Motor Dealers Serving as Credit Brokers Owe a Fiduciary Duty to Customers, Court of Appeal Rules

The Court of Appeals ruled in favour of the consumers on Friday (25 October 2024) in the landmark case over motor finance commissions that consolidated three appeal proceedings: Hopcraft v. Close Brothers, Wrench v. Firstrand Bank, and Johnson v. Firstrand Bank and Motonovo Finance.

The three complainants, namely Amy Hopcraft, Andrew Wrench, and Marcus Johnson, were offered financing by car dealers to help buy used cars costing under £10,000. They asserted that the car dealers had a responsibility to provide fair and unbiased information.

The appeal hearing started in July 2024, and was presided over by three Justices of the Court of Appeal, namely Lady Justice Andrews, Lord Justice Edis, and Lord Justice Birss, who gave a unanimous ruling, upholding the appeals.

The Court of Appeal found that the dealers were in breach of their fiduciary duty to their customers, and ordered the lenders to repay the commission to the borrowers.

The Court of Appeal highlighted that dealers serve as car sellers and credit brokers for the buyers, which means that as brokers, they were supposed to help customers find a finance option from a selection of lenders that was competitively priced and met the customers' needs. In some cases, the dealers even promised to find the best or most suitable deal for the customer.

The Court also noted that there was no indication in any of the cases that the complainants were aware of the motor finance commission.

In one of the cases, the dealer, serving as a credit broker, failed to inform the customer about the commission they received from the lender. On the other hand, the information was partially disclosed in the two cases through a small print in the credit agreements.

Furthermore, the dealer in both cases only offered the customers a single option for motor finance i.e. Close Brothers in one case, and FirstRand Bank (trading as MotoNovo Finance) in the two others. The car finance claims were brought against the lenders.

The Court also established that there was a conflict of interest in all three cases, and that the appellants have not provided their informed consent to the receipt of the commission.

The Hopcraft and Wrench cases were brought by lead barrister Robert Weir KC, instructed by Consumer Rights Solicitors. Robert Weir KC also brought the Johnson case, instructed by HD Law Ltd.

Representing Firstrand and Motonovo in the defence is lead barrister Matthew Hardwick KC, instructed by Eversheds Sutherland (International) LLP. Meanwhile, Close Brothers is represented by lead barrister Ian Wilson KC, who is instructed by Russell Kelsall, a partner at Walker Morris.

The three individual cases are motor finance commission complaints that were not brought up to the Financial Ombudsman Service, as they were initially pursued through court proceedings in regional courts across England. 

The Close Brothers finance claim was initially heard in Kingston-upon-Hull Combined Court, where it was dismissed. Meanwhile, the two cases against Firstrand Bank were heard in County Courts.

All three cases were granted permission to appeal the decisions of their respective courts in March.

A “Secret” Commission

The appellants invoked the 2021 case of Wood v Commercial First Business in contending that the brokers had the “disinterested duty” to provide impartial information, advice or recommendation. Such assertion was held by the Court of Appeal in the Wood case to be sufficient in establishing a claim for the “disgorging of a secret commission.”

However, to establish primary liability to the lenders, the Court explained that the commission has to be a secret. In the case where “there is partial disclosure which suffices to negate secrecy,” the lender can only be held liable in equity as an accessory to the broker’s violation of their fiduciary duty to act in the customer’s best interest.

Consequently, the Court ruled that the lender in the Hopcraft case was liable as a primary wrongdoer, as there was no disclosure provided to the customer about the commission.

The Court also ruled that the banks in the Wrench case were also liable as primary wrongdoers since there was insufficient disclosure. The Court explained that the statement that a commission may be paid to the broker was “hidden in plain sight”, further pointing out that such disclosure was “tucked away” in a sub-clause under a “General” heading of the lender’s standard terms and conditions. The Court noted that FirstRand did not make an effort to require the customers to read the clause or to obtain their confirmation that they had done so.

In the Johnson case, the Court agreed there was enough information shared to avoid total secrecy, but it found that the details provided were not enough for the customer to fully understand and agree to the payment. In this case, the lender was liable as an accessory.

The Court ruled that hiding a statement about possible commission in the fine print, knowing the borrower is unlikely to read it, is not enough to avoid secrecy. However, this could be different if the borrower’s attention was clearly directed to it.

The Court ordered the lender in the Johnson case to repay the commission of £1,650 (plus relevant interest) to the appellant. Meanwhile, the amounts are yet to be determined in the other two cases.

Close Brothers to Appeal Ruling

Close Brothers intends to appeal the Court decision, it said in a statement. It also disclosed that it will temporarily stop offering new UK motor finance deals while it reviews and updates its paperwork and processes to meet the new requirements.

Referring to the Court finding that dealers have the fiduciary duty to prioritise customers' needs over other interests when arranging finance, Close Brothers said it disagrees with the “Court's extension of the existing case law in this area,” further stating that it will appeal this decision to the UK Supreme Court.

Close Brothers assured that the financial impact of the Hopcraft case alone was not significant for the company. However, subject to the UK Supreme Court judgement on the appeal, it could set an example for similar claims, which might, depending on the details, lead to significant costs for the company.

Industry Reactions

The Court of Appeal judgement will affect every lender in the motor finance market, according to Principal Kavon Hussain at Consumer Rights Solicitors, further stating that the ruling is a “huge step” towards those individuals being repaid the hidden commissions.

Consumer Rights Solicitors estimated as much as £42 billion for the amounts owed to consumers. Hussain disclosed that they “already have a substantial number of clients with claims waiting to go.” 

HD Law Director Kevin Durkin expressed relief that the Court of Appeal has “finally provided much-needed guidance” on the  common “underhand” scheme of lenders secretly paying car dealers to direct customers to them or raising interest rates to increase their own profits.

The latest court decision is a “massive win for consumer justice,” according to Sentinel Legal’s director, Sam Ward, further stating that the lenders have “taken advantage” of customers “for too long” with the “complex, unfair” finance deals.

Ward further expressed that the ruling “finally puts power back into the hands of consumers, forcing banks to face the consequences of their actions.”

“Tensions” in Precedent Cases

The Court of Appeal added a note that there were “tensions” between the earlier cases of Hurstanger and Wood, which it found challenging to reconcile.

The Court also acknowledged that judges in Hurstanger were hesitant to hold a lender responsible for paying a hidden commission if the lender had made efforts to inform borrowers about the commission and get their approval, even if those efforts fell slightly short.

The Court recognized that these types of cases are complex and create “numerous difficulties.” However, it expressed hope that its analysis would give county court judges, who often handle such cases, enough guidance.

In the future, the Court suggested, it may be useful for the Supreme Court to review the Hurstanger and Wood decisions more closely and clarify when a commission paid by a third party to someone’s agent would make the payer legally responsible, whether directly or indirectly.