Practical support when considering the Court of Appeal case on commission disclosure

Case summaries and court findings

• 1. Hopcraft v Close Brothers – In this case, the court found that the commission payments were entirely undisclosed to the consumer, classifying them as “secret commissions”, thereby resulting in Close Brothers being deemed the primary wrongdoer due to the secret nature of the commission.
• 2. Wrench v Firstrand Bank – The court similarly concluded that insufficient disclosure had rendered the commission payment secret. Firstrand Bank was held liable as the primary wrongdoer in this case.
• 3. Johnson v Firstrand Bank and Motonovo Finance – In this case, the lender made partial disclosures that negated secrecy but failed to ensure the consumer’s fully informed consent. This insufficient disclosure led the court to find the lender liable as an accessory to the broker’s breach of fiduciary duty, stating that adequate commission disclosure was lacking and that the partial disclosure was insufficient to establish informed consent. Additionally, the court found an unfair relationship under the Consumer Credit Act 1974 (CCA), allowing the consumer relief under sections 140A-C.

In these judgments, the court emphasised that simply including a commission disclosure in the terms and conditions without adequately informing or directing the consumer to this disclosure would fail to negate secrecy.

Consumer Credit Act 1974 and Unfair Relationships

A key aspect of the judgment in Johnson concerned the Consumer Credit Act 1974 (CCA), where the court found that inadequate commission disclosure created an unfair relationship under sections 140A-C of the CCA. Jodie Craven, who is an expert on consumer finance and regularly advises on the financial regulatory landscape, confirms that this ruling expands the “unfair relationship” concept in credit agreements, allowing consumers greater recourse when lenders fail to disclose commissions adequately, demonstrating that lenders’ practices may be deemed unfair where there is an extreme disparity of information, and where brokers have undisclosed financial incentives that impact consumer decision-making.

Financial repercussions and industry impact

The Court of Appeal’s decision has significant cost implications, with major lenders including Santander and Lloyds Banking Group already setting aside £295m and £450m respectively to cover the potential costs, while the industry wide impact could reach £30bn according to Moody’s. While the ruling enhances transparency and consumer protection, it establishes a challenging precedent by exposing funders to retrospective liability for actions lawful under existing regulations.

This raises critical concerns about the reliability of regulatory frameworks when evolving case law imposes unforeseen liabilities. The judgment redefines disclosure standards, leaving funders with limited protection from historic compliance. Larger institutions may absorb the impact, but smaller lenders face serious risks to their financial stability.

Though the decision prioritises customer fairness, it highlights the tension between protecting customers and providing legal certainty for funders, complicating the enforcement of retrospective liabilities in an evolving legal landscape, and ultimately that may lead to increased prices for those customers in the medium to long term if the choice of funders reduces and their liabilities.

Practical takeaways for lenders and brokers

• 1. Revise Commission Disclosure Practices: Lenders, dealers and brokers will be keen to:
  • i) ensure that commission disclosures are not merely included in fine print i.e. embedded in the terms and conditions, but should be actively communicated to customers (consumers and businesses) in a transparent and accessible manner prior to entering into a finance agreement;
  • ii) seek written consent from the customer to the payment of commission prior to the customer entering into the finance agreement; and
  • iii) ensure the obligations as between funders and dealers or their brokers, are written clearly in terms of what is expected of them, and in particular, as to commission and fees disclosure.
• 2. Prepare for Customer Complaints and Claims: The court’s decisions will likely increase customer complaints and ultimately claims for those that have entered into finance agreements. Lenders, dealers and brokers should assess resources and ensure efficient complaint handling mechanisms and controls are in place to manage these complaints and anticipated claims cost effectively.
• 3. Align with Consumer Duty Requirements: This judgment also indicates the need for lenders to ensure that the customer journey and all customer-facing materials are clear, fair, and not misleading, thereby aligning with the broader consumer duty requirements under FCA regulations both leading up to entering into a finance agreement (whether or not it is CCA regulated) and after the relevant finance agreement has been entered into.

Conclusion

Whilst the industry will no doubt welcome the Court of Appeal’s recent ruling marking a sharper shift towards enhanced transparency, accountability and consumer protection in motor finance arrangements and its implications extending into additional markets where commission is paid, the decision has created significant uncertainty as the heightened disclosure standards surpass previous legal and regulatory requirements. Firms in the asset finance industry should take proactive steps to update their practices immediately, particularly around customer consent and fiduciary responsibilities thereby ensuring compliance with these elevated legal standards and mitigating the risk of potential future liability.

Natalie Coates, a Partner in the Banking and Finance team at Blake Morgan, is available with her capable team to discuss and provide support.