An Overview by IMDA Legal Partners Lawdata
COURT OF APPEAL DECISION
The Court of Appeal Judgment in relation to commission payments clearly came as something of a surprise to the industry.
As matters currently stand, we need to understand what the Court of Appeal has actually said, and the short term implications of that judgment.
Whilst similar complaints have now been considered by both the Court of Appeal and the Financial Ombudsman Service (FOS), neither is strictly bound by the other’s findings, whilst the ongoing investigation by Financial Conduct Authority (FCA) is independent of both.
There are undoubtedly a number of questions to be raised and observations to be made about the content of the judgment, but it will remain the law unless, or until there is a further judgment on the point.
Close Brothers have expressed an intention to appeal, so we’ll need to see how that develops.
In short, the Court of Appeal found that the dealer has two independent commercial roles, one selling cars, and one acting as a credit broker, and that when acting as a credit broker, the dealer owed the customers a duty to act on a disinterested basis. They weren’t persuaded by the argument that the dealer is in business to sell both cars and finance, or that the dealer acted as an agent of the lender and not the dealer and found that whilst customers expect dealers to make a profit on selling cars, they don’t necessarily expect dealers to also make a profit on finance.
The Court accordingly found that, in order for the commission payment to be lawful, the customer must have given their fully informed consent, and there could be no informed consent if the customers did not know how much the commission was, or how it would be calculated. It was insufficient for lenders to tell customers that the amount was available on request or for dealers to tell customers “we may earn a commission” or similar. On the facts of these particular cases there was no evidence that the customers had given such consent.
The award is for the repayment of the commission by the lender to the customer, together with interest.
Whilst the Financial Ombudsman Service also found in January that some lenders were liable to repay finance commissions, that decision was based on the finding that the lenders had breached their own regulatory obligations, including the Principles and those set out in the Consumer Credit Sourcebook (“CONC”). The Court of Appeal decision has wider implications about the duty of care owed by dealers (credit brokers) and lenders.
The major concern arising from the Court of Appeal judgment is that the lender’s liability is founded on the finding that the dealer was in breach of a duty to obtain the customer’s fully informed consent. The lenders were liable because they had not satisfied themselves that the borrowers had given their fully informed consent to the commission payment. This would seem to leave open the possibility of customers seeking to hold dealers jointly and severally liable for claims, or for lenders to look at seeking an indemnity from dealers in respect of costs incurred. This will however depend on the terms of each dealer agreement.
Judgment Conclusion
(1) Does a statement in the terms and conditions of the credit agreement that commission may or will be paid have the effect of negating secrecy, even where the borrower has neither read the statement nor been directed to read it?
Answer: not necessarily. The question whether the borrower has been told or informed about the commission will depend on the facts of each case, including the steps, if any, that are taken to bring the matter to his attention. Burying such a statement in the small print which the lender knows the borrower is highly unlikely to read will not suffice.
(2) For the purposes of establishing an accessory liability on the part of the payer of commission in a partial disclosure case, is it necessary for the broker to have owed a fiduciary duty to the claimant, or does the “disinterested duty” suffice?
Answer: a fiduciary duty is a necessary requirement but in a case such as this, a fiduciary duty arises in tandem with and in consequence of there being a disinterested duty.
(3) If there is a fiduciary duty in a partial disclosure case, what are the necessary requirements to establish accessory liability on the part of the lender?
Answer: knowledge of the existence of the fiduciary relationship and payment of the commission to the broker in circumstances in the lender has not satisfied itself that the borrower has given their fully informed consent to the payment. Those circumstances will inevitably arise if the disclosure is partial, particularly if the lender has encouraged partial disclosure.
(4) Did the broker owe the relevant duty to the claimants in these cases?
Answer: yes. In all three cases there was a disinterested duty which was sufficient to give rise to a primary liability in the cases of Hopcraft and Wrench, which were secret commission cases. In all three cases there was also a parallel fiduciary duty which was sufficient to found the claim for accessory liability in the Johnson case and would have been sufficient in Wrench had it been a partial disclosure case.
(5) Is the lender liable for the repayment of the commission?
Answer: yes.
Full Document ewca_civ_2024_1282
Graham Jones LL.B (Hons.) FIMI, Director of Legal Services, LAWDATA LIMITED