Car finance: the legal questions and implications

James Evison and Miranda Joseph at Stevens & Bolton LLP discuss the legal and economic implications of the Supreme Court’s car finance rulings

 

Hopcraft and another (Respondents) v Close Brothers Limited (Appellant); Johnson (Respondent) v FirstRand Bank Limited (London Branch) t/a MotoNovo Finance (Appellant); Wrench (Respondent) v FirstRand Bank Limited (London Branch) t/a MotoNovo Finance (Appellant)

 

The UK Supreme Court’s forthcoming rulings on car finance are poised to be some of the most consequential decisions in consumer credit law in recent years. The linked cases concern the legality of undisclosed commission payments by lenders to car dealers, raising fundamental questions about transparency, fiduciary duties, and contractual fairness. The rulings may have far-reaching consequences for financial institutions, dealerships, manufacturers, and consumers alike.

 

 

Key issues

The appeals, brought by FirstRand Bank Limited and Close Brothers Limited, challenge earlier rulings that lenders must repay commission plus interest to affected consumers. 

 

The Supreme Court is considering several key legal questions, including: 

1. Duty of car dealers – Do car dealers have a fiduciary or other duty to act in the best interests of consumers when acting as credit brokers?
2. Secrecy of commission payments – If such a duty exists, did lenders make secret commission payments to dealers, resulting in those lenders being primary wrongdoers?
3. Liability for bribery – can lenders be held liable in the tort of bribery in relation to commission payments made to car dealers? If so, what legal remedies should be applied?
4. Disclosure and consumer consent – If commission payments were not secret, was the level of disclosure sufficient to secure fully informed consumer consent? If not, are lenders liable for facilitating a breach of duty by credit brokers?
5. Fairness under Consumer Credit Act 1974 – Does a lack of transparency in commission disclosures create an “unfair” relationship between the lender and the consumer, as defined by section 140A of the Consumer Credit Act 1974? 

The Financial Conduct Authority (“FCA”) is also reviewing whether compensation should be paid to consumers for historic discretionary commission arrangements entered into before its 2021 ban. This could create a double financial hit for the industry, with regulatory redress following the Supreme Court’s ruling.

 

 

Commercial and economic consequences

The motor finance industry has been bracing for a compensation scheme billed as the UK’s largest since PPI. Since 2007, over 31 million car purchases have involved commission payments, meaning the financial exposure for lenders could be enormous.

 

Beyond lenders, car dealerships face significant risks. If the Supreme Court finds dealers breached fiduciary duties and/or insufficiently disclosed commission, they may face contribution claims from lenders seeking to recover payouts. Many dealerships, particularly independent firms, may struggle to meet this liability. 

 

The knock-on effects extend to car manufacturers. If dealerships sell fewer cars due to reduced financing, manufacturers will inevitably feel the impact, potentially leading to production cuts and job losses across the supply chain. 

 

Lenders in other markets where sales are made through brokers, will also be looking closely at the potential implications.

 

HM Treasury was so concerned about the potential economic fallout that it sought (unsuccessfully) to intervene in the case, advocating for a fair and proportionate outcome - one allowing consumer redress without destabilising the motor finance industry.

 

 

Balancing consumer protection and industry stability

While consumer rights must be safeguarded, the rulings will hopefully consider the wider economic impact. Excessive liabilities on lenders could harm both businesses and consumers. Conversely, it is important that any systemic transparency issues are addressed, particularly where they lead to genuine unfairness for consumers.

 

Many in the legal industry expect the court to shy away from imposing potentially unworkable fiduciary duties on car dealers but will nevertheless try to ensure that cases of unfairness are resolved. Either way, as we await the judgment, the future of motor finance hangs in the balance.

 

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James Evison is a Partner and Miranda Joseph is a Senior Knowledge Lawyer at Stevens & Bolton LLP

 

Main image courtesy of iStockPhoto.com and Milan Markovic