Victory for lenders in Supreme Court decision on motor vehicle finance
The Supreme Court has rejected two of the three claims it was asked to decide, and upheld the other based on its specific facts
Overview
In a landmark decision which will be closely scrutinised by the finance industry, the UK Supreme Court today overturned the Court of Appeal’s October 2024 decision1. The Supreme Court's decision, issued shortly after markets closed in the UK today, is significant for the motor finance industry and beyond.
It will come as a welcome relief to financial services firms. The Supreme Court overturned the key parts of the Court of Appeal’s decision and rejected two claims entirely, upholding one in part, based on its specific facts and under a fairly well established area of law which is not new to the industry.
The FCA has previously said it will issue guidance within 6 weeks of the judgment on how firms should approach paying any redress owed to customers.
In addition, according to press reports, the government (which unsuccessfully sought to intervene in the appeal before the Supreme Court) might have considered the introduction of legislation to clarify disclosure thresholds and limit the economic effect of compensation claims on the industry and lenders alike. However, given the outcome, this is unlikely to be necessary.
Case background
The case involved three linked appeals by three different claimants. Each claimant bought cars on credit supplied by either FirstRand Bank Limited or Close Brothers Limited.
In each instance, (i) only one offer of finance was presented to, and accepted by, the claimant; and (ii) the dealer made a profit on the sale of the car but also received a commission from the lender for introducing the business to them.
The Court of Appeal, and now the Supreme Court, has considered three different fact scenarios in respect of whether and how the commissions was disclosed:
- The lender did not disclose that any commission was paid (Hopcraft);
- The lender’s detailed terms and conditions made reference to the payment of a commission of an unspecified amount (Wrench and Johnson);
- The customer signed a document indicating that the dealer could receive a commission from the lender (Johnson).
In each case, the Court of Appeal found that the disclosure of the commission was inadequate to avoid liability on behalf of the lender. This was on the basis of the tort of bribing an agent or fiduciary (or equivalent) and on the basis of dishonest assistance of a breach of fiduciary duty. Mr Johnson was also successful in his claim under the Consumer Credit Act 1974 (“CCA”). The lenders appealed to the Supreme Court.
As the Supreme Court said when handing down its decision: "the decision of the Court of Appeal came as a shock to the car finance industry as it conflicted with the assumptions which had been made not only by the industry but also by the FCA as its regulator. "
Supreme Court decision – key findings
The Supreme Court overturned the main bases of the Court of Appeal’s decision. Rooting its position in what it considered to be the commercial reality, it has provided helpful guidance on why car dealers should not normally be treated as agents or fiduciaries of customers, and on this basis rejected the claims based on civil bribery and dishonest assistance.
It also found that the Court of Appeal’s decision in relation to the CCA in Mr Johnson’s case was vitiated because it was flawed. Rather than referring that matter back to the District Court it decided to determine the issues for itself, and in doing so, it also provided helpful clarification on the relevant parts of the CCA.
Like the Court of Appeal, but for different reasons, it found that the relationship between Mr Johnson and his lender was "unfair" for the purposes of the CCA. This was based on facts specific to Mr Johnson’s case, in particular, the size of the commission (55% of the total charge for credit), and the fact that the documents provided to Mr Johnson created a false impression that the dealer was offering "products from a select panel of lenders" and recommending "the Consumer Finance product that best meets our individual requirements".
This is not a new area of law and has already been the subject of a previous Supreme Court decision which was decided on a similar basis.2
Next steps
The decision will be a welcome relief to the car finance industry and also to a wide range of other firms for whom the Court of Appeal’s decision might have been relevant. In particular, any firms using intermediaries – even outside the financial services sector – could have been affected if the Court of Appeal’s decision had been fully upheld.
As noted, the FCA has previously said that within 6 weeks of the Supreme Court judgment it will publish guidance on how firms should approach redress. This might have involved a formal redress scheme or less formal guidance on how firms should review their sales and calculate redress. The FCA will need to decide the right approach based on the decision but a formal redress scheme now seems less likely given the outcome.
It is also now unlikely that there will be a need for any government intervention. The government may have been concerned about the economic consequences if the Court of Appeal’s decision had been fully upheld, but this decision can be expected to have significantly less impact.
The decision is not only relevant for motor vehicle financing companies and dealers. Many others will be considering the outcome and what it means for them, including other retail and wholesale lenders and brokers, insurers, other financial services firms, issuers, securitization experts, litigators and restructuring specialists, and other intermediaries and their principals.
1 Marcus Gervase Johnson v Firstrand Bank Limited (London Branch) T/A Motonovo Finance (CA-2024-001453); Andrew Wrench v Firstrand Bank Limited (London Branch) T/A Motonovo Finance (CA-2024-00353); (1) Amy Louise Hopcraft (2) Carl Hopcraft v (3) Close Brothers Limited (CA-2024-00482) [2024] EWCA Civ 1282
2 Plevin (Respondent) v Paragon Personal Finance Limited (Appellant) [2014] UKSC 61 On appeal from [2013] EWCA Civ 1658
