Car finance: Hiding commission in the small print is not enough
The Court of Appeal has opened the door to billions of pounds worth of claims for mis-sold motor finance after finding dealers in breach of their fiduciary duty to customers.
As a result, the lenders have been ordered to repay the commission to the borrowers.
Law firms and claims management companies have been busy attracting clients and court cases have been proceeding while the Financial Conduct Authority investigates what has been billed as the ‘next PPI’.
One of the law firms involved, Manchester-based Consumer Rights Solicitors, had 17,000 claims awaiting the outcome of the ruling.
We will be discussing the motor finance claims market at our Claims Futures conference on 12 November in Manchester.
The court heard three appeals together where the claimants were offered finance by motor dealers to help buy second-hand cars worth less than £10,000.
The dealer was acting as a credit broker in doing so and in one case failed to disclose the commission they received from the lender and in the other two partially disclosed it in the small print of the credit agreement.
“There is no hint in the evidence in any of these cases that the consumers concerned were aware of this,” the court said.
The dealer only presented the consumer with one offer of finance, in two of the cases from FirstRand Bank (trading as MotoNovo Finance) and from Close Brothers in the other, and the claims were brought against the lenders.
All three claimants contended that the brokers owed them a duty to provide information, advice or recommendation on an impartial or disinterested basis, which was held by the Court of Appeal in the 2021 case of Wood v Commercial First Business to be sufficient to found a claim for disgorging a secret commission.
The court – with Lady Justice Andrews, Lord Justice Birss and Lord Justice Edis giving a unanimous ruling – upheld the appeals from the consumers, finding that the dealers owed them this “disinterested duty”.
It continued: “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.”
To give rise to a primary liability on the part of the lender, the commission had to be secret, the court went on. “If there is partial disclosure which suffices to negate secrecy, there is binding authority [Hurstanger v Wilson in 2007] that the lender can only be held liable in equity as an accessory to the broker’s breach of fiduciary duty.”
Here, however, there was no disclosure in one case and “insufficient disclosure” in one other, making the lenders were liable as primary wrongdoers. In the third, it was conceded that there was sufficient disclosure to negate secrecy, but the court found “insufficient disclosure to procure the consumer’s fully informed consent to the payment”. This meant the lender was liable as an accessory.
The court held that “burying” a statement about possible commission “in the small print which the lender knows the borrower is highly unlikely to read will not suffice” to negate secrecy, although it might be different if drawn to the borrower’s attention.
In one of the FirstRand cases, the court described the statement that a commission may be paid to the broker as being “hidden in plain sight”, explaining: “It was tucked away in a sub-clause of the lender’s standard terms and conditions, under the heading ‘General’.”
In one of the, the court found that the commission of £1,650 plus interest should be paid back. The amounts to be awarded on the other two are yet to be determined.
Two of the cases were brought by Consumer Rights Solicitors and the other by Bradford-based HD Law, supported by Cheltenham firm Sentinel Legal.
Consumer Rights Solicitors said the figure owed to consumers could be as high as £42bn. Principal Kavon Hussain added: “This Court of Appeal judgment is going to affect every lender in the market, including Lloyds Blackhorse, VW Finance, BMW, Stellantis, Mercedes, and Barclays Clydesdale.
“We already have a substantial number of clients with claims waiting to go. This decision at the Court of Appeal is a huge step towards those clients being repaid these hidden commissions.”
Kevin Durkin, director of HD Law, said: “The Court of Appeal has finally provided much-needed guidance on the common underhand practice of lenders paying secret commissions to car dealers for steering consumers their way or inflating interest rates to boost their own payouts.”
Sam Ward, director at Sentinel Legal, continued: “This ruling is a massive win for consumer justice. For too long, lenders have taken advantage of consumers through complex, unfair finance deals. This decision finally puts power back into the hands of consumers, forcing banks to face the consequences of their actions.”
The Court of Apeal added by way of a postscript that there were “tensions” between Hurstanger and Wood which it had not found easy to reconcile.
“We also understand the judicial reluctance (expressed in Hurstanger) to visit a principal liability for payment of a secret commission upon a lender who (in stark contrast with the lenders in these three cases) has gone to some lengths both to notify the borrowers of the payment of the commission and obtain their consent to it, but has not quite done enough.”
Such cases gave rise to “numerous difficulties”, the court acknowledged, but hoped that its analysis would 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 in future that “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 which the payment of a commission by a third party to another person’s agent or fiduciary will give rise to a liability (whether as principal wrongdoer or an accessory) on the part of the payer”.