The Financial Conduct Authority (FCA) has hit out at last October’s Court of Appeal ruling on motor finance commission, saying its “ sweeping approach” in treating motor dealer brokers as owing fiduciary duties to consumers “goes too far”, in its submission to the Supreme Court ahead of this week’s appeal on the landmark judgment.
The FCA submission warns the Court “ought to be cautious about expanding the well-established categories of fiduciary relationships, which could result in many types of intermediaries being regarded as being in fiduciary relationships with their customers”.
The regulator goes on to argue that the existence of a fiduciary duty is “highly fact-sensitive”, claiming it is possible to recognise a fiduciary duty ”in respect of a particular subject matter only, rather than in respect of the entire relationship”.
The FCA then states: “Moreover, any finding of a fiduciary obligation must be sensitive to the relevant contractual arrangements and (of particular interest to the FCA) the statutory and regulatory framework.
In particular, the regulator said such an approach would create a generally applicable standard of conduct for motor dealer brokers which overrides the standards established by the FCA Handbook, giving rise to inconsistencies.
“From the regulator’s perspective, such dilution could also have significant, unintended read-across to other regulated intermediaries, which in turn may generate a range of unanticipated legal consequences,” the FCA stated.
“Disinterested” duty
The Court of Appeal ruling related to three cases, one of which involved a “secret” commission, which was never disclosed, and where legal arguments centred on the law relating to bribery (the other two concerned commission arrangements which were only partially or unsatisfactorily disclosed).
In its submission, the FCA argued that the appellants’ approach of jettisoning the tort of bribery in favour of one based on fiduciary duty would remove an important protection, because in cases where an agent does not owe fiduciary duties, the principal will be left without the protection against conflicts of interest currently provided by the civil law of bribery.
Instead the regulator prefers the term “distinterested” duty rather than fiduciary duty as a more suitable “middle ground” to apply to the tripartite arrangement between the consumer, lender and motor dealer broker, as it is the reverse of having a conflict of interest.
The FCA said the service provided by the broker “does not give rise to a fiduciary duty in the sense of acting in the consumer’s interest to the exclusion of the broker’s own interests”, pointing out that this approach “goes much further than the regulatory framework, which is principally focused on transparency, and which recognises that in many cases the motor dealer broker performs the more limited functions of providing information and options to the consumer.”
In the regulator’s view this “requires presenting information in an unbiased way to be able to make an informed choice. If a commission is paid then the customer ought to know this insofar as it is relevant to their decision-making.”
Threatened chaos
The National Franchised Dealers Association (NFDA) which, like the FCA, has been granted permission to intervene in the Supreme Court hearing, is also highly critical of the extension of the fiduciary duty concept, saying “ a novel duty that has not been consulted upon by a regulator or digested by Parliament has the capacity to cause havoc within an established commercial order, surprising regulators and threatening financial chaos.”
Its pre-hearing submission states: “The NFDA accepts that a credit broker may become a fiduciary if it undertakes to act on behalf of a customer with undivided loyalty. However, the mere act of credit broking, essentially introducing and administrating the execution of a credit agreement, is not sufficient. The Judgment makes an error in deriving a fiduciary duty from the nature of a credit broker’s basic tasks. It effectively establishes a new settled category of fiduciary.”
The NFDA said that a motor dealership is legally responsible for keeping the promises it makes to a customer, but strongly disputes the idea there is any undertaking to act with “undivided loyalty”, pointing out that none of the dealerships in the three Court of Appeal cases promised customers they would do so.
In addition, the NFDA flagged up concerns that the rigidity of the remedies for bribery may lead to punitive awards and to innumerable windfall payments, citing a recent motor finance claim in the County Court at Exeter in which the claimant now seeks full rescission of a hire purchase arrangement where the commission paid to a credit broker was just a single penny.
First day in court
On the opening day of the Supreme Court hearing, lawyers for Close Brothers, who are the lenders in the Hopcraft case, made similar arguments relating to the extension of fiduciary duties to those raised by the FCA and NFDA.
Using a comparison with retail shoppers, Mark Howard KC said: “Consider what an extreme test this is. A salesman in a shop plays a role in the decision-making of customers, having made judgment calls of what products to put forward to the customers. But, when the shopworker is asked their advice, they are not expected to respond in the best interest of the customer. They are, effectively, ‘there to make a sale’.”
Even if a car dealer told a customer that they could get them “the best deal”, this did not mean they were duty bound to the buyer, “just as much as when a salesman says ‘this is the best suit you can buy’,” Howard said.
The Supreme Court hearing is scheduled to run April 1- 3, with its judgment on the issues expected in the summer.
