The keenly awaited judgment of the Court of Appeal (Johnson v Firstrand Bank Ltd, Wrench v Firstrand Bank Ltd, and Hopcraft v Close Brothers Ltd) issued on 25 October 2024 has caused not only significant disruption in the motor finance market over the past week but has also rippled into other regulated products, creating uncertainty in business-to-business arrangements where a broker is used to facilitate funding and introduce a lender to provide finance.
The case itself (known as the "Hopcraft Case") involved three consumers on relatively low incomes, each of whom was offered finance by motor dealers to assist them in buying second-hand cars valued at less than £10,000. The key question at a high level related to the payment of a commission by the lender to the dealer in those arrangements and whether, ultimately, the finance had been mis-sold. The consumers' appeal was upheld in all cases.
The legal debate in this area isn't new. There is already case law on the topic (most notably Hurstanger v Wilson and Wood v Commercial First Business), but despite that common law precedent and the Financial Conduct Authority (FCA) Handbook rules specifically dealing with commission disclosure, there has been a raft of consumer complaints to the Financial Ombudsman Service (FOS) and the regional courts throughout the UK, which have increased over recent years following a focus by claims management companies on pursuing claims of this type. The only consistent aspect of how these complaints were handled seemed to be the inconsistency in approach and outcome, which ultimately left consumers and lenders without clarity.
Recognising this, the FCA stepped in last year and has been conducting a review of the historical use of discretionary commission arrangements and sales by lenders in the UK. This type of discretionary commission arrangement known as Difference in Charges (DIC) was thought to potentially lead to detrimental customer outcomes. That investigation focuses on deals made between 2007 (when FOS started overseeing discretionary commission arrangements) and January 2021, when the FCA banned this type of commission model. While their investigation is ongoing, consumer complaints in respect of such DIC commission models are paused. The "pause period" was recently extended to May 2025, when it was anticipated that the FCA would announce its next steps, albeit there was speculation that compensation payments could be tied to the review, and the industry was braced for that.
The Hopcraft Case
The Hopcraft Case fundamentally turned on the payment of “undisclosed” commission to brokers in relation to the introduction of customers to finance companies and the "duty" the broker owes to the customer in these relationships.
In considering the relationship that the broker had with the customer, the court distinguished between a "disinterested duty" and a "fiduciary duty" but concluded in the circumstances of each of the three cases being appealed that a fiduciary duty arose as a matter of fact (even where the broker only had a “disinterested duty”). Thus, in all three cases, the broker was deemed to be acting on behalf of the customer. It was considered that the broker had a duty to be honest and impartial, and thus a conflict of interest had arisen. This rule is likely to apply not only across all such relationships in the motor finance industry but potentially in any arrangement where a broker acts in a similar capacity. Consequently, the judgment's reach is extensive.
The court also considered whether the lender had a primary liability to the customer, based on whether the commission had been disclosed. If the commission was undisclosed and thus "secret," then the lender bore primary liability. If there was "partial disclosure," the lender could only be held liable in equity as an accessory to the broker's breach of fiduciary duty.
The court examined what constituted sufficient disclosure and, in particular, whether a statement in the credit agreement's terms and conditions, indicating that commission may or will be paid, negates secrecy, even where the borrower neither read the statement nor was directed to it. The judges concluded that a general term “buried” in the terms and conditions does not absolve the broker or lender of the duty to disclose that commission is payable, stating: “Disclosure in this context means taking reasonable steps to ensure that the fact actually comes to the attention of the consumer in a way which makes its significance apparent.” In one case, the court described a statement included in the terms and conditions that "commission may be paid" as being “hidden in plain sight.”
In two of the appeal cases, there was deemed to be insufficient disclosure to the customers, resulting in primary liability on the part of the lender. In the other case, although there had been sufficient disclosure to negate secrecy, there was not informed consent by the customer to the commission payment, so the lender was still liable as an accessory. The court clarified that disclosure must be sufficient and that the customer must be aware that the introducer is free to promote their own self-interest at the customer's expense.
As an ancillary point, one consumer raised an "Unfair Relationship" claim under s140 of the Consumer Credit Act (CCA) because the commission hadn't been disclosed. While that claim succeeded on the facts of the case, the court clarified that a lack of disclosure or partial disclosure alone will not necessarily suffice to render the relationship between the consumer and the lender unfair under the CCA.
The Implications of the Judgment
The judgment has brought certainty via the common law regarding expectations for these motor finance broker arrangements, notwithstanding that the lenders involved believed their practices were compliant with the legal and regulatory standards at the time and consider the judgment to extend existing case law in this area. Funders have acted quickly to implement the changes required by the case, given its immediate effect. However, inevitably, some funders have understandably paused new business while they amend their systems, policies, and procedures to comply with the judgment’s requirements.
Uncertainty remains on the potential impact of the Hopcraft Case not only on the motor finance market but also on financing in the business-to-business space, as well as the potential industry-wide costs for compensation claims. While the facts and circumstances of each consumer claim heard in the Hopcraft Case led to the decision, and certain of those facts may not apply universally, the concern is that it will set a precedent for similar claims in consumer and business transactions, which could result in significant liabilities for lenders.
While the Court of Appeal has refused permission to appeal the case, the respondents are likely to apply directly to the Supreme Court. However, until the judgment is overturned, the finance industry continues to grapple with its implications.
