Niels Bohr, the Nobel Prize-winning physicist, reportedly said: "Prediction is very difficult, especially about the future". With that warning firmly in mind, this article comprises a (very cautious) look at what the future may hold for professionals in the context of commission payments, after the Supreme Court hears the linked appeals in Johnson v FirstRand in April of this year.
Johnson v FirstRand
In October of last year, the Court of Appeal handed down its much-anticipated decision in Johnson, a case concerning motor finance commissions across three linked appeals: Johnson v Firstrand, Wrench v Firstrand and Hopcraft v Close Brothers. It is no exaggeration to say that the decision upended the orthodox view of the law on commissions and caught many people, this author included, by surprise. I was not alone in this regard, as the decision represents a departure from the current FCA rules on commission disclosure and appears to have somewhat wrong-footed the regulator.
Ultimately, the Court of Appeal decision represents a marked shift in favour of the consumer in a number of ways. This could be interpreted as consistent with a recent general trend towards consumer-friendly decisions regarding professionals, mirrored in other cases like Glaser v Atay [2024] EWCA Civ 1111 on the subject of direct access costs. The Court of Appeal's decision highlights in multiple places the vulnerability of the consumers in the Johnson appeals. At the risk of a somewhat reductive analysis, it seems possible that this may have partially informed the Court's reasoning in finding that ad hoc fiduciary duties were owed by the brokers.
The Supreme Court will hear the expedited appeal from the lenders on 1-3 April 2025. It is notable that the Treasury applied to intervene in the case but was refused in February, while the FCA was granted permission.
The Current Impact of Johnson
As it stands, unless reversed by the Supreme Court, the impact of the Johnson decision shapes to be enormous. In the immediate context of motor finance commissions, it has been suggested that there could be a compensation regime to rival that which followed the PPI scandal. A number of lenders will rightly be very worried about this prospect, with Close Brothers (the lender in the Hopcraft case) in the news this week after setting aside £165m for potential consumer pay-outs, pushing the company to a loss of over £100m, as against a profit of £87m one year earlier.
In the wider context relating to brokers and other professionals, the impact looks to be less immediate but perhaps even more significant over time. Principally, the decision marked an unexpected and substantial widening of the circumstances in which a fiduciary relationship will arise between professionals and their clients.
The Court of Appeal found that the dealers, in their role as credit brokers, were in a fiduciary relationship with the buyers. The result of this finding was that even in case of 'partial disclosure', or 'half-secret commissions' as they had previously been described in the case law, accessory liability could arise on the part of the lender.
The Court's reasoning for this was articulated at [100]:
"It is precisely because the brokers were in a position to take advantage of their vulnerable customers and there was a reasonable and understandable expectation that they would act in their best interests, that they owed them fiduciary duties. There was obviously reliance on them to act in good faith, just as there was in Hurstanger and McWilliam."
In this author's view, however, this reasoning puts the cart before the horse. It is true that fiduciaries are in a position to take advantage of their principals. However, that arises as a result of them being in a fiduciary position, it should not be the reasoning for finding that they are in such a position in the first place.
The Court of Appeal, at [102-103], robustly rejected the argument that no fiduciary relationship should arise in circumstances where the dealers were selling a car to the consumers, as well as arranging credit for them. At [103], the Court stated:
"That analysis is flawed, not least because there is no such inherent conflict of interest between the broker and the consumer. On the contrary, as Mr Weir pointed out, the broker's interest is aligned with that of the customer. Both of them are keen to facilitate the sale at the price that the broker/dealer is prepared to accept, and the customer is willing to pay."
This rejection seems too hasty and emphatic. The context in which the credit-broking relationship arises must surely be important. The car dealer is, principally, a seller of a car, to a buyer on the other side of a transaction. In the absence of evidence that the seller then communicated a specific change of role, to assume fiduciary duties, this starting point should be relevant. That evidence could take the form of a broker who expressly states that they will advise a buyer, or will 'obtain the best deal' or similar.
The remedies which flow from these breaches are also significant. The Court of Appeal held that the consumers were entitled to rescission of the agreements they had entered into, alongside payment to the value of the commission received by the broker. These remedies could be particularly significant in a wider variety of credit broking relationships, such as mortgage lending. The prospect of rescission may serve to increase the value of the claim beyond the value of the commission itself, which may constitute a small claim, so that costs are recoverable by claimants. This would be significant for claimant firms which may rely on the recoverability of costs to support their business model.
The Supreme Court
It is no surprise that the appeal to the Supreme Court has been expedited. The issues at stake have the potential to have a genuine macroeconomic impact on the UK, as seen in the applications to intervene. After the Treasury's application to intervene was refused, there is always the possibility that Parliament could even legislate on the issue, depending on the outcome in the Supreme Court and the nature of the judgment.
The Court of Appeal itself delivered its decision clearly aware that it would be further appealed, due to the unsatisfactory interplay of the existing case law on the issues. The Court was surprisingly candid in stating at [176]: "There are tensions between Hurstanger and Wood which we have not found it easy to reconcile, though we have done our best."
This now brings me back to the thorny question of prediction.
In my view, the Supreme Court is likely to overturn the Court of Appeal's decision that a credit-broking relationship is necessarily a fiduciary one. Clearly, there will be fact patterns where fiduciary duties are assumed, such as where some element of advice, as in the Johnson case itself. However, I consider it most likely that the Supreme Court will find this is the exception, rather than the default starting point. This seems to be the outcome which is the best fit with the existing case law, market expectations and practical reasoning, and which will avoid far-reaching and unwelcome consequences for other professionals.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
