Supreme Court hears submissions in UK motor finance test case

At the beginning of April, the UK Supreme Court heard the much-anticipated appeal in Johnson v FirstRand Bank Limited t/a MotoNovo Finance, following the previous Court of Appeal findings that have raised wide-ranging questions for UK credit brokers and lenders.

The issues before the Supreme Court go to the heart of the motor finance business model, which is that lenders pay motor dealers commission for introducing their finance products to customers. 

The crucial issue is the reach of the dealer's duty to obtain the customer's consent to receipt of commission from the lender. The Supreme Court's ruling has the potential to impact other intermediated credit models.

Judgment in the appeal will not be handed down for several weeks. But, in the meantime, what is the current position and what were the arguments heard by the Supreme Court?

Previous Court of Appeal ruling

In October 2024, the Court of Appeal found that a motor dealer only has to be "in a position to influence or affect the customer's decision on finance" to be treated as both an agent and a fiduciary of the customer (encapsulated in the concept of a "disinterested duty"). This means that a fiduciary duty appears to exist in a wider range of circumstances than previously thought.

The court had found that a motor dealer may have received "secret" commission from a lender if it (or the lender) has not obtained consent from the customer as to both the nature and amount or method of calculation of commission being paid.

The Court of Appeal ruled that a general term about commission “buried” in the terms and conditions (which previously was thought to amount to a "half secret" commission) does not negate secrecy. Where there is a breach of a disinterested duty through receipt of secret commission, it found that equitable remedies will be available to the customer against both the motor dealer and potentially the lender as accessory. A lender will have accessory liability if it knew that the dealer was receiving commission and, as a matter of fact, there was a failure to obtain the borrower’s informed consent.

It also found that if a commission payment is secret and made in the context of a fiduciary relationship, the customer will also have a direct claim against the lender (on the basis that the lender has paid a "bribe" to the broker).

FCA rules and Court of Appeal findings clash

The findings of the Court of Appeal are in conflict with the Financial Conduct Authority (FCA) rules applying to credit brokers. Motor dealers act as credit brokers when they are arranging finance.  The FCA only requires the dealer – and not the lender – to disclose commissions, and then only in certain circumstances.

There is no requirement in FCA rules to obtain a customer's "informed consent" to receipt of commission.  In other words, the Court of Appeal judgment has the effect that, where motor dealers and lenders have disclosed commission payments in line with FCA rules, those disclosures are now potentially insufficient to comply with the law.

Motor finance market concern

This Supreme Court appeal is of considerable importance to the motor finance industry, which has never worked on the basis that motor dealers owe a duty to their customers when finding them finance such that they must seek informed consent before receiving commission for doing so.  It may also be relevant to other intermediated credit markets.

The potential market impact of mass claims-management company complaints and claims for refunds of commission is considerable. It comes at a time when the FCA is already grappling with how best to deal with a significant number of motor finance commission complaints on hold at the Financial Ombudsman Service (FOS) while it reviews its approach to the historical use of discretionary commission arrangements.

It is, therefore, not surprising that both the FCA and the National Franchised Dealers Association (NFDA) were given permission to intervene in the Supreme Court appeal. 

Main issues before the Supreme Court

The main issues considered by the Supreme Court included:

• Whether motor dealers owe consumers a “disinterested” or fiduciary duty.
• What is meant by "secret" commission.
• The circumstances in which the common law tort of bribery arises, and its associated remedies.

Disinterested duty versus fiduciary duty

Both the lenders and the customers in the appeal argued (for different reasons) that a disinterested duty is not distinct from a fiduciary duty and that it is an ad hoc/common law analogue of a duty of loyalty but disagreed on the test to be applied for the duty to arise. The NFDA's main submission was focused on the argument that a motor dealer epitomises a retailer acting in its own self-interest and does not owe a disinterested or a fiduciary duty at all.

Interestingly, however, the FCA took a more nuanced view, suggesting that the two duties are distinct and that there are boundaries between disinterested and fiduciary duties. The regulator suggested that the regulatory framework does not treat motor dealers as performing an advisory function simply by dint of their status as credit brokers, so they do not owe a fiduciary duty to customers. However, the FCA said that motor dealers do owe a disinterested duty, arguing that this position is consistent with the FCA regulatory framework. It asked the Supreme Court to provide guidance as to the key conditions in which the fiduciary or disinterested duties may arise in regulated industries.

Whoever the justices agree with on this point, they have an important opportunity to provide legal clarity on when a financial intermediary owes a disinterested or fiduciary duty, providing certainty and stability to the market.

Secret commission, consent and bribes

In one of the cases being considered (Hopcraft) there was no dispute that the commission was kept secret from the claimant. In the other two (Wrench and Johnson), the lender’s standard terms and conditions made reference to the payment of commission to the dealers. In Johnson, the dealer also provided the claimant with a lending suitability document that Mr Johnson signed which said that commission "may" be paid. 

The Court of Appeal found that a commission payment is either secret or it is not, a binary concept. It is the extent of disclosure given that may negate the secrecy and, in these cases, it found that any disclosures that had been made were not sufficient to negate secrecy. As a consequence, the lenders were liable on the basis that they had paid bribes to the dealers.

Before the Supreme Court, the lenders argued that the commission payments were legitimate, arms-length commercial arrangements, not secret inducements, and that the general reference to commissions (in Wrench and Johnson) and Mr Johnson’s signed acknowledgment were enough to negate secrecy. As such, informed consent was not required and this was in line with existing legal standards.

The customers (unsurprisingly) argued that the Court of Appeal had been correct to find that even where references to receipt of commissions exist, the absence of meaningful information may mean there is no informed consent and, therefore, the lenders were liable for paying bribes.

Focus on tort of bribery

There was a great deal of focus on the common law tort of bribery in the arguments before the Supreme Court. This is understandable – the potential ramifications for lenders if they are held to have paid bribes to motor dealers is considerable, not least because it opens up the opportunity for lenders to be pursued for refunds of interest (where rescission is possible) as well as for "repayment" of the commission to the borrower. The lenders argued that the law took a "wrong turn" when it established the common law tort of bribery and that it should be abolished, leaving remedies only in equity. Counsel for the customers argued the contrary.

Again, the FCA took a middle ground, suggesting that abolishing the tort of bribery would be an extreme outcome, but that the test (as put forward on behalf of the customers) for liability for the tort was too wide. The FCA also suggested that the available remedies for the tort should be clarified. 

FCA on secrecy and consent

On secrecy and consent, the FCA noted that the reason that secret payments are outlawed in certain circumstances is because they can give rise to conflicts of interest, undermining trust and confidence in commercial transactions. However, it emphasised that, as a result of the case of Hurstanger v Wilson, where there is partial disclosure, a case will be taken out of the realm of bribery. The regulator suggested that, ordinarily, where terms and conditions disclose the possibility of commission being paid, that ought to be sufficient to amount to partial disclosure. 

It is really important that the Supreme Court demarcates when a commission is secret and when it is not. The FCA's suggested approach may be attractive to them, as it will likely reduce calls to abolish the common law concept of bribery (because almost all motor finance journeys include a commission disclosure, which would be a partial disclosure in line with Hurstanger) while also bringing the common law back into a position of consistency with the FCA regulatory framework.

Timing of judgment and FCA next steps

The FCA asked for the Supreme Court's judgment dealing with both liability and remedies to be handed down as soon as possible to provide legal certainty on the market-wide issues, with questions on facts and quantum to be remitted if necessary. The Supreme Court referred to the four months that it took the Court of Appeal to hand down its judgment and indicated that, if it were to take the same length of time, its judgment might be expected in July 2025 – before the court's summer break.

However, the timing will depend on the extent of agreement or disagreement between the justices.

The FCA highlighted that it will confirm within six weeks of the judgment being published whether it will consult on implementing a consumer redress scheme pursuant to section 404 of the Financial Services and Markets Act 2000 and, if so, how it will take that forward.

It is likely to consult on that scheme if, taking into account the findings in the judgment, customers have lost out as a result of widespread failings by firms.

The FCA also mentioned that the appeal against the Administrative Court's judgment in Clydesdale, a judicial review case, is scheduled for 1-3 July before the Court of Appeal. This is a judicial review of certain Financial Ombudsman Service (FOS) decisions on similar facts and issues.

Osborne Clarke comment

We are aware that non motor-finance lenders may be receiving commission complaints from customers, prompted by the Court of Appeal judgment. Pending judgment of the Supreme Court being handed down, it is, in our view, fair for those lenders to not uphold those complaints provided that FCA regulatory requirements as they were understood to have operated at the time have been complied with. 

However, both the industry and the FCA will be eagerly awaiting a definitive pronouncement from the Supreme Court. Lenders outside the motor finance market will want to examine carefully the extent to which the relevant principles are capable of wider application to other intermediated forms of credit.

While it is disappointing that the industry will need to wait a bit longer for the court to opine further on the FOS's approach to motor finance commission claims, a definitive pronouncement from the Supreme Court will allow the FCA to progress its next steps and thereby give the motor finance industry some of the certainty it needs.