Storm clouds gather after Court of Appeal ruling

Close Brothers has announced it is “temporarily” pausing the writing of new UK motor finance business in the wake of the Court of Appeal’s recent decision in three motor finance mis-selling cases, signalling the crushing impact the legal ruling is likely to have on the sector as it awaits the outcome of the Financial Conduct Authority (FCA) review into historical motor finance commission arrangements and sales.

Close Brothers has already cancelled a dividend payment earlier this year and agreed to sell its wealth management unit to Oaktree in a deal worth up to £200 million, in a bid to build up war chest to fund any future consumer compensation scheme, with some observers suggesting the industry overall could be facing a £21 billion bill to settle mis-selling claims.

Court of Appeal ruling

The three cases were brought to the Court of Appeal together in July, as a response to the very large number of cases before the County Courts, all raising the issue of what duty (if any) is owed where a commission is paid to a dealer who arranges for customers to enter into a finance agreement with a finance company.

The three involved financially unsophisticated consumers on relatively low incomes who, prior to January 2021, engaged car dealers as their credit brokers to arrange finance agreements in order to buy a second-hand car for less than £10,000.  Two of them (Johnson and Wrench) involved FirstRand Bank (trading as MotoNovo Finance), while the third (Hopcraft) concerned Close Brothers.

The Court of Appeal’s judgment has been keenly awaited, as it provides the first steer as to the potential outcome of the FCA review. This was due to conclude in September but has been extend to May 2025 specifically so the regulator can account for the outcome of legal cases, and the FCA has said it is “carefully considering” the latest decision.

Stephen Haddrill, director general of the FLA, said: “This is a significant and unexpected judgment, the implications of which stretch far beyond the motor finance sector, making it an issue that demands the immediate attention of the FCA.”

Secrecy

In their findings, the judges stated that the dealers “were the sellers of the cars, but they were also acting as credit brokers on behalf of the claimants.” As such, “their task was to search for and offer the customer a finance deal from their panel of lenders which was suitable for their needs and competitive” and were deemed to owe the claimants “disinterested duty”. The relationship was also a fiduciary one.

In all three cases, the judges found there was a conflict of interest and no informed consent by the consumer to the receipt of the commission. However, that would be insufficient in itself to make the lender a primary wrongdoer. In order to give rise to a primary liability on the part of the lender, the commission must be secret.

While in the case involving Hopcraft, the judges said there is no dispute that the commission was kept secret, in the other two instances the claimant did not know and was not told that a commission was to be paid.

However, the lender’s standard terms and conditions made reference to the fact that “a commission may be payable by us [i.e. the lender] to the broker who introduced the transaction to us”, and in one instance the dealer/broker supplied the claimant with a document called “Suitability Document Proposed for Mr Marcus Johnson”, which he signed. This said, near the beginning, “…we may receive a commission from the product provider”. 

Consumer impact

The Court of Appeal’s decision has been welcomed by claims management companies as representing a victory for consumer rights. Kevin Durkin, Director of HD Law, a legal specialist in mis-selling claims, which brought the case relating to Johnston and FirstRand/MotoNovo Finance, said the ruling exposed what he termed “unethical practices”.

“Rather than being upfront, lenders buried vague references to commissions deep within the fine print of convoluted paperwork, keeping consumers unaware of these behind-the-scenes kickbacks,” Durkin claimed.

Sam Ward, Director at Sentinel Legal, a law firm which also specialises in consumer law added:  “This case marks a turning point, offering a clear path for consumers to come forward and seek compensation for unfair finance deals. With £21 billion due to be paid back to consumers, the scale of this decision highlights the significance of holding lenders accountable.”

Future developments

In a regulatory statement, Close Brothers said it “disagrees with the Court’s extension of the existing case law in this area and intends to appeal this decision to the UK Supreme Court.”

The lender went on to maintain: “The Court has determined that motor dealers acting as credit brokers owe both a disinterested duty and a duty of loyalty (“fiduciary duty”) to their customers. This sets a higher bar for the disclosure of and consent to the existence, nature, and quantum of any commission paid than that required by current FCA rules, or regulatory requirements in force at the time of the case in question.”

FirstRand has also made a statement that it believes that “the commission disclosures in both the Wrench and Johnson agreements were in accordance with all legal and regulatory requirements. The court however found that disclosure should have gone beyond that.”

The MotoNovo parent company said: “This judgement finds that a fiduciary duty suddenly and retrospectively now likely applies to all providers of credit at point of sale which has far-reaching and materially negative implications for the motor finance industry and broader consumer finance sectors in the UK.”

In response FirstRand is also launching an appeal to the Supreme Court, on two grounds: firstly, that motor dealers do not owe customers fiduciary duties or any other duty around providing advice, recommendation, or information on an impartial basis; and secondly that when lenders make disclosures regarding the possibility of payment of commission in the terms and conditions of their finance agreements signed by the customer, it cannot be said that the commission has been hidden or kept secret.

 Also in the legal pipeline is the judicial review Barclays has brought over a Financial Ombudsman Service (FOS) decision on a motor finance mis-selling arrangement made by Clydesdale Financial Services trading as Barclays Partner Finance. The case was heard in the High Court in mid-October. Judgment has yet to be handed down, but should it go against Barclays the pressure on lenders will intensify.

Perfect storm

“Without clear direction from the FCA as to the likely shape of any future redress or compensation scheme, claims management companies are free to encourage yet more claims, which risk overwhelming the legal and regulatory systems.

“In addition, there is a high risk of unintended consequences. As Close Brothers’ actions have demonstrated, funders are starting to pull back from lending in this market because of uncertainty about how to interpret regulatory requirements, and concerns about conserving capital in case of punitive compensation claims.

“As a result, vulnerable consumers will find it much harder to gain access to finance for cars which may limit their opportunities to work, particularly as some lenders may abandon the market altogether. Hardly the kind of support for growth which the government has championed, and there is now an urgent need for the FCA to ensure it embraces its mandate to prevent disorderly, inconsistent and inefficient outcomes.”

Asset Finance Connect’s UK Autumn Conference on 26th November will be looking at the implications of the Court of Appeal decisions, with expert input from Wayne Gibbard of Shoosmiths, plus a collaborative workshop with the FLA and the NACFB on the challenges facing the sector, and analysis of the FCA motor finance review.  For further details and to book your place visit the conference website.