The decision has significant implications far beyond regulated motor finance. It applies to all intermediated credit where a commission is paid to a broker and the customer is not told the amount and explicitly consents to it.
The Court of Appeal's Judgment had been long awaited and its findings (it has to be said) were unexpected by the finance industry. It was delivered in the in the context of the Financial Conduct Authority’s (FCA’s) own work regarding a potential redress scheme for failings in the use Discretionary Commission Arrangements (DCAs) in the same market. The FCA’s findings in that instance have been put on hold until December 2025, partly due to the ongoing litigation on similar points.
Both MotoNovo and Close have publicly stated their intention to seek permission to appeal to the Supreme Court.
The Judgment itself anticipates an appeal in the concluding paragraph which states:
"We hope that our analysis will provide sufficient guidance for the County Court judges who have to deal with these types of claim on a virtually daily basis, but it may be that on some future occasion it will be felt desirable for the Hurstanger and Wood lines of authority to be considered in greater depth, and for a definitive pronouncement to be made by the Supreme Court about the circumstances…".
In this article, we consider the key findings and what comes next. We also consider practical considerations for firms at this moment in time.
See our previous article regarding the FCA’s pause and work on DCAs in the past 12 months for additional information.
Judgment and findings
Fiduciary Duty / Disinterested Advice
In succinct terms, the Court held that the motor dealers, when acting as credit brokers by arranging finance for car buyers to purchase their cars, owed them a disinterested duty to provide information, advice or recommendations on an impartial or disinterested basis. The Court also ruled that in course of arranging the finance for the customer, the relationship between the motor dealer and the customer was fiduciary in nature.
That finding represents a change in the law. The Judgment is at odds with the (then) High Court decision in Branwhite v Worcester Works Finance Ltd [1969] 1 AC 552 where the House of Lords stated that “In a typical hire-purchase transaction the dealer is a party in his own right, selling his car to the finance company, and he is acting primarily on his own behalf and not as general agent for either of the other two parties. There is no need to attribute to him an agency in order to account for his participation in the transaction.” The Court did not state why it saw fit to depart from that previous Judgment and that is an obvious omission.
Lenders as accessories
The Court found that the lenders were liable as accessories for procuring the brokers' breach of fiduciary duty, by making commission payments to them without sufficient disclosure to the consumers. The Court determined that the lenders were aware of the brokers' fiduciary duty to the consumers and that the non-disclosure of commissions created a conflict of interest that had to be disclosed to the customer.
Partial Disclosure and Secrecy
The Court also appeared to suggest that the disclosure of the existence of commission and possibility that it might be paid would not be sufficient to negate secrecy. The Court was particularly critical of such wording being "hidden in plain sight", meaning “the prospect that the borrower would read those terms was negligible”.
Unfair Relationship
Unfair relationship, under s140A of the Consumer Credit Act 1974, was not the main focus of the Judgment. However, it comes as no surprise that the Court ruled the relationship (addressed in Johnson) was unfair due to the lack of disclosure. The Court did stress that every case must be determined on its facts, but provided that a determining factor could be if the commission was very high in relation to the sum borrowed. As small mercies go, the Judgment stops short of a Plevin "read across".
What’s next from a litigation perspective – the motor finance mis-selling wave
The Judgment will be a welcome boost for consumer champions and Claims Management Companies, who had up until now faced difficulty in gaining traction in the Courts when prosecuting such mis-selling claims. We expect an influx of new cases being issued at Court and applications to lift the stays on existing cases, together with an increase in volumes of pre-action correspondence.
Lenders faced with claims, especially in the motor finance sector, will be reviewing their existing cases to find distinguishing features to argue they fall outside of the scope as the Judgment. In particular, we consider limitation will become a key battleground going forward, as will understanding who could be a "sophisticated customer", which was a key finding by the Court, but on which there was precious little assistance. Of course, firms will still need to consider the level of disclosure provided to customers and whether it was sufficient to negate secrecy.
If permission to appeal to the Supreme Court is granted then it is likely to prompt a further stay in issued court claims. If lenders face ongoing litigation, they would be advised to get applications made to stay now.
What’s next from a regulatory perspective?
Remarkably, the Judgment makes no substantive reference to the regulatory framework that currently governs the disclosure of commission. There was no analysis of the prescribed information required by Consumer Credit Act 1974.
So far, the FCA has been relatively limited in what it has said publicly, not saying much beyond:
'We are working closely with the financial services sector, the Financial Ombudsman Service and the Government to understand any wider consequences and further steps needed.
'While the case itself was not focused specifically on discretionary commission, it clearly relates to our work to determine whether motor finance customers have been overcharged because of the past use of discretionary commission agreements.
On 29 October 2024 Nikhil Rathi, FCA chief executive, stated this:
"First and foremost, we need clarity on whether this is the courts' final word on the issue. The 2 lenders in the case intend to appeal and it is in everyone's interest that when they do, the Supreme Court decides quickly whether it will take the appeal and, if it does, whether it agrees with the Court of Appeal…We are working closely with the financial services sector, the Financial Ombudsman Service and the Government to understand any wider consequences and further steps needed."
In motor finance, we have endorsed extending the time firms have to respond to complaints relating to non DCA commissions, and it is welcome news that the FCA is consulting on this now. We understand from conversations with the finance industry and trade associations that the FCA has been speaking to various stakeholders and seeking to understand the impact on access to lending for consumers, as well as on Firms’ processes and procedures. However, it has not yet provided any guidance, leaving the industry to consider the legal implications for itself, although it did note that ‘the Court of Appeal has made the law clear and, if that is not challenged further, then firms need to handle any complaints in line with that’.
It’s likely that in the longer term the FCA will need to consider how the ruling sits within the existing regulations and its expectations of authorised firms. As it seeks to ensure market integrity, it will no doubt wish to avoid ongoing confusion and seek to provide clarity to avoid potential for further customer harm. This is especially as the Judgment will precipitate an influx of customer complaints and FOS referrals, coupled with what appears to be an increase in incidence of dealer insolvency and potential cross contamination. It therefore comes as no surprise that the FCA will write to the Supreme Court to ask it to decide quickly on whether it will give permission to appeal and if so, to expedite the determination of an appeal.
In the context of motor finance, it is expected that the FCA will want to understand what the implications of broader redress exercises might be for the industry and the realities of how it may test firms’ financial resilience.
The FCA has talked much recently about the need for firms in other sectors to ensure that funds for potential redress is being appropriately determined and ring-fenced, so we could see similar here to ensure consumers are protected.
What does this mean for firms now and what should they be considering?
Plainly the implications of the Judgment, as it currently stands, are momentous. Not being limited to DCAs in motor finance, the Judgment could be read across a range of goods and services purchased through credit and arranged by credit intermediaries. The unclear and undefined (and therefore unhelpful) reference to "unsophisticated customers" also leaves open the possibility for the Judgment to be referred to in commercial lending to sole traders and small partnerships.
In short, this is not a Judgment that differentiates between regulated or unregulated lending and so firms in other sectors should be taking note too.
Lenders will of course be reviewing their existing portfolios to understand their exposure against potential claims and remediation, but they will need to consider how to conduct business going forward. To be clear, commission arrangements are not banned but what is clear is that lenders and brokers need to be clearly disclosing commission to customers, especially those deemed to be "unsophisticated", during the sales process. The Judgment provides that lenders should be making sure that customers/borrowers, are consenting to the commissions that the broker is receiving. To do so appropriately and to provide ‘informed consent’, the customer will need to understand the key facts about the payment.
Naturally, this brings practical implications with it. In the context of motor finance, in the time since the Judgment, both the Finane & Leasing Association (FLA) and the British Vehicle Rental and Leasing Association (BVRLA) have published guidance to their members, providing their interpretations of what lenders and brokers should be disclosing, with the aim to obtain the informed consent of customers. We expect lenders and brokers in other sectors will be doing the same.
After the Court ruled that claimants need not bring specific evidence of dishonesty against the lender in order for them to be liable as an accessory in a breach of a fiduciary duty, lenders should be conscious that it is unlikely to be sufficient to rely on brokers and their processes to meet the disclosure requirements and to gain the required consent. It is the lender’s responsibility to ensure that ultimately they are satisfied the customer has what is needed to safely proceed. Lenders will therefore need to consider their audit and on-boarding processes.
It is also worth noting that the Judgment is not contained solely to a specific type of ‘commission’. Firms should consider what other payments they provide to brokers, or receive from lenders. If there is any that could be interpreted to create a conflict of interest, or induce the broker to offer a specific product in that instance, then it is likely that should also be disclosed.
