Secret commission in motor vehicle sales – where are we now?

At the end of October, the Court of Appeal handed down judgment dealing with three appeals heard together from claims made by customers against car finance providers about commission payments made to dealers who referred customers to the finance providers.

That arrangement itself is common in the industry and uncontroversial.

The questions the court were asked to consider, concerned if such a payment of commission is permitted, where the arrangement to pay it was secret or not fully disclosed to the to the customer.

The Court, in upholding all three appeals, held that:

1. A dealer, as well as bring the seller of the vehicle, also acts as a credit broker and accordingly owes their customers a disinterested duty (to make recommendations or give advice on an impartial basis) and an ad hoc fiduciary duty to avoid conflicts of interest.
2. Commission arrangements should be disclosed to customers.
3. Although each case will turn on its facts, it is unlikely to be sufficient disclosure of the commission arrangement to “bury such a statement in the small print which the lender knows the borrower is highly unlikely to read”.
4. Where a commission is held to be “fully secret”, primary liability lies with the lender.
5. Where a partial disclosure of the commission means the commission is not secret, but the customer has not given fully informed consent to the payment of the commission, the lender can still be liable as an accessory to the dealer’s breach of fiduciary duty.
6. Available remedies include repayment of the commission by the lender.

So what now?

The Supreme Court have granted Close Brothers and FirstRand permission to appeal the decision and the FCA (Financial Conduct Authority) has asked the court to determine the appeal as soon as possible. The appeal is expected to be heard early 2025.

Close Brothers, after suspending their book in the immediate aftermath of the decision, are back writing motor finance.

Taken individually, the value of this and similar claims is not material to the lenders’ business. But they and other lenders will be concerned that the floodgates could open to a huge number of claims and worried about the impact that a more transparent approach to declaring commission could have on future business.

More generally, providers of different types of finance with similar commission arrangements will be watching developments with great interest.