In the UK, it’s common for car dealers to connect customers with lenders so that the car can be purchased on finance, with the lender paying a commission to the dealer. While most car buyers choose to finance their purchase, it’s vital for customers to understand the duties and responsibilities owed to them by both the dealer and the lender. This knowledge can help protect them in situations that may feel unfair, particularly where there is a suspicion of bribery or improper incentives.
When purchasing a car through hire purchase, many individuals will have been unwitting participants in a scheme whereby the higher the interest rate they agreed to, the higher the commission lenders were paying to dealers. Many have argued that this creates a clear conflict of interest by encouraging dealers to offer higher interest arrangements.
Let’s take a look at the recent Supreme Court decision on this issue and the impact it could have on buyers.
By Nancy Nan
Background
The dispute involves a tripartite relationship between customer, dealer, and lender. There are three cases focusing on this dispute: Johnson v FirstRand Bank Limited (London Branch) t/a MotoNovo Finance, Wrench v FirstRand Bank Limited (London Branch) t/a MotoNovo Finance and Hopcraft and another v Close Brothers Limited.
All three cases are intricately linked to each other, with Johnson the leading case amongst them. The respondents are the customers who bought the car with credit supplied by the lenders, the appellants.
The customers received different decisions at first instance and first appeal but eventually were all successful in the Court of Appeal. The lenders reacted to this by choosing to appeal. The legal issues discussed below will focus on the lenders’ appeals to the Supreme Court.
Legal Issues
While there are other issues, the main legal issue focuses on whether a car dealer, who receives a commission from a lender, owes a duty to the buyer of the car that entitles the buyer to bring a claim against the lender, either for bribery or dishonest assistance under the Consumer Credit Act 1974 (the “CCA”).
The CCA demands that both the customer and the lender have a duty to maintain a fair relationship. A further question would be, to what extent the information of a commission is undisclosed for the fairness of the relationship to be affected? This is a straightforward question to answer – the court will apply the CCA standards.
Decision
The Supreme Court allowed the lenders’ appeals. There is a distinct tort of bribery and the respondents suggested that the car dealers owe a fiduciary duty to them which enables them to bring the claim of bribery against the lenders. The Court held that no fiduciary duty is owed by the dealers to customers. The court believes it is reasonable for any party to consider their own interests in the first place, and receiving a commission falls under the scope of the dealers’ commercial objectives. Hence, with the absence of fiduciary obligations, the customers’ claim of bribery towards the lenders was unsuccessful.
On the other hand, Mr Johnson’s claim under the CCA was affirmed. The secret 25% commission from the lenders to dealers was considered significantly affected by the fairness of the relationship between Mr Johnson and FirstRand, under section 140A of the CCA. The reason only Mr Johnson’s claim under the CCA was successful, was because of the unfair relationship between Johnson and the lender. The size of the commission paid by the lender to the dealer was excessive and disproportionate to the price of the car.
In addition, the dealer supplied a misleading Suitability Document, concealing the relationship between the dealer and the lender, misrepresenting the dealer’s independence. It is in breach of disclosure rules under the Financial Conduct Authority (the “FCA”), which further affected the fairness of the customer-lender relationship. As a result, a compensation was ordered under section 140B of the CCA, that Mr Johnson would receive a payment equivalent to the commission of £1,650.95 with interest.
Our Thoughts
The banks may be relieved by the Supreme Court decision. However, the decision does not completely let the lenders off the hook for paying compensation to consumers if the interest rates are unfairly charged or the excessive charges are imposed on consumers.
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