A Court of Appeal ruling that car-buyers offered finance without being aware that the dealer may receive commission are owed a disinterested and fiduciary duty could open the door to more compensation claims.
In Johnson v Firstrand, Lady Justice Andrews, Lord Justice Birss and Lord Justice Edis allowed three appeals in claims over finance options arranged by car dealers.
Before the Financial Conduct Authority introduced new rules in January 2021, a dealer who arranged the finance also received a commission from the lender, financed by the interest charged under the credit agreement. The Court of Appeal judges noted that in these circumstances only ‘quite sophisticated consumers may be aware that a dealer in this situation is fulfilling two different commercial roles in what the consumer is likely to regard as a single transaction’.
In the three appeals the claimants were ‘financially unsophisticated consumers’ who engaged their car dealers as brokers to arrange hire-purchase agreements on second-hand cars.
In each case, the dealer made a profit on the sale and received a commission from the lender. In one of the appeals, the commission was kept secret from the claimant. In the other two, the claimant did not know and was not told that a commission was to be paid but the lender’s standard terms and conditions made a reference that a commission may be paid.
Each claimant brought proceedings against the lenders in the county court arguing the broker owed them a duty to provide information, advice or recommendation on an impartial or disinterested basis.
The judgment said the dealers, by acting as sellers as well as credit brokers, ‘owed the claimants the “disinterested duty”’. It added: ‘The relationship was also a fiduciary one. In all three cases there was a conflict of interest and no informed consent by the consumer to the receipt of the commission.’
The judgment said: ‘All of the dealers in these cases were undoubtedly acting as credit brokers, a role they undertook on behalf of the claimants they were introducing to the lenders, and the DDJ in Hopcraft [one of the three cases] was wrong to find the contrary.
‘The very nature of the duties which the credit broker undertook gave rise to a “disinterested duty” unless the broker made it clear to the consumer that they could not act impartially because they had a financial incentive to put forward an offer from a particular lender or lenders.’
It added: ‘It is precisely because the brokers were in a position to take advantage of their vulnerable customers and there was a reasonable and understandable expectation that they would act in their best interests, that they owed them fiduciary duties.
‘In our judgment…in this particular context the dealers/credit brokers would owe both a disinterested duty and a fiduciary duty of loyalty to their customers, unless they made it clear that they did not accept such duties.’
The CoA found Johnson, one of the three appeals, is entitled to equitable compensation: the £1,650 commission plus interest from the date on which it was paid – from lender FirstRand for its accessory liability.
Kevin Durkin, director of HD Law, who was instructed for claimant Marcus Johnson, said: ‘This unanimous judgment from the Court of Appeal in these test cases is both emphatic and clear. It represents a massive win for consumers who have bought motor vehicles on finance and seek compensation from the lender. In certain circumstances consumers could even be entitled to have their motor finance loans unwound.
‘It is no longer enough for lenders to hint at the vague possibility of a commission being paid and deliberately bury it away somewhere in their small print, within their standard terms and conditions. That practice by lenders was clearly designed to keep the customer unaware of the payment of a commission and the Court of Appeal have quite rightly agreed.’