In a recent case the Court of Appeal (CoA) gave its judgment on three separate appeals, which had then subsequently been joined together. In all of these cases the CoA found in favour of the claimants (the Cs) who, as a result, are now entitled to be paid a sum equivalent to the commission which had been paid by the respective finance companies to the dealerships from which they bought their cars. Clearly whilst this scenario frequently occurs in the world of vehicles, this decision will also have a knock-on effect on many other sectors.
In a nutshell, this case looks at a fairly common scenario in which often fairly “financially unsophisticated” consumers buy a second-hand car from a dealership. Often the customer visits a car dealership, agrees to buy a car, and then dealer and customer discuss how the car is to be paid for. Assuming they are not buying the car outright, then some form of hire purchase (HP) agreement is discussed. The dealer itself often then arranges the finance through a specific finance company or companies, frequently using just the one firm. It often has the requisite paperwork to conclude the finance deal there and then, and usually enters the relevant figures into the HP agreement themselves, including the price of the vehicle, amount of deposit, length of the agreement, interest rate etc. In some of these cases the dealer has the discretion to set the interest rate the customer pays, and their commission is linked to this. Assuming the finance company then agrees to the proposal, which can often happen very swiftly, more often than not they then pay commission to the dealer. Whilst the fact that some commission will be paid is often mentioned in the paperwork, the amount or how it is calculated is often not, and furthermore, such terms are often not prominent in the paperwork so can easily be missed by the customer.
There isn’t a fundamental problem with these arrangements as such, the issue which arises in these and many other cases purely relates to the commission payment from the finance company to the dealer, in circumstances where the customer was not informed about this, either fully or partially. This is sometimes called a “secret commission”. One of the arguments put forward in all of these cases is that the dealer is acting as the customer’s agent, and should be trying to find the best deal possible. As such the very existence of undisclosed commission (either partially or fully) creates a conflict of interest. It's also frequently argued on behalf of the customer that under the Consumer Credit Act 1974 there was an extreme inequality of knowledge between the finance company and the dealer, on one side, and the consumer on the other, meaning that at the relevant time the consumer was unable to make an informed decision, and as a result may have ended up paying inflated interest rates for the duration of the HP.
As with all case law, it’s vitally important to be aware that the decision is highly fact-specific, and no two cases are necessarily the same. On the one hand, the outcome is likely to be very different, for example, in circumstances whereby a car dealer simply introduces a customer to a finance company, but ultimately then leaves them to sort out the subsequent deal between themselves. On the other hand, the decision will be particularly concerning to those organisations who do have variable or discretionary commission structures, that is to say the commission paid to the dealer is linked to the nature of the deal they arrange with the end customer, including things like the interest rate.
As previously stated, the CoA found in the customers’ favour in all three cases, and the finance companies are now liable for the repayment of the commission. This case will now be extremely important in providing guidance to lower courts, as and when cases of this nature appear before them. In these cases, the CoA held the payments were secret, despite the finance companies using certain contractual terms buried deep in the small print. As they had not made adequate disclosure, and what information there was not sufficiently brought to the claimants’ attention, the commissions were deemed to be fully secret.
Claims management companies have launched bulk litigation (i.e. multiple claims) against finance companies, and there are thought to be hundreds of thousands of so-called ‘motor finance commission’ cases awaiting determination, many of which have been stayed (that is to say paused by the court) pending the handing down of this judgment. Some of the key takeaways from this case which are worth noting include:
- A general statement in the finance agreement T+Cs, simply stating that a commission may/will be paid is not necessarily, of itself, enough to mean there is no secrecy, even when the customer has clearly seen it. It depends on the facts of the case, including what the clause says, how specific it is, as well as how prominent it is.
- If there is some sort of “partial secrecy” for example the customer may know that a commission is being received, but they do not know how much or how it will be calculated, there are slightly different rules as to the extent of the liability of the finance company. The nature of the finance companies’ obligations and therefore the remedies open to the customers will vary according to the circumstances of each case including whether the commission was kept fully or partially secret.
The CoA decision itself ends by acknowledging there is now a tension between this decision and previous legal precedents. It is anticipated the finance companies will wish to appeal to the highest court in the land, the Supreme Court, in fact it’s even possible that the customers will appeal as they did not necessarily get all of the remedies they were seeking.
Finally, the Financial Conduct Authority (FCA) has issued a statement outlining that it is “carefully considering” the decision and closely monitoring the situation. It has also stated it hopes that the Supreme Court would review the case to resolve the uncertainty. Whilst this case is extremely important, there still is, as often is the case with the law, an element of needing to wait to see how things develop further.