Blog Supreme Court resets rules on motor finance

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The ruling clarified the duties of car dealers in finance arrangements and reaffirmed principles under section 140A of the Consumer Credit Act 1974 (CCA).

Background

Each case involved a customer purchasing a vehicle via a dealership, which arranged finance and received commission. Dealers had discretion over interest rates, and commission disclosure varied: none in Hopcraft, general reference in Wrench, and greater disclosure in Johnson but with the commission amount given no prominence. The claimants alleged the commissions were bribes and that lenders were liable either directly or as accessories to fiduciary breaches. They also claimed the agreements were unfair under s.140A CCA.

Initially heard in County Courts, the cases reached the Court of Appeal in 2024, which found in favour of the claimants. It held that dealers owed fiduciary and "disinterested" duties, and that commission payments constituted bribes. In Johnson, the relationship was deemed unfair. The decision sparked concern across the finance industry, prompting appeals to the Supreme Court.

Key findings

1. No fiduciary duty

The Supreme Court ruled that dealers do not owe fiduciary duties in typical dealer-lender-customer arrangements. It emphasised that all parties pursue their own interests: dealers aim to sell cars, lenders provide finance, and customers seek affordability. The dealer's role in arranging finance was ancillary to the sale and not a separate service. No undertaking of loyalty was given, and customer vulnerability or trust did not create fiduciary obligations. The Court also clarified that FCA rules on commission disclosure (CONC 4.5.3R) do not impose fiduciary duties.

2. Bribery requires fiduciary duty

The Court reaffirmed that bribery under English law involves secret commissions paid to fiduciaries. It rejected the Court of Appeal's broader "disinterested duty" approach and overturned Wood v Commercial First Business Ltd, which had allowed bribery claims without a fiduciary relationship. The Court stressed that full disclosure of material facts is required to avoid a breach, and what is "material" depends on context. Since dealers were not fiduciaries, bribery claims failed.

3. Johnson v FirstRand: unfairness found

While the lenders succeeded on fiduciary and bribery grounds, the Supreme Court upheld Johnson's unfairness claim under s.140A CCA. It declined to apply the Plevin precedent directly, noting differences in product types. Instead, it reaffirmed that unfairness is a fact-sensitive assessment, considering factors like commission size, consumer characteristics, disclosure extent, and regulatory compliance.

In Johnson, three factors led to the finding of unfairness:

• A large commission (£1,650.95), representing 25 per cent of the loan and 55 per cent of the total credit charge.
• A misleading Suitability Document implying impartiality, despite the dealer's operating agreement with FirstRand, which contained a right of a "first refusal". This was considered to all intents and purposes to have created an exclusive relationship.
• Mr Johnson's financial unsophistication.

The Court awarded the commission amount plus interest but denied broader remedies like rescission or additional damages.

Implications for the industry

This ruling narrows the scope for claims based on fiduciary duty and bribery, offering clarity to lenders and dealers. It confirms that dealers are not fiduciaries and that commission payments alone do not constitute bribery. However, unfairness under s.140A remains a viable route, subject to detailed factual analysis.

The FCA has announced plans to consult on a redress scheme by October, with potential compensation payments beginning next year. While not a complete shield for lenders, the judgment significantly limits exposure and provides a clearer framework for future disputes.