Court of Appeal hands down judgment in the latest update to the ongoing Motor Finance probe

Last Friday the Court of Appeal handed down judgment in three linked appeals - Johnson v FirstRand Bank Ltd, Wrench v FirstRand Bank Ltd and Hopcraft v Close Brothers Ltd (the Appeal).

The appeals which were heard concurrently all concerned the use of discretionary commission arrangements (DCAs) in the motor finance industry. For more information, please see our previous article.

In short, the Court of Appeal found in the customers’ favour in all three cases.  In doing so, it reviewed the law on secret commissions (or bribes) and set out some principles that are expected to provide guidance to the County Court in deciding on the large number of claims before it.  Of particular note is that the Court of Appeal decided that:

1. A statement in the terms and conditions of the credit agreement that a commission may be paid or will be paid, does not necessarily have the effect of negating secrecy, even where the borrower has neither read the statement nor been directed to read it.   Whether or not such a statement negates secrecy will turn on the facts of each case, but the Court of Appeal commented that “Burying such a statement in the small print which the lender knows the borrower is highly unlikely to read will not suffice”;
2. Whilst establishing that the broker owes a customer a fiduciary duty is necessary in a case of partial disclosure (commonly referred to as a “half secret” situation, although the Court of Appeal does not endorse that term), a fiduciary duty “arises in tandem with and in consequence of there being a disinterested duty”; and
3. In order to establish accessory liability on the part of a lender in a partial disclosure case, it will be necessary to show that the lender had knowledge of the existence of the fiduciary relationship between customer and broker, and of payment of the commission to the broker in circumstances where the lender has not satisfied itself that the borrower has given their fully informed consent to the payment.  Crucially, the Court of Appeal added that these “circumstances will inevitably arise if the disclosure is partial, particularly if the lender has encouraged partial disclosure”.

A key difference in a claim being a secret or partial disclosure claim (aside from the liability of the lender being primary in the case of a secret commission) is that in the case of a secret claim, if successful, the customer will have available a broader suite of remedies, including an automatic right to rescission of the agreement.

Whilst each case will of course still turn on its facts, and the Court of Appeal did distinguish the case of Medsted Associates Ltd v Canaccord Genuity Wealth (International) Ltd [2019] EWCA Civ 83 on the basis that the customers in that case were sophisticated investors and as such being told that a commission would be paid (but they were not told the amount) was sufficient to put them on notice to ask the amount and therefore negate secrecy, it seems likely that many, if not the majority, of customers currently bringing claims against lenders will be in a similar situation to the three customers in the Appeal.   

In the case of Mr Johnson, there was also a claim under s.140A of the Consumer Credit Act 1974.  This was largely considered on the facts, with the Court of Appeal determining that the relationship between Mr Johnson and FirstRand was unfair and “a very clear case”.  Whilst a relationship will not necessarily be unfair for the purposes of the Act simply because the broker receives a commission from the lender and the borrower is not aware of that fact, in this case the Court of Appeal considered it a key fact that the commission paid was 25% of the sum advanced, and also a key fact that the sum borrowed by Mr Johnson and paid to the dealer was much more than the car he was buying was worth.  Whilst a bad bargain in and of itself is not necessarily an unfair relationship, the Court of Appeal determined that here the bad bargain arose from a relationship between the broker and lender that was falsified by the broker and not disclosed by the lender, a fact described by the Court of Appeal as “critical” (it is important to note here that under the agreement terms between the broker and FirstRand, FirstRand had a first right of refusal on all potential deals, a fact that was not disclosed to Mr Johnson and of which he was unaware).  As an aside for those involved in PPI, the Court of Appeal relied on the principles set out in Plevin v Paragon Personal Finance Limited [2014] 1 WLR 4222, a case that has potentially brought PPI back into the limelight, in the context of secret commissions.

Both lenders have applied for permission to appeal to the Supreme Court.

In the meantime, news of the judgment has not only negatively impacted the share price of both FirstRand and Close Brothers (Close’s share price dropped 25% alone on the day of the judgment, and further since then, whilst FirstRand’s dropped 2% on the same day), but also other lenders known to be players in the motor finance market – Lloyds dropped 6.5% on the Monday after the judgment, whilst Santander has delayed detailed publication of its Q3 results to assess the impact of the Appeal.  Both FirstRand (through its MotoNovo motor financing arm) and Close have also announced immediate halts to new credit approvals, as has Honda Finance Europe.  Others, such as BMW and Secure Trust Bank, are also understood to have paused lending.  Whilst Lloyds (through its Black Horse motor finance arm) is still lending, it has announced that it is cancelling the payment of commissions.

The FCA has issued a short statement to confirm that it was “carefully considering” the decision and has subsequently also said that it is closely monitoring the situation. It did not say what effect the decision may have on the timescales of its ongoing review, or its next steps, but it has said it hopes that the Supreme Court would review the case to resolve the uncertainty.  Beyond the motor finance market, the decision could also have an impact on other credit-based transactions.