Supreme Court: Three-day hearing
All eyes are on the Supreme Court this morning as it begins a three-day hearing on motor finance commissions that could open up or close down a major new source of legal work.
In three conjoined cases, known as Johnson v FirstRand, the Court of Appeal found it unlawful for car dealers, acting as credit brokers, to receive a commission from the lender without obtaining the customer’s informed consent.
Dubbed the ‘new PPI’, estimates of what it could cost lenders are anyway up to £30bn or even more.
The Financial Conduct Authority (FCA) – which is one of the two intervenors in the case – has said it would confirm within six weeks of the decision whether to press ahead with a redress scheme as an alternative to consumers having to complain to or sue finance companies.
Under this, providers would be responsible for determining whether customers have lost out due to their failings and, if so, then offer “appropriate compensation”. The FCA would set rules providers would have to follow and put checks in place to make sure they did.
Dr Derek Whayman, a law lecturer at Reading University, said “the financial stakes could not be higher”.
He explained: “The Supreme Court must confirm several critical points: what constitutes sufficient disclosure of fees; whether small enough fees might not require explicit disclosure; and most importantly, when lenders are liable if dealers fail to disclose commissions properly.
“The current position is that this they are liable simply if there was anything less than full disclosure. This is a low bar the Supreme Court may raise.”
Consumer rights organisation Consumer Voice urged the Supreme Court to uphold the appeal court’s decision.
Co-founder Alex Neill said: “Consumers are very inexperienced when it comes to taking out car finance loans. This vulnerability is compounded by their lack of knowledge of the product, alternative financing options and the failure of the lenders and the dealers to disclose commissions.
“People don’t shop around for their car finance and simply take the deal on the spot. They rightly put their trust in their dealer to get them a good deal and often think the cost of the car is dependent on taking out the finance.
“In the vast majority of cases consumers were kept in the dark and commissions weren’t disclosed. However, even where they were, given how the market operates it is completely unreasonable to expect a customer to dig through the small print to discover and understand the terms.
“It is only right the Supreme Court upholds the landmark ruling from the Court of Appeal. Dealers are acting as brokers when they offer customers car finance and consumers have the right to expect they will offer them a good deal or explain why they can’t act impartially.”
Sam Ward, a director of Cheltenham firm Sentinel Legal, which is supporting Bradford-based HD Law, solicitors to one of the claimants in the case, said last month’s Supreme Court ruling in Rukhadze v Recovery Partners indicated its direction of travel, after the court held that financial institutions could not justify keeping secret profits.
He said the decision “shreds the key defences used by lenders” in Johnson, citing Lady Rose’s comment that “if the principal enters into a transaction which a fiduciary helped bring about in circumstances where the fiduciary had a conflict of interest, the principal is entitled to have the transaction set aside”.
This meant lenders could not that borrowers would have taken the loan anyway; “hidden commissions automatically make the deal unfair”.
He continued: “Full transparency is now the only defence. Lenders can’t hide behind vague terms such as ‘(We may pay a commission)’ buried in finance agreements.”
Mr Ward also pointed to another Court of Appeal ruling last month on commissions in business energy cases, Expert Tooling v Engie, which it expressly expedited to rule on before the motor finance appeal.
In it, Lord Justice Zacaroli said: “It is not sufficient, in order to obtain the consent of the principal, that they are given some information, leaving them to ask for more…
“There was no disclosure whatever… nor any identification that they gave rise to a conflict of interest, nor any explanation of the nature and extent of that conflict, so as to bring home to Tooling precisely what it was being asked to consent to.”
Mr Ward opposed the possibility of an FCA scheme too: “This is a complex area of law and regulation. It involves considerations of breaches of common law duties, the tort of bribery, rescission, various breaches of CONC, and sections 140A-C of the Consumer Credit Act 1974.
“Volume bonuses, advanced commissions and [other] bonuses may also need to be taken into account, depending on the facts of each case.
“Can an ordinary member of the public, who is not a solicitor in this field, seriously be expected to understand all these issues when their lender makes an offer, so they can properly assess whether it is reasonable and fair?”
He predicted that Sentinel would litigate “everything we deem appropriate to do so. We won’t be allowing lenders to low-ball clients with laughable offers when we know the offer should be much more.
“We have a database with thousands and thousands of lines of disclosure. We know exactly what the average commissions were paid on an car finance agreement on a per lender basis. If an offer comes in below average, we’ll start litigation.”
Darren Smith, managing director at Blackburn firm Courmacs Legal, which currently has over 2.2m car finance claims on its books, urged the government to respect the outcome of the Supreme Court ruling if it did keep open the door to claims and not cap or limit compensation, as has been suggested.
“Our concern is that there is no political interference with the redress the victims of car finance mis-selling are ultimately due,” he said.
“Like all lawyers, we will abide by what the court says. We would expect in these circumstances our politicians to do the same.”
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