reach out to for support? Get in touch with Sushil Kuner, Ian Weatherall, Tom Pringle or Sean Adams who are on hand to advise and support you.

Footnotes

[1] The CoA handed down judgment in three test cases concerning motor finance commission arrangements; Johnson v FirstRand Bank Ltd, Wrench v FirstRand Bank Ltd and Hopcraft v Close Brothers Ltd
[2] FCA bans discretionary commission motor finance models