No clarity on car finance until July

July is the earliest that the motor finance sector will know the outcome of the crucial Supreme Court hearing on the question of commission disclosure and fiduciary duty, which was held over three days at the start of April.

Lenders Close Brothers and FirstRand (trading as Moto Novo) brought the appeal to the UK’s top court following last October’s shock Court of Appeal ruling in three cases involving cars purchased on finance, where dealers were found to have failed partially or entirely to disclose the existence of any commission payments.

In his summing up at the end of the appeal Lord Reed, President of the Supreme Court said: “The case has been very well argued on all sides, and we are most grateful to the interveners for their assistance.”

He also indicated that no judgment would be handed down before July, after the Financial Conduct Authority (FCA) called for the decision to be expedited and noted that it is waiting on any fresh ruling before setting out its next steps in relation both to its ongoing review of motor finance commission arrangements, and to any potential redress scheme.

Key arguments

The FCA along with the National Franchised Dealers Association (NFDA) were the two bodies granted permission to intervene in the Supreme Court case and made submissions, both in written form in advance of the hearing, and during the hearing itself.

The arguments put to the Supreme Court covered several issues, including whether or not car dealers, when acting as credit brokers, owe consumers a fiduciary duty (as the Court of Appeal determined), and/or a disinterested duty, as the FCA outlined in its pre-hearing submission.

The Court also looked at whether the payment of commission by lenders to car dealers in secret made the lenders the primary wrongdoers, and whether lenders could be held liable in the tort of bribery.

In addition the panel of judges considered whether, in cases where commission was disclosed, the fact that consumers were not asked to demonstrate fully informed consent made lenders liable as accessories for procuring the brokers’ breach of duty, and also meant that the relationship between the lender and the consumer was “unfair” for the purposes of the Consumer Credit Act.

“Objective undertaking”

Robert Weir KC, who represented the borrowers, told the Supreme Court that the Court of Appeal had been right to conclude that they were owed a fiduciary duty.  He argued that dealers agreed a price with the customer and then moved on to the credit-making journey, saying these were two distinct roles.

Weir said the dealers went on to select a single proposed agreement from one lender and put forward only this option, which meant they did not demonstrate an “objective undertaking”, and so the tort of bribery was engaged. Consumers signed agreements without full knowledge and consent to the dealer earning commission, so the motor finance firms involved were in breach of their fiduciary duty.

Countering this argument, Mark Howard KC, acting for the lenders, compared car dealers’ duties to those of a shop assistant or a sommelier, saying they had no legal responsibility to find the best deal for customers and had never undertaken to subordinate their own interests to that of the customer. He argued that someone does not become a fiduciary simply if they have a role in the decision-making process of another.

Expert reaction

“A fascinating few days in the Supreme Court, with a stellar list of advocates to hear arguments relating to commission payments to dealers by lenders and the scope of duties which may, or may not, be owed in these circumstances. The legal arguments and questions demonstrated the seriousness of the issues in contention and the complexity of navigating these. The cases for the lenders provided a rehearsal of the common law principles developed over the last 150 years.

“As was to be expected, the Justices were well briefed and asked pertinent questions to really open up understanding. These challenges provided some insight to the critical thinking and how opinions may be formed.  

“It is certainly true, that the industry has presented its best case and has put a spotlight on areas where it is felt the analysis by the Court of Appeal has gone too far. The insights from the NFDA and parallels to other markets highlighted the expansive interpretation accepted by the Court of Appeal. The FCA also provided their view and sought to limit the application of a fiduciary duty and the unfair relationship test to fact specific assessments.

“We now have to wait for the judgment to be handed down. Lord Reed has said that the “court is not going to rush”, setting down an expectation that this may be provided in July.

“There are now a number of steps that firms should be taking, if not already in place. Whatever the judgment from the Supreme Court, the FCA continue to look at discretionary commission arrangements and CMCs take aim at lenders. There is still a lot to navigate, but with some focussed actions the firms can be prepared for whatever comes next.”  

Asset Finance Connect will continue to keep the motor and asset finance sector abreast of developments, and the question of how to respond to the current legal challenges will form an important part of the AFC UK Summer Conference to be held on June 3^rd at County Hall in London.