The High Court has dismissed all 3 grounds of appeal brought by a lender under a discretionary commission arrangement (DCA) for motor finance, following a FOS decision to uphold a customer complaint.
The grounds of challenge related to:
- errors of law on the requirement to disclose the commission mode and in determination of liability;
- irrational result on quantum; and
- error of law on deemed agency under the CCA.
Specifically on the first two grounds, the lender said that:
- the FOS had misinterpreted the law in concluding that the broker should have disclosed to the customer what its commission agreements with the lender were and that the DCA between the lender and the broker was caught by CONC 4.5.2G; and
- the FOS’s decision to award the customer compensation was irrational because she had suffered no financial loss.
The broker also applied for additional ground to be considered, specifically:
- that the FOS decision was procedurally unfair as it did not invite the broker to take part in the proceedings, refused an application for a hearing and did not ask it to supply evidence;
- that the monetary award was “illegal” because the customer suffered no loss; and
- that an expert witness report should be considered as additional evidence.
The judge found that the FOS had correctly interpreted the relevant FCA rules in force at the time and the CCA when it found that neither the dealer nor the lender met the required standards, and, as a result, the FOS was entitled to find that neither disclosed their commission arrangements adequately to the borrower and that the relationship between the borrower and lender was unfair in those circumstances.
The original complaint arose when one complainant (Ms Lewis) bought a car from the Arnold Clark dealership in November 2018. She bought the car on a conditional sale agreement with the lender, Clydesdale Financial Services Limited, under which she would get title to the car after making 60 equal monthly payments. She complained to the FOS in 2021, and the FOS upheld the complaint in January 2024. The decision focussed on what the commission arrangements were and what was disclosed to Ms Lewis about them. The Ombudsman held that the dealer was the lender’s agent under the CCA and made a monetary award against the lender in favour of Mr Lewis, which the lender paid. However, it then challenged the Ombudsman’s decision on several grounds, and the Supreme Court considered:
- whether the Ombudsman misinterpreted the relevant provisions of the FCA Rules;
- whether the Ombudsman was right to say that the commission arrangements between the lender and the dealer should have been disclosed or more fully disclosed to the customer;
- whether the dealer could rely on grounds of challenge additional, separate and independent of the lender’s grounds;
- whether the Ombudsman treated the dealer in a manner that was procedurally unfair;
- whether the dealer could rely on expert opinion evidence that the Ombudsman had not seen;
- whether the Ombudsman erred in law, disregarded relevant considerations or reached an irrational conclusion when it decided to make the monetary award to the customer;
- whether the Ombudsman erred in law in deciding that the the dealer was the deemed agent of the lender under the CCA; and
- whether under the Senior Courts Act 1981 the judge should refuse relief on the basis that, if the conduct complained of had not occurred, it is highly likely the outcome for the lender would not have been substantially different.
Overall, and we will consider the issues further in a more detailed article, the Court was persuaded that the grounds of challenge were permitted to be advanced, but dismissed them on their merits. It did not entertain an argument from the dealer of procedural unfairness against it.
In summary, the lender was one of a panel used by the dealer, and the two had entered into an agreement in 2012 (which had been updated before Ms Lewis bought her car). In 2018, the lender had provided the dealer with a document setting out the motor loan application process. The document included detail on the option to vary the interest rate within set limits and explained clearly to sales staff what was and was not a valid consideration for varying the rate, and what they could not do. At the time Ms Lewis bought her car, the dealer was advertising an APR of 8.9% on all its used cars, “with no hidden terms and no unexpected costs”. Ms Lewis borrowed just over £13,000, under the agreement with the lender that recorded both a flat rate of interest and the 8.9% APR. Under the brokerage agreement, the dealer could set a flat rate of between 2.68% and 15.25%. Ms Lewis had received an IDD which, among other things noted that lenders typically paid the dealer a fee for introductions, and stated that the dealer would not give advice or a recommendation. The dealer ended up receiving nearly £1,600 from the lender for arranging the loan – partly on the discretionary commission and partly because of a provision in the agreement that required the lender to pay the dealer 2% of the amount borrowed.
Subsequent to Ms Lewis taking out the loan, the lender withdrew from the motor finance market and the FCA banned DCAs.
Ms Lewis complained in late 2021 to the lender, which rejected her complaint and forwarded it to the lender as the party that had provided the services. Ms Lewis complained to the FOS the next day saying that the dealer had received undisclosed commission and that she had been caused financial hardship and stress. In late 2022, the FOS adjudicator wrote to the lender saying it felt the complaint should be upheld. The lender disputed this, and the FOS produced a provisional decision in June 2023 explaining its view. At this point, the dealer decided not to engage with the FOS and the lender commissioned a report on the motor finance market at the relevant times. The report concluded the customer had received a “highly competitive and fair deal”. The lender then wrote to the FOS disputing the provisional decision and saying it would not accept responsibility for the actions of the dealer (although it did not criticise the dealer). Ultimately, the Ombudsman’s final decision was that
- the discretionary commission model created an inherent conflict between the interests of the dealer and the customer because it allowed the broker to set a higher interest rate than the lender would have accepted;
- the lender acted contrary to CONC 4.5.2G and Principle 6 in entering into and operating the DCA on the terms that it did (simply stating “lenders typically pay us a fee for these instructions” did not amount to adequate disclosure;
- it was likely a court would conclude the relationship between the lender and the customer was unfair to the customer under s140A CCA for any or all of three reasons – the inherent conflict between the interests of dealer and customer, the inequality of knowledge and understanding caused by the lender’s own failure to disclose the basis of commission, and the dealer’s failure to comply with CONC 3.7.4G(2) and Principles 7 and 8, which under s56(2) CCA would be deemed to be a failure of the lender; and
- on that basis, the lender should compensate the customer by paying the difference between the amount of interest she paid and the lowest rate the lender would have accepted, interest on the overpayment and a consequential reduction in any outstanding payments. The FOS considered that, if fully informed, the customer would not have argued with the 2% fixed rate for head office, but would have negotiated down the discretionary amount of the commission to the minimum rate at which the lender would have lent.
The High Court granted permission for each challenge to be brought, but dismissed them all. Key aspects of the Court findings include:
- while it agreed that the correct interpretation of the FCA Handbook provisions is a matter for the Court and not the FOS, so that if the FOS misinterprets them it will have failed to take them into account, in this case the FOS had correctly interpreted the FCA rules and the CCA when it decided the lender and broker did not meet relevant standards;
- the correct interpretation of a provision is ultimately governed by the language used;
- it is for the Ombudsman and not the court to decide whether on the facts a rule or Principle has been breached;
- it is not the case that if a rule is complied with a Principle will of necessity also be complied with;
- the Ombudsman is free to award compensation for breach only of a Principle;
- it was for the Ombudsman to decide what would meet the FCA requirements to disclose the “existence” or “any” commission payable -in this case there was the standard head office fee/commission of 2% and the discretionary rate; and
- the lender did not enter a plea of perversity or irrationality in determining liability;
- it was open to the Ombudsman to decide that the 2018 version of the relevant CONC rule was already wide enough to require disclosure of commission, and it was for the Ombudsman to decide what level of disclosure would meet the requirement to disclose the existence of any commission payable.
The Court also said:
- that the phrase ‘differential commission rates’ as used in CONC 4.5.2G is (as the guidance suggests) intended to include both those “providing for differential commission rates” and also those “providing for payments based on the volume and profitability of business” and, therefore, the discretionary commission arrangement between the lender and the broker was subject to CONC 4.5.2G; and
- that the FOS did not need to consider whether the broker could have offered its minimum interest rate to all borrowers, only that it could have done so for the borrower in this case and that a scenario in which the borrower negotiated the minimum rate was not implausible.
The court also found that the FOS had correctly interpreted s.56(1)(b) of the CCA such that the broker could be ‘deemed’ to be Clydesdale’s agent in respect of the pre-contractual negotiations between it and the customer and Arnold Clark in relation to the commission.
The FCA welcomed the judgment, saying it brings greater clarity to DCA complaints.
It will publish its decision on extending the pause on all motor finance complaints by 19 December.