Motor finance commission: Supreme Court allows lender appeals

The Supreme Court has delivered its long-awaited judgment on motor finance commissions, and has allowed lender appeals on 2 of the 3 matters under appeal. It upheld only the CCA unfair relationship claim.�This post has been drafted on the basis of Lord Reed’s speech. We will publish updated and more detailed articles in the light of the published judgment.

Delivering the judgment, Lord Reed described the nature of the relationships involved. He focussed on how the car dealer is dependent on the finance being agreed in order to sell a car. He spoke of various actions the dealer could take if, for instance, the lender would not advance enough credit or the monthly payments would be too much for the customer to pay. The key, he said, is that the dealer has a commercial interest in the negotiations over the finance package, which will continue until the package is entered into.

He moved on to discuss how the consumer does not deal directly with the finance company, although the loan agreement is directly between the consumer and the finance company. The motor dealer will make all the arrangements. It does not act as agent of the customer, is not remunerated by the customer and does not give the customer any reassurance that it is putting its commercial interests aside – and it could not do that! The Supreme Court noted that FCA rules require the dealer to disclose that commission is receivable if it could affect the dealer’s impartiality or have a material impact on the customer’s decision, but that nothing in the regulatory regime requires lender or dealers to disclose the existence or amount of any commission payment or to get the customer’s consent.

The customers seeking to recover from the lenders the commission that had been paid to the brokers all contended that:

• the finance companies committed the common law tort of bribery by paying commission to the dealers
• the dealers owed the customers a fiduciary duty and as such could not have any personal interest in the conclusion of the transaction and if that is so, acceptance of the commission was a breach of this, and the lenders had dishonestly assisted in the breach by paying the commission

Mr Johnson additionally claimed the relationship was unfair under the CCA.

The Supreme Court, noting that the Court of Appeal’s stance had shocked the lenders and the FCA, stated:

• the payment of commission was not a bribe. The car dealers clearly and properly had an interest in the finance being arranged, and clearly wanted to sell the vehicles at a profit, and so clearly owed no duty to the customers. Each of the 3 parties (lender, dealer, customer) was engaged at arm’s length pursuing their own interests, and no-one could think otherwise;
• for the same reason, no-one could think the dealer was acting as a fiduciary because it was at all times pursuing its commercial interests. The Supreme Court said that the distinguishing obligation of a fiduciary is often described as a “duty of single-minded loyalty to the person for whom they act”;
• the Court of Appeal had failed to understand that the dealer had its own interests and mistakenly thought the dealer was acting in the interests of the customer once the customer had chosen the car. It was also wrong to take the approach that because the customer trusted the dealer and may have been vulnerable this meant that the dealer was acting as fiduciary.

So the Court of Appeal was wrong on the first two issues. On the unfair relationships issue, the Supreme Court said that the fact there may have been no or only partial disclosure of commission did not of itself make a relationship unfair. There are many factors to consider. Here, a major factor was that the commission was 55% of the total charge for credit, and that large figure is a good indication of unfairness.� Additionally here the documentation was misleading in that they did not disclose that the dealer and lender had an agreement that gave the lender first refusal – in fact it gave the impression that the dealer would go to a panel of lenders to get the best price for the loan. The fact that Mr Johnson did not read any of the documents he was given was not a persuasive factor against a decision of unfairness, given that the information in question was well hidden – even though, had Mr Johnson read it, it could have led him to discover the amount of the commission. The Supreme Court said the lender should pay to Mr Johnson the amount of commission plus a commercial rate of interest, and that because what the Court of Appeal had said was full of mistakes, the lender’s appeal had to be allowed so as to substitute an order in Mr Johnson’s favour on different terms to the Court of Appeal’s.

The Supreme Court also explained that it had refused the Treasury’s application to intervene since the Treasury wanted to discuss the economic impact of any decision, which is not within the Court’s interest.