Johnson v Firstrand et al: What the auto finance ruling means for all broker-introduced business

Summary

A recent Asset Finance Connect (AFC) webcast, sponsored by Bynx, delved into the significant and potentially far-reaching consequences of the Johnson v Firstrand et al 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.

This landmark judgment has raised pressing questions for both regulated and unregulated sectors, with a particular focus on motor finance, but it also affects all intermediated asset finance business.

A panel of industry experts, including John Phillipou (chair of the Finance & Leasing Association – FLA), Jim Higginbotham (CEO of NACFB), Wayne Gibbard (partner at Shoosmiths), and David Betteley (head of content at AFC), gathered to assess the ruling’s impact on the auto and asset finance industries, calling for clarity on fiduciary responsibilities and disclosure practices across broker-introduced business.

Scope of the judgment: Broader implications for lending and fiduciary duties

The AFC webcast commenced with an examination of the judgment’s scope, which consolidates three High Court cases surrounding payment of motor finance commission into a single ruling. According to Wayne Gibbard, the decision brings focus to fiduciary duties attached to intermediaries, such as motor dealers, exploring the circumstances under which these duties arise and how various roles in the value chain might influence liability. The court deemed that intermediaries, specifically vehicle sellers who also arrange finance, held a fiduciary duty to consumers, as highlighted in cases involving financially unsophisticated and vulnerable borrowers.

In a summary of its ruling, the Court of Appeal said that brokers owe a fiduciary duty to consumers, which imposes “an obligation on the part of the broker to act in the best interests of the customer and not to put themselves in a position of conflict”. This meant brokers cannot lawfully receive a commission from lenders “without obtaining the customer’s fully informed consent to the payment”, the court added.

John Phillipou from the FLA emphasised the judgment’s scope beyond the motor finance sector. This broad interpretation leaves “grey areas,” particularly concerning definitions of “sophisticated” versus “unsophisticated” borrowers, as these categories lack clear demarcation.

Jim Higginbotham echoed these sentiments, stressing the urgent need for a unified definition from regulators to help lenders and brokers better interpret these rulings across diverse financial products.

‘Sophisticated’ versus ‘unsophisticated’ borrowers

The recent Court of Appeal ruling in Johnson v Firstrand et al has highlighted the complex issue of distinguishing between “sophisticated” and “unsophisticated” borrowers—a distinction that has significant regulatory consequences. John Phillipou highlighted the difficulty in defining these categories across various borrower types, from retail customers to SMEs, noting that the boundaries between them remain unclear. Jim Higginbotham echoed this, stressing that a universally applicable and practical definition is hard to pin down, and calling for regulatory standards to clarify where “sophisticated” ends and “unsophisticated” begins.

David Betteley from AFC suggested that “sophisticated” borrowers are generally corporate entities, while “unsophisticated” borrowers include retail customers or even SMEs. However, this classification remains ambiguous, raising questions about how protections and responsibilities should be practically applied across different borrower types.

Wayne Gibbard further observed that the ruling prioritised protections for financially vulnerable, unsophisticated borrowers, suggesting that financial vulnerability itself might be a more important consideration than the label of sophistication alone.

Together, these viewpoints highlight the urgent need for clearer regulatory definitions that balance effective borrower protection with practical categorisation. The impact of distinguishing between sophisticated and unsophisticated borrowers may be especially significant in asset markets, where sophisticated borrowers are more prevalent.

Implementing guidance: Disclosure, standardisation, and practical challenges

One of the primary challenges identified during the webcast was implementing disclosure guidance in a way that is both practical and protects consumers. The judgment has heightened awareness of the importance of informed consent and transparency, particularly in consumer finance. For example, Phillipou observed a “tidal wave of activity” among lenders, many of whom paused new business to adjust their processes, issue disclosure forms, and assess how the ruling impacts their operations.

Efforts toward standardising these practices have intensified. Higginbotham shared that many brokers had already received new commission disclosure forms from multiple lenders and that the NACFB and FLA were working together to create standardised, cross-market wording to reduce complexity and maintain a smooth customer journey. While these steps represent an interim solution, standardisation across different financial products remains challenging, as each has its unique transaction timelines and customer interactions.

The webcast also discussed when commission should be disclosed to customers. Higginbotham and Phillipou both stressed that timing should be aligned with the customer journey to ensure they make informed decisions without delaying the purchase process, a factor critical in sectors like motor finance, where customers often have a pressing need for immediate vehicle access. “The reality is that business models and product types are very different so no one size fits all,” noted Jim Higginbotham.

What’s next for the industry?

The ruling has spurred speculation over its future implications, with the industry awaiting further guidance and, potentially, a Supreme Court ruling.

One significant area of concern is the economic impact, with John Phillipou noting that, “the rulings are at stark odds with the government’s growth agenda.”

Higginbotham highlighted that increased regulatory burdens might lead to a reduction in market competition, especially among smaller brokers: “we could see a reduction in customer choice as a result of this ruling”. If regulations become excessively restrictive, some participants fear a shrinkage in customer choice, as smaller or specialised brokers may struggle to meet new compliance requirements.

Another key concern raised by the panel is the potential effect on pricing. In a competitive lending environment, market forces will likely dictate pricing, but increased transparency could necessitate a breakdown of fees and clearer communication around commission costs.

The webcast also questioned whether lenders might shift to a model where they work with fewer brokers, or even develop their own in-house sales forces. However, both Phillipou and Higginbotham defended the current broker model, noting the value brokers add by expanding market access and offering specialised knowledge, especially for smaller businesses and consumers without access to larger financial networks.

Broader regulatory and market considerations

The webcast highlighted the FCA’s role in the regulatory landscape, particularly in responding to increased scrutiny on market integrity. While the regulator’s pace has been questioned, the panel noted efforts behind the scenes, with the FLA actively communicating with government departments to push for a reasonable and clear path forward. The discussion underscored a shared hope that the Supreme Court will bring clarity, which might not come until 2025-26, allowing the finance sector to adapt sustainably while avoiding disruption.

Despite these challenges, the ruling presents a unique opportunity for the industry to embrace transparency and foster consumer trust. Both Higginbotham and Phillipou argued that if brokers and lenders proactively work toward a fair disclosure process, the industry can turn this judgment into an opportunity to reshape the market positively. Rather than seeing transparency as a threat, the sector should strive to collectively build a “level playing field,” minimising competitive disadvantages for brokers and ensuring customers benefit from honest and informed decision-making.

Conclusion: A call for collaboration and industry unity

As the industry faces regulatory uncertainty, the webcast closed with a call to action for brokers and lenders to join associations like the FLA and NACFB, to drive forward the conversation and collectively navigate the challenges ahead. Standardising documents, streamlining disclosure processes, and fostering cooperation between lenders and brokers are crucial steps to adapt to a changing landscape. As John Phillipou remarked, “As an intermediary and lender community, we have done well to get where we are,” underscoring the importance of association membership in influencing policy and protecting broker interests.

NACFB’s Higginbotham added that, “the lack of alignment is a challenge but working together we can influence that and create a logical and supportive environment in which to operate going forward.”

“We have a stronger voice together.”

Jim Higginbotham, NACFB

In conclusion, the Johnson v Firstrand et al ruling has cast a spotlight on fiduciary responsibilities and disclosure requirements across the auto and asset finance sectors. The need for industry cohesion, clear regulatory guidance, and proactive transparency has never been greater. By addressing these demands with a spirit of unity, the auto and asset finance sectors have a real opportunity to enhance consumer trust, safeguard broker value, and maintain the integrity of the market amid an evolving regulatory landscape.

Watch the webcast in full here.