The motor finance sector is bracing for a Supreme Court ruling that could reshape dealer-lender relationships, redefine commission structures, and expose the industry to substantial financial and regulatory risks. At the heart of the case are three claimants — Johnson, Wrench, and Hopcraft — who allege that undisclosed discretionary commissions compromised the impartiality of dealers acting as credit brokers. The case against FirstRand Bank Ltd has escalated through the courts and is now set for a final judgment in April.
When a car dealer offers you finance with a vehicle, what is their role? Is their job to maximise their profit on a sale, or do they have a duty to ensure their customer gets the best deal? Over the last few years, these questions have become increasingly pointed, coming to a head in Johnson, Wrench and Hopcraft versus FirstRand Bank Ltd.
All three claimants were described as financially unsophisticated individuals who set out to buy second-hand cars. Their dealers offered finance for the vehicles, acting as credit brokers. In each case the lenders paid the dealers a discretionary commission under the “difference in charge” model, allowing the dealer to set interest rates from within a selected range and receive a commission from the lender that would be the difference between the lowest rate in the range and that agreed with the customer.
The FCA banned this commission model, effective from 28 January 2021.
These claimants would argue that because they were unaware the dealer was receiving this commission, it compromised the dealer’s duty to provide information, advice and recommendations in an impartial way, also arguing that the lenders were accessories to this.
“I think the key factors were about regulatory compliance by dealers, and more broadly how the market works,” says Julian Rose, Director, Asset Finance Policy Ltd. “Had all dealers made the commission disclosures they were required to under the FCA rules that started in 2014, had all finance commissions been kept to reasonable levels, and had all dealers made it simple for customers to use external brokers, I doubt we would be where we are today.”
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Across all three cases, the court found that the dealers were acting as credit brokers, which gave rise to a “disinterested duty” unless the broker made it clear to the consumer that they had a financial incentive that would make impartiality impossible. The court also found that as well as a disinterested duty, there was a fiduciary duty that came out of “the nature of the relationship, the tasks with which the brokers were entrusted, and the obligation of loyalty which is inherent in the disinterested duty.”
“The ruling used lots of aggressive wording that would not previously have been used,” points out Sam Ward, Director of Sentinel Legal. “The Court of Appeal went one step further, not only refusing to grant permission to appeal, but giving a clear reason why, which is not common practice.”
Sentinel Legal has run an investigation into PCP agreements, claiming to have unearthed evidence of widespread mis-selling that shows car finance companies consistently hiding commission payments from consumers. The law firm highlights one case involving FirstRand Bank that saw 43.66% of the total interest charged on a car finance agreement funnelled into undisclosed commissions. FirstRand Bank denied any wrongdoing.
The law firm has also conducted 50 whistleblower interviews which found that dealers viewed the car as “a mechanism to sell the finance”, often referred to as “the metal”.
The industry is not taking the Court of Appeal’s ruling lying down. Dealers and lenders have banded together to ask the Supreme Court for a chance to appeal. “The buck well and truly stops there,” Ward says.
The case the lenders seek to make is that no concept of disinterested duty can be distinguished from a fiduciary duty, which is required if bribery is alleged to have taken place, and that the dealer’s role as a credit broker is not advisory, meaning neither duty is in play.
Verdicts and consequences
The Supreme Court will hear the case on the first and third of April, delivering their verdict sometime later. If the court finds in the claimants’ favour, the ripple effect will be felt across the industry.
Most are hoping that the ruling, whichever way it turns, will provide clarity.
“What we are hoping for is a judgement that recognises the reality here for the motor finance sector, recognises the economic significance of it, and gives us certainty about the legal position,” says Adrian Dally, Director of Motor Finance at the FLA. “That is what the Supreme Court is able to do. We would like legal certainty that recognises the importance of the sector and its need to provide affordable motor finance to millions of people.”
Others, however, are more sceptical about what the verdict can offer.
“I don’t expect the outcome will provide all that much clarity in itself, whichever way it goes,” says Rose. “Ongoing uncertainty seems likely to lead to more of the lowest cost providers restricting lending or leaving the market, leading to higher prices.”
If the Supreme Court finds in favour of the claimants, the consequences could be much more immediate and dramatic, however.
“It means that as it stands, millions of people with car finance could technically make the same claim Johnson did about undisclosed commissions,” says Ward.
Ward points to a case where Santander paid over £16,047 in commission on a Land Rover. The total cost of the deal to the customer came to £81,000, meaning that almost 20% of the total loan amount was paid as commission.
Ward is keen to point out that Santander does not just pay a discretionary commission, or fixed commission, but pays multiple commissions through head office based on outcomes, with as much as three different commissions being paid on a single finance agreement.
If customers who have been subject to these sorts of deals follow Johnson, Wrench and Hopcraft’s example, the cost to the industry could be huge.
“Moody’s now saying it could come to £43 billion, but the fixed commission is paid to head office, which means double market exposure,” Ward says. “That means £100 billion of compensation is truly owned.”
Even beyond that, people in other sectors are wondering if the ruling might have consequences for them too.
“This is a motor finance issue, based on three motor finance cases, and we are a trade body for the motor finance sector,” says Dally. “This is an issue for motor finance and we recognise that. Those not in the motor finance sector may be asking to what extent it applies to them, but ultimately, the regulatory bodies recognise this as well. It can’t be considered in a motor finance context alone.”
Rose agrees that consequences beyond the motor finance sector are possible, but not necessarily constructive to consider at this point.
“It has theoretical ramifications for any market where similar circumstances exist outside of automotive finance,” he tells us. “But every sector is different and it seems unhelpful to assume how courts might respond to cases elsewhere. Even the FCA has cautioned against making sweeping assumptions.”
Ward, however, argued that the motor finance sector could prove a useful example to the rest of the financial industry.
“There’s an argument it would get people to look at how they disclose their commission models,” he suggests. “Close Brothers has already paused lending while they rewrote their agreements, and came back with very clear terms.”
Those terms include a list of five things the lender has to disclose and the customer has to sign off on before a deal can go ahead.
“It wasn’t a mammoth task to do this, and they implemented within thee-to-five working days,” says Ward. “Whether this ruling causes an immediate chain reaction in terms of liability in other industries, I don’t know. But you could say that anything under a consumer credit act finance agreement might be affected.”
A legal remedy to an economic problem
However, there is an argument that legal action is simply the wrong remedy to what is primarily an economic and market-driven problem.
“The economic problem with car finance is a simple and very well-established one, being that a retailer has a ‘point of sale’ advantage when selling add-ons,” explains Rose. “The economic theory is that when the customer is in the dealership, the only finance option immediately available is from the dealer, so there’s a lack of competition. As a result, there’s an incentive for the dealer to reduce the price of the car and to increase the price of the finance.”
Rose argues that if that is allowed to happen, higher finance commissions make up for low margins on the car.
“Overall, the dealer might make a perfectly fair profit, and most customers are no better or worse off, but there are risks involved,” says Rose. “For example, the theory suggests that customers not taking out finance are likely to be subsidised by those who are.”
Rose suggests that competition authorities have dealt with similar situations across many sectors, and with a full understanding of how the wider market works.
“That is important because neither the courts or the FCA will be focused on the economics of the overall car dealership,” says Rose.
On the other hand, Dally argues that the FCA is more than equipped to navigate these challenges.
“The CMA is not the only competition regulator. Sectors often have their own competition regulator and the FCA is one of those,” Dally says. “Ultimately lenders and dealers are regulated by the FCA and we consider competition issues. We have three statutory objectives- consumer protection, competition and integrity. If you look at everything we have done since last year, it is done with all three of these in mind.”
But Dally argues that the issues here are more complex than competition alone.
“It is not just a competition issue but a conduct and integrity issue. All the work the FCA has ever done on this is about recognising there needs to be a competitive market and ensure the competition is fair with a level playing field that gives good outcomes to consumers,” Dally insists.
Ward, meanwhile, remains a passionate advocate for legal redress as a way of rectifying these issues.
“PPI was the biggest consumer redress event. £53 billion was paid out. There was no need for government intervention. It didn’t go to the Markets Committee,” Ward recalls. “What will be telling is that this will dwarf PPI.”
Next steps
While Ward argues the industry is adequately capitalised to pay this compensation, he also points out that a lot of groups are incentivised to put off the moment of truth. Chancellor of the Exchequer Rachel Reeves has been looking to intervene to shield the motor finance industry, with the Treasury arguing that the uncertainty caused by the judgment could undermine confidence in UK financial regulation. Rose argues such intervention might be necessary.
“Whichever way the Supreme Court goes, there’s likely to be a need for clarity on how the car finance market should work in future, so that providers can be confident that they will not be subject to future claims,” says Rose. “It might well also make sense for the FCA or Government to decide that handling of existing complaints should be put on hold and reviewed after the completion of a full market study.”
Ward, however, remains to be convinced.
“Banks are trying to kick the can down the road with HM Treasury and Rachel Reeves, coming out and siding with the lenders, trying to block consumers accessing compensation,” says Ward.
When the verdict is announced, which will hopefully be by May, the FCA plans to release its own proposals for an address scheme if one is needed, with the hope of fully enacting that plan by December this year.
Ward is confident that the Supreme Court will find in favour of the claimants but points out that the industry is doing everything it can to push the other way.
“Mr Johnson has three representatives, the lenders have nine. There have been five intervention events, all on the lenders’ behalf, with not one from consumer representative firms,” Ward says. “That is because the argument is so strong on its own.”
Explainer: What is Discretionary Commission and why has the FCA launched a probe?
