Hidden commission and car finance: how companies could owe billions in compensation

The decision was handed down by the Court of Appeal in three conjoined cases, on the 25th of October 2024: Johnson v FirstRand Bank Limited (London Branch) T/A Motonovo Finance, Wrench v FirstRand Bank Limited, and Hopcraft v Close Brothers Ltd [2024] EWCA Civ 1282.

The court ruled in favour of three claimants who were seeking repayment of commission made to car dealerships as part of their Personal Contract Purchase (PCP) loans and car hire agreements. A PCP loan involves paying an initial deposit and then making a set number of fixed monthly payments to cover the car’s depreciation. When the contract ends the customer can make a final ‘balloon’ payment to buy the car or hand it back to the dealer.

Background

The appeal heard the three cases concurrently, each against a car loan provider. In each case the claimant was described as a ‘financially unsophisticated’ consumer looking to finance their vehicle purchase through a dealership. The dealership promised to find a loan provider that best met the needs of each consumer. However, it was not properly disclosed to each consumer that the dealership was also acting as a credit broker. As such, the dealership was receiving commission from the finance companies for each loan they agreed with a customer.  This incentivised some dealers to offer loans with higher interest rates, so that they received more commission.

Previously, car dealerships held the authority to set interest rates on car finance loans themselves through what are known as Discretionary Commission Arrangements (DCAs). This practice was banned by the FCA in 2021, but most car loans which were offered by dealers from 2007 to 2021 were DCAs.

The commission paid to the dealerships by the loan providers resulted in the consumer paying a higher cost than they could have done through a different lender. As such, each claimant in the case sought the return of these commission payments, plus the appropriate interest.

What did the court decide?

The court ruled in favour of all three claimants. They each received repayment of the full commission payment with interest.

The court separated their ruling into two categories: situations where the consumer was not informed of commission payments, and situations where commission payments were partially disclosed to the consumer.

In situations where the commission was kept secret from the customer, the loan provider, or lender, had what’s known as a ‘disinterested duty’ to act in the best interests of the consumer and provide information and advice on an impartial basis. This was violated by the dealership being able to choose a loan provider according to the amount of commission they would receive. The lender was found to be the primary wrongdoer in these situations.

If the commission was partially disclosed to the consumer, the lender (the car finance company) can still be held liable as an accessory to the broker’s (in this case the car dealership’s) breach of fiduciary duty, which is the duty to act in the best interests of the consumer. In all three cases, the court ruled that both types of duty (fiduciary and disinterested) applied due to the obligation of loyalty and trust placed in the car dealership by the customers. To establish that the loan providers were involved in the wrongdoing, known as “accessory liability”, there must have been payment of commission to the car dealership when the consumer had not given fully informed consent. The court acknowledged that in situations of partial disclosure, this would often have been the case.

Importantly, the court decided that disclosure of commission payments in the fine print of documents was not sufficient for car dealerships to avoid liability. Disclosure of the commission payments is only sufficient to make up for this secrecy if the customer had given specific and fully informed consent to the commission payments being taken. It is also paramount that any such information in the documentation is accurate and not misleading.

The court also stressed that the consumer in each case should have been made aware in their loan agreement that commission may be paid to the dealership, whilst acknowledging that this will not have happened in most cases.

How wide ranging could this judgment be?

Owing to the way in which the court defined the relationship between the consumers, credit brokers, and lenders, it has been speculated that other consumer finance agreements in which a customer has been introduced to a lender through an intermediary and not told the exact amount of commission being paid could fall under the scope of the judgment.

Loan agreements taken out to finance electronics, caravans and other consumer goods may fall under the same category.

Indeed, the judgment has set alarm bells ringing in the financial sector. The FCA had written to firms on 12th April 2024 recommending they retain sufficient resources to compensate claimants, with cost estimates rising into the billions. Now, finance providers have delayed financial reports to assess the impact of the judgment. It’s believed some have set aside vast funds in preparation. Close Brothers, a major lender in the motor finance market, temporarily ceased offering loans to consumers to finance vehicles. Independent dealerships have also expressed concern over their future.

The finance companies whom the decision was brought against have sought permission to appeal. It remains to be seen how the Supreme Court will respond.

How is Leigh Day involved?

We are currently investigating this issue and assessing the impact this judgment will have.

Leigh Day’s experts are also currently representing over 100,000 clients in claims against various vehicle manufacturers, alleging that they installed ‘defeat devices’ in their vehicles to cheat emissions tests.

As many of our clients will have used finance to purchase their vehicles, they may also have a claim against the loan provider and car dealership for charging too much interest when they purchased their vehicle.

How to contact us?

If you purchased your vehicle with finance between April 2007 and 28 January 2021 and believe you may be affected by this issue, please register your interest here.

You may also be able to pursue a claim yourself, by lodging a complaint against your car finance company. Money Saving Expert offers free advice, seen here.