To disclose or not to disclose…is that the question?

The Court of Appeal answered this question affirmatively in its landmark judgment in the combined cases of Johnson v FirstRand Bank Ltd, Wrench v FirstRand Bank Ltd, and Hopcraft v Close Brothers Ltd [2024] EWCA Civ 1282, holding that full disclosure of both the fact and the amount of commission is necessary to avoid conflicts of interest, irrespective of whether this related to full or half commissions.

The background

The cases involved claimants who had entered into credit agreements facilitated by motor dealerships. These dealerships received commissions from the defendant lenders, with the commission structure allowing dealers the discretion to influence the setting of interest rates. The higher the interest rate, the higher the commission earned by the dealer. The claimants argued that the lack of transparency regarding these commissions constituted a breach of duty by the dealers and lenders.

The ruling

The Court of Appeal ruled that motor dealers, when acting as credit brokers, owe a disinterested duty and a fiduciary duty to consumers. This means they must provide information, advice and recommendations on an impartial basis. The Court found that the dealers breached these duties by receiving undisclosed commissions from lenders, creating a conflict of interest unless the borrower fully consents to the commission.

The ruling emphasises the need for transparency in commission arrangements and the importance of ensuring that consumers are fully informed about any potential conflicts of interest. This is particularly relevant in the context of the Financial Conduct Authority’s (FCA) ongoing work regarding discretionary commission arrangements (DCAs) in the motor finance market and its continued emphasis on the Consumer Duty.

The wider implications

This decision has cataclysmic implications for the motor finance, credit management and consumer finance industry in that it is not restricted to discretionary commission models and regulated agreements. It impacts all intermediated credit where a commission is paid to a broker and the customer is not told the amount and given the opportunity to explicitly consent to it. The widespread impact on consumers and the consumer credit industry makes it ripe for an appeal to the Supreme Court that is due to be heard between 1 and 3 April 2025 before a panel of five justices, which demonstrates the importance of this case. This appeal will provide an opportunity for further clarification on the duties owed by credit brokers and the requirements in regard to the effective disclosure of commission. The outcome of the appeal will be closely watched by the financial services sector, as it will have significant implications for the regulation of consumer finance.

Lenders will need to take a more proactive approach to monitoring and managing relationships with credit brokers, ensuring that brokers are acting in the best interests of consumers and that any commissions paid are fully disclosed and understood by borrowers. This will involve implementing stricter oversight and compliance measures to ensure brokers adhere to the required standards.

For consumers, the decision provides greater protection and assurance that they will receive impartial advice when entering into credit agreements. It also empowers consumers to challenge unfair practices and seek redress if they feel they have been misled about commission arrangements.

The appeal in Johnson comes at a time when the financial services sector is already under scrutiny, as evidenced by the recent dispute between Barclays Bank and the Financial Services Ombudsman which centred around allegations of mis-selling and inadequate disclosure of fees and commissions in regard to various financial products. It will be interesting to see whether the Supreme Court will take the Barclays decision into account when determining the Johnson appeal.

The parallels between these cases highlight the broader industry challenges related to transparency and consumer protection. The outcome of the Johnson appeal could set a precedent that influences the resolution of similar disputes, reinforcing the need for financial institutions to prioritise clear and comprehensive disclosure practices, and highlights the continued need for an overhaul of consumer credit legislation in the UK.