Supreme Court hands down much anticipated judgment in UK motor finance commission case

The Supreme Court handed down its much anticipated decision in Johnson v FirstRand Bank Limited (London Branch) t/a MotoNovo Finance on 1 August, which was immediately followed by a Financial Conduct Authority (FCA) announcement on a proposed redress scheme. 

Motor dealers don't owe fiduciary duties to their customers

Although motor dealers are in a position to influence or affect the borrower's decision on finance, that is not enough for a fiduciary duty. For a fiduciary duty, there must be a single-minded duty of loyalty undertaken by the fiduciary that prevents them from having a personal interest in the transaction. Throughout the transaction, including the arranging of finance, motor dealers have their own commercial interest in getting the purchase of the vehicle concluded. 

In most circumstances motor dealers do not owe a disinterested duty to provide information, advice or recommendation. This would require something beyond merely acting as dealer and arranging the finance. In any event, owing a disinterested duty is not enough to give rise to a finding that the dealer has been "bribed" by the lender. In other words, lenders can't be liable for paying dealers a "bribe".

Since a motor dealer doesn't owe the customer a fiduciary duty, the question of whether commissions have been paid "secretly" or whether "informed consent" needs to be or has been obtained does not arise. However, importantly, the FCA regulatory framework still applies in terms of transparency and disclosure. As a result of the unfair relationship provisions in section 140A of the Consumer Credit Act 1974, a lender can still be liable for the acts or omissions of a motor dealer if they have not disclosed commissions in line with their regulatory obligations.

Commission disclosures and unfair relationships

Insufficient disclosure can be a factor in finding that the relationship between a customer and a lender is unfair under the Consumer Credit Act.  Other factors could include the size of the commission relative to the credit, the nature of the commission – for example, if there is an incentive to charge a higher interest rate – the characteristics of the consumer and compliance with regulatory rules. 

Unfair relationship claims are highly fact sensitive. There were two main reasons why the Supreme Court decided that the relationship between the lender and Mr Johnson was unfair:

• the commission paid to the dealer by the lender was equivalent to 55% of the total amount of interest and fees charged for the credit provided; and
• there was a commercial tie between the dealer and the lender, by which the lender was given the right of first refusal by the dealer. That commercial tie was not disclosed and, in fact, the documents provided to the borrower were misleading as they suggested that the dealer had a panel of lenders and would choose the most appropriate lender for the customer.

FCA redress scheme proposal  

Proposals have been expected for some time for a redress scheme in respect of discretionary commission arrangements (DCAs), being arrangements where dealers were given discretion to be paid more commission by charging higher interest rates. These kinds of arrangements were banned in 2021, but there are several thousand complaints about these deals pre-dating the ban.

Almost immediately after the judgment was handed down, the FCA announced that it would be consulting on a potential redress scheme for those consumers who may have lost out where a lender has acted unfairly and, therefore, unlawfully. Interestingly, the FCA says that as well as consulting on remediation for customers in respect of whom there were DCAs, it will also consult on which non-DCAs should be included. It points to the Supreme Court decision in the Johnson case, which did not include the payment of any discretionary commission, as making clear that non-disclosure of other facts relating to the commission can make the relationship unfair.

The consultation – expected by early October and to be finalised in time to allow compensation to start in early 2026 – will consider how a combination of factors may point to an unfair relationship between lender and borrower as well as how redress could be calculated.

Likely proposals for redress

The FCA has provided some insight into what we can expect to see in October:

• DCAs. The FCA will propose that any redress scheme covers DCAs if not properly disclosed and consult on which non-discretionary commission arrangements should be included.
• Redress calculation. This will be informed by the degree of harm suffered by the consumer, as well as the need for consumers to access affordable motor loans in future. A de minimis threshold will be considered.
• The FCA will consult on an interest rate for each year of the scheme (average base rate plus 1%) – i.e. a simple interest rate of c. 3% per year.
• Compensation per consumer. The FCA expects that most individuals will receive less than £950 per agreement in compensation.
• Estimated overall cost. The FCA considers that the cost of such a scheme (including administrative costs for lenders) will fall somewhere between £9-18 billion.

How far will lenders have to go back when providing redress?

The FCA proposes that the scheme covers agreements going back to 2007, for consistency with the Financial Ombudsman Service (FOS) complaints already being considered.

Will firms will have to opt in or opt out of any scheme?

Although the FCA is yet to decide whether it will operate an opt in or opt out scheme, firms will be required to make consumers aware of the possibility of compensation.

Other cases in the pipeline

Now that the Supreme Court judgment has been handed down, the Court of Appeal will hear the appeal in Clydesdale Financial Services v Financial Ombudsman Service, in which a lender is seeking to judicially review findings of the FOS in complaints centred on commissions disclosures. The hearing had been adjourned until September 2025, to allow the parties (and the Court of Appeal) to consider the impact of the Supreme Court's decision.

Similarly, at the end of July, the stay of proceedings in the Competition Appeal Tribunal class action against several motor finance providers (which alleges that the use of DCAs prevented, restricted or distorted effective competition in the motor finance sector causing loss) was extended to 25 October 2025. That extension was premised on the FCA's announcement (before the Supreme Court's ruling) that it would set out its next steps on redress within six weeks of the judgment.

It will also be worth following the Court of Appeal's hearing of the case of Angel v Black Horse, where it was held that 5,800 motor finance claims could be brought using a single (omnibus) claim form as opposed to each being brought as a separate claim. The appeal is due to be heard in April 2026.

Osborne Clarke comment

This is an important decision that has been eagerly awaited by the entirety of the lending and broking industry, whether motor finance or otherwise. The industry, and its advisers, will be thankful for the clarity given by the Supreme Court to what is required for a fiduciary duty to arise and, therefore, the application of the rules around bribery, both at common law and in equity. 

The decision was met with relief when first handed down, and the share price of the most exposed funders rallied following the ruling. However, the ultimate financial impact on the main providers of motor finance will depend on several factors, including the scope of the potential redress scheme. This creates market uncertainty, although lenders are not currently expected to increase the amounts already set aside for compensation payments given the judgment was largely in their favour.

Lenders offering intermediated finance in other areas of the market will also be relieved the with judgment. Those lenders should now be able to determine, with some certainty, whether their brokers owe fiduciary duties, and, at a high level will be better able to assess the likelihood of success of any unfair relationship claims made against them via the FOS and/or the courts (on the basis that such claims would be outside of the FCA's redress scheme).

Despite the expedited timeframe in which to consider the issues, the judgment is thorough, covering common law principles of fiduciary and agency relationships, the tort of bribery and remedies in considerable detail. The Supreme Court has seen fit to overturn the Court of Appeal decision in Wood and Pengelly, which is unsurprising. They have also cast some doubt on at least parts of the previously well-established judgment in Hurstanger. The judgment leaves the intermediated finance industry, as a whole, in a position whereby claims founded on bribery or breach of fiduciary duty will fail unless and until a fiduciary duty is established. While this is fact specific, the Supreme Court has confirmed that the bar is high and the duty is assumed not imposed.

In relation to unfair relationships, arguably the Supreme Court has said nothing novel. It cited with approval Lord Sumption's guidance in Plevin and proceeded to apply it to the case of Mr Johnson, ultimately finding that the relationship was unfair based on the size of the commission, the fact that it wasn't drawn to Mr Johnson's attention and the undisclosed right of first refusal FirstRand had on lending. Of most interest is the court's finding that a failure to disclose commission didn’t in and of itself make the relationship between FirstRand and Mr Johnson unfair.

That leaves the impact of the FCA's redress scheme not only on motor finance firms but also on the wider lending market. The redress scheme is unlikely to be straightforward in either its design or implementation, and the devil will be in the detail of the consultation proposal. Firms not in scope of the redress programme will be thinking carefully about whether it will nonetheless have an impact on their business. The FCA's announcement is high level and leaves us with several areas of uncertainty:

• The FCA says the scheme will compensate "consumers". Exempt credit agreements (specifically for credit exceeding £25,000 for business purposes) are within the scope of the unfair relationships provisions in the Consumer Credit Act, but those borrowers would not ordinarily qualify as consumers, so we assume they will be excluded from the redress scheme.
• The FCA appears ready to require that, in any redress programme, a certain level of non-discretionary commission by reference to the total charge for credit should trigger a re-examination of a customer relationship. However, in Johnson, (unlike in Plevin, which triggered a payment protection insurance commission redress programme), the amount of the commission was not the sole focus of the Supreme Court judgment. This will make it more challenging for the FCA to decide on minimum parameters in terms of what amount of commission was acceptable.    
• The FCA states that customers who have "lost out" should be appropriately compensated. It will be interesting to understand the reasoning or criteria for assessing whether a customer has "lost out", noting that (again, unlike in Plevin) motor finance customers do not directly pay for commission. It is also noteworthy whether a customer has suffered a loss isn't necessarily a factor in an unfair relationship claim before the court.
• The FCA has said that the redress scheme will cover agreements dated back to 2007. However, it is unclear how it will be able to square asking lenders to go back to 2007 with applicable limitation periods. We note the FCA has said it is discussing with the government the best way of doing this. 
• The FCA announcement does not talk about regulated hire agreements. Section 140A of the Consumer Credit Act does not cover regulated hire agreements. Whether a redress scheme would be cast more widely to over cover hire remains to be seen.

While we await the FCA's consultation, firms are advised by the FCA to refresh their estimates of potential liabilities – both potential compensation payments and associated administrative costs – and make sufficient provision as needed. The FCA reiterates that those who have already complained, do not need to do anything further – and, perhaps unhelpfully, encourages those who think they have overpaid to complain now.

In the meantime, we would be delighted to discuss the above with you and the likely ramifications for your business.