The judgement involved two companies, Close Brothers Limited and FirstRand Bank Limited (MotoNovo Finance), that sold car finance deals to consumers via a car dealer. The appeals involved three cases of consumers who took out car finance deals without being fully aware of the commission paid out by the lender to the broker.
The court ruled that the broker (and car dealer) should have acted in the best interests of the customer. In addition, it ruled that the car dealer should not have received a commission from the lender without disclosing it to the customer and having the customer give informed consent to the payment.
The court also found that the car dealer acting as a broker has a fiduciary duty towards the customer. A fiduciary duty means the broker must act in the best interests of the client first and foremost. The decision also stated: "In all three cases there was a conflict of interest and no informed consent by the consumer to the receipt of the commission."
This is despite the fact that in two of the cases, customers were presented with terms and conditions which stated that the broker could receive a commission payment for the brokered deal.
What does the judgement mean for car finance companies and brokers?
The new requirements mean that simply stating that a broker may receive a commission in the terms and conditions of a financial agreement may no longer be sufficient. Companies may need to disclose further details of the amount of commission paid as well as the nature of the commission. Brokers must also ensure they are acting in the best interest of the customer when offering finance deals as a fiduciary duty towards the customer is now implied.
It's expected that this judgement will be appealed but the process could take months.
However, in the meantime, car finance companies are scrambling to implement the new requirements around informing consumers about commissions which may have arisen as a result of the judgement. Due to this, some car finance companies have temporarily halted operations while others are reviewing their processes and making immediate changes to how they work.
FirstRand and Close Brothers to take case to the Supreme Court
Both FirstRand and Close Brothers intend to appeal the decision in the Supreme Court.
In a statement to its shareholders, FirstRand said: "FirstRand is concerned by the judgement and does not agree with its findings.
"This judgement finds that a fiduciary duty suddenly and retrospectively now likely applies to all providers of credit at point of sale which has far-reaching and materially negative implications for the motor finance industry and broader consumer finance sectors in the UK.
"Given the importance of this issue, FirstRand believes these matters should now be heard by the UK Supreme Court which only considers matters of law with wider public importance."
In a press release published following the judgement, Close Brothers said: "Close Brothers disagrees with the Court’s extension of the existing case law in this area and intends to appeal this decision to the UK Supreme Court."
As a result of the judgement, Close Brothers has halted the writing of new UK motor finance business while the team conducts its own review into the judgement and updates its processes to comply with the new requirements. FirstRand has also temporarily halted operations in the UK.
The case took place against the backdrop of a wider FCA review into the potential misselling of car finance under now-outlawed discretionary commission arrangements (DCAs) and is likely to have an impact on the FCA's findings as a result.
What is the FCA car finance review?
The DCA car finance review relates to discretionary commission arrangements (DCAs) where car dealers were encouraged to sell finance deals with higher interest rates in order to earn higher commissions. The FCA banned DCAs back in 2021.
However, following thousands of complaints to the Financial Ombudsman from consumers who believe they've been treated unfairly, the FCA launched its own investigation to determine whether there has been any car finance misselling. If the FCA concludes that there has been widespread misconduct, it'll take steps to ensure consumers receive compensation.
Consumers who believe they have been missold car finance can still complain to their car finance company. We discuss this in more detail in our car finance misselling article.
What was the FCA's response to the judgement?
The Financial Conduct Authority has been in close contact with the firms involved, the wider industry as well as the Government to analyse the impact on the industry and consumers and identify whether specific action is required.
Nikhil Rathi, Chief Executive of the Financial Conduct Authority, added: "In the meantime, our focus is on ensuring that customers receive fair treatment in line with the law and that the market for motor finance continues to function well, recognising that over two million people rely on it each year to buy a car.
"While the case itself was not focused specifically on discretionary commission, it clearly relates to our work to determine whether motor finance customers have been overcharged because of the past use of discretionary commission agreements."
Car finance companies have been told they do not need to make decisions on compensation until December this year in order to ensure customers are treated in a fair and consistent way. Following the judgement, some companies have requested that the pause on decisions be extended beyond December. The FCA has confirmed that it is considering this request but no decisions have been made as of yet.
What is the impact on the wider car finance market?
The landmark judgement has already had an impact on the wider car finance industry, and particularly financial institutions involved in the DCA review. For example, Lloyds' share price has slipped by nearly 15% since Friday (October 25) in part due to the potential repercussions for its vehicle finance division Black Horse. Experts believe the money Lloyds set aside for potential financial compensation following the DCA review may no longer be sufficient in light of the new judgment.
Matt Britzman, Senior Equity Analyst at Hargreaves Lansdown added: “Details are thin but [the] Close Brothers court ruling, upholding the appeal of the claimant in the Hopcroft motor finance case, suggests the FCA could take a harsher view in its wider investigation into motor finance discretionary commission arrangements.
"Lloyds has set aside £450mn already, and analysts had pencilled in another c.£500mn for next year. But with some rumours suggesting the number could be closer to £2bn, that leaves a £1bn hole to be filled."
Black Horse has halted commissions to brokers for the time being as a result of the judgment. Several other companies have followed suit or introduced interim measures, with others immediately halting operations as they review their processes.
FCA discretionary commission arrangement review - What's next?
The FCA is still conducting its review into the potential car finance misselling. While the regulator had hoped to set out the next steps in September this year, delays with obtaining evidence for its review as well as ongoing litigation meant that it was unable to do so. The deadline has instead been extended to May 2025.
The FCA also hopes to confirm the final rules on how consumers will be compensated if there has been mishandling by December 2025, with firms expected to start to follow the new approach laid out by the FCA from 2026 onwards.
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