In a landmark decision, the UK Supreme Court resolved three conjoined appeals concerning the legality of commission payments made by lenders to motor dealers in hire purchase car finance arrangements. In this article we review the key points of the decision, and what it means for the finance industry and affected consumers.
Summary of the Supreme Court decision
The Supreme Court held that lenders were not liable for common law bribery as a result of making commission payments to the dealer-brokers. The dealer-brokers were also found not to owe fiduciary duties to customers, meaning lenders could not be liable as accessories to any breach of fiduciary duty. These findings effectively restore the status quo in the financial services sector, where commission payments have long been part of standard commercial practice.
An exception arose in the case of one respondent, Mr Johnson, where the Supreme Court held that he was entitled to succeed in his claim under section 140A of the Consumer Credit Act 1974 (CCA). The Court ruled that the relationship between Mr Johnson and the lender was unfair because of the size of commission and the failure to disclose the commission. An order was made for the dealer to pay the commission to Mr Johnson with interest. This part of the judgment is likely to set a benchmark for future statutory claims.
Background to the appeal
In our previous article, Court of Appeal slams brakes on hidden commission payments in finance agreements we examined three linked claims concerning motor finance commissions. In each case the customer had bought a second-hand car via motor finance arranged through a car dealer. The dealers received a commission from the lender, which was not disclosed or only partially disclosed to the customer.
The Court of Appeal found that dealers owed customers a duty of impartiality when recommending finance, creating a fiduciary relationship. Accepting commission from lenders on concluded finance arrangements conflicted with that duty and the lenders were therefore found liable for bribery (in two of the claims) or dishonest assistance (the third). This article will not examine this aspect in detail.
As discussed in our follow-up piece, Motor finance face off: predictions on the Supreme Court's judgment, the lenders appealed these findings to the Supreme Court.
Fiduciary duty and how the court applied the law to the tripartite relationship
The Supreme Court considered whether a fiduciary duty could arise in a typical car finance deal, involving a customer, dealer and lender, such that a commission payment would amount to a bribe at common law or a breach of fiduciary duty. Their key findings were:
- The arrangement was a standard arm's length transaction, with each party acting in pursuit of its own commercial interests. The dealer's offer to assist in securing a suitable finance did not imply any abandonment of its primary objective of selling the vehicle at a profit.
- The dealer's role in arranging finance was considered as ancillary to their primary role of selling the car; it was not provided as a separate service.
- The dealers made no commitment to act exclusively in the customer's interests.
- Dealers did not act as agents for the customers: they could not bind them in legal relations with the lender, and customers signed the agreements themselves. Although confidential information was obtained by the dealer, this did not establish agency.
- While customers were generally less informed or vulnerable, this alone was not sufficient to place fiduciary obligations on the dealer.
- The Court dismissed the idea that the transaction could be split into two stages (car sale and finance arrangement) with differing duties. The dealer's interest persists until completion of the sale.
On this basis, the Supreme Court concluded that there was no fiduciary duty and therefore no basis for bribery or equitable claims relating to undisclosed commissions. As a result, the lenders' appeals were upheld.
Unfairness under section 140A of the Consumer Credit Act 1974
The Supreme Court also considered whether the conduct of the car dealer Mr Johnson's case created an unfair relationship under section 140A of the CCA, which allows the courts to intervene to vary or set aside credit agreements where the relationship is unfair to the debtor.
The Supreme Court examined if the dealers' involvement in sourcing the finance packages created an unfair relationship under the statute. Key factors included the transparency of commission payments, the dealer's role in negotiating finance terms and whether the customer was placed at a disadvantage as a result of the dealer's conduct. The Supreme Court found that:
- The high commission payable in Mr Johnson's case was a "powerful indication of unfairness" and because it was not disclosed, Mr Johnson had no opportunity to question it.
- The dealer was contractually obliged to offer all finance business to one particular lender first, effectively limiting customer choice. This was not disclosed to Mr Johnson, and the Suitability Document provided to him misleadingly suggested impartial advice from a panel of lenders.
- The dealer and lender breached several rules in the FCA's Consumer Credit Sourcebook (CONC), including failing to disclose commission payments (CONC 4.5.3R) and failing to explain lender relationships (CONC 3.7.3R).
- Although Mr Johnson did not read the documents provided, the Court acknowledged he was commercially unsophisticated and questioned to what extent a lender could reasonably expect a customer to have read and understood the detail of the finance documents, especially when key disclosures, such as the commission payment were not prominently presented. As a result, Mr Johnson was unaware of the commission, which contributed to the unfairness of the relationship under section 140A CCA.
The Supreme Court accordingly ordered the lender to repay the commission of £1,650.95 to Mr Johnson, with interest from the date of the agreement (29 July 2017).
Implications for Car Finance Compensation
This decision is significant given the scale and importance of motor finance arrangements in the UK. According to the FCA, around two million people each year rely on finance to buy a car. The widespread nature of such finance, and the fact that undisclosed commissions were formerly common in the market, means that the judgment had the potential to impact a very large number of lenders and individual consumers on historic finance agreements.
While the Supreme Court's decision narrows the scope for large scale payouts, consumers who entered into undisclosed discretionary commission arrangements between 2007 and January 2021 may still be eligible for compensation, as well as those with unfair relationship claims under the CCA.
The FCA responded swiftly to the Supreme Court decision. Before markets reopened after the judgment, it confirmed in a press release that it will now consult on an industry-wide scheme to compensate motor finance customers who were treated unfairly.
Recognising the imperatives of quick compensation for consumers and certainty for investors, it has said the consultation will be published by early October, and the resulting scheme will be finalised and launched in time for affected consumers to start receiving compensation in 2026.
The precise shape of the redress scheme will become apparent in the coming weeks, with matters to be explored in the consultation including:
- Principles – how to balance potentially competing principles, including comprehensiveness, fairness, simplicity and timeliness.
- Unfairness – how to weigh a range of factors (including disclosure, the nature and size of a commission and customer sophistication) in deciding whether a commission relationship was unfair.
- Calculation – how to calculate redress – though it notes there may be a de minimis threshold, and compensation is likely to be capped at the level of commission. It will also consider what interest rate should be payable on compensation. The FCA's current estimate is that most consumers will probably receive less than £950 in compensation per agreement.
The FCA has also indicated that it wants any redress scheme to be simple for consumers to use directly, without necessarily needing to involve a claims management company or law firm.
While the Supreme Court decision delivers welcome clarity which will now inform a consumer redress scheme to be implemented swiftly, many questions remain as to how precisely the redress will operate. We will report on the consultation in due course.
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