Breaking News: Discretionary Commission Claims

28 October 2024

Deciphering Johnson v Firstrand Bank Ltd: What It Means for Dealerships, What We Still Don’t Know, and What to Do Next

Those of you paying attention to the news, and to the financial markets, will almost certainly have come across the appeal case; Johnson v FirstRand Bank Ltd, Wrench v FirstRand Bank Ltd and Hopcraft v Close Brothers Ltd. [2024] EWCA Civ 1282.

On Friday last week (25th October) the court handed down its judgment on the matter. This judgment not only made national news with regards the recovery of discretionary commissions, but it also severely impacted the value of financial institutions by close of trading.

At MILS we spent the weekend looking carefully at the judgement, which brings clarity (and some new questions) to the roles, responsibilities, and risks for dealerships involved in vehicle financing. Below, we offer a balanced assessment of the decision’s implications, of remaining uncertainties, to where we see the law moving, and, most importantly, what steps you should take now to best protect your business.

The Case

As the rather unwieldly name suggests, the case of Johnson is a collection of 3 cases brought by Mr Johnson, Mr Wrench and Mr and Mrs Hopcroft against two financial institutions; FirstRand Bank Limited (London Branch) t/a Motonovo Finance, and Close Brothers Limited.

These particular cases were selected by the court to consider the common situation in which a consumer purchases a vehicle along with finance, but then alleges mis-selling due to the payment of a commission to the motor dealer who helped arrange the finance.

The most concerning of these sorts of situations took place between 2013 and 2021 and involved the the Difference in Charge (DIC) commission model. Because the FCA banned DIC financing arrangments in 2021, the direct impact of this case is retrospective, though, as we will discuss, there are some future compliance issues that it also creates.

Motor Dealers’ Duty when Selling Finance

One of the important decisions in the case concerns what duty is owed to the Consumer by the motor dealer when arranging finance.

Mr Johnson argued that the motor dealer acted as a broker when arranging finance and therefore owed a duty of care to the consumer, such that they were obliged to act in the consumer’s interest and not in their own. He went on to argue that, because of this duty, the motor dealer was required to explain clearly anything that would affect its independence, including the existence and the amount of any commission it would receive, as well as the nature of the relationship between it (the dealer) and the finance company.

The financial institutions argued the exact opposite. They maintained that the motor dealers were not acting on behalf of the consumers when arranging the finance, and were therefore not under such a duty.

The Court of Appeal agreed with Mr Johnson.

It decided that the motor dealer was acting as a broker, and therefore owed at least an obligation to provide advice or recommendations without personal financial bias or undisclosed incentives (disinterested Duty). The watershed change to the law, however, was that, in certain circumstances, the dealers also acts as a trusted adviser, with an obligation to recommend options solely in the customer’s best interest, even if those interests conflict with the dealer’s interests (fiduciary Duty).

What Fiduciary Duty Means

Historically, dealerships were primarily expected to avoid conflicts of interest (the disinterested duty), but they were rarely, if ever, held to the higher standard of “fiduciary duty.”

Johnson has shifted the law: If a dealership presents financing options, it assumes at least a specific sort of fiduciary duty. This requires the dealership to act with loyalty, putting the customer’s interests first. The court determined that the dealerships, by not fully disclosing commission arrangements and by implying impartiality to their customers, had breached that duty.

As we’ll explain more shortly, the precise contours of the duty and what it means are still up for grabs.

It is also worth highlighting, without getting too detailed, that the court only found this duty in one of the three cases that was consolidated for the appeal, and that the case has some facts that are uniquely bad for the dealership.

What Sort of Disclosure Would Get a Dealership out of the Fiduciary Duty?

The court made it clear that whether a fiduciary duty arises—and whether disclosures are sufficient to negate it—depends heavily on the specific facts of each case. It is these facts that dealers will now have to focus on when dealing with commissions cases.

The court stressed that adequacy of disclosure cannot be judged in a vacuum; the details matter. A brief or ambiguous statement that “a commission may be payable” will rarely be sufficient. The court recognised that what suffices as disclosure will vary based on context: what may seem adequate in a straightforward, low-value transaction could be entirely insufficient in a more complex, higher-stakes financing arrangement. Ultimately, the court underlined that only full, transparent, and contextually appropriate disclosures can mitigate the risk of a dealership being held to fiduciary standards. While these generalised statements frame the obligation at a high level, its operation is harder.

Unfortunately, the specific facts in the case provide little guidance.

In Hopcraft, there was no mention of the commission in any of the documents or in any of the pre-contractual discussions. In Wrench, the standard terms included a statement that “a commission may be payable by us [the lender] to the broker who introduced the transaction to us.”. However, this was buried within the lengthy terms and conditions and not explicitly highlighted to Mr Wrench.

In Johnson, the customer was given a “Suitability Document” which stated that

“We do not charge a fee for handling your application for Consumer Credit, but we may receive a commission from the product provider.

We do not offer a whole of market option for Consumer Credit; we offer products from a select panel of lenders, details of which can be seen below… (there follows a list of 22 lenders including FirstRand).

But, in Johnson, this disclosure was misleading as he was not referred to all 22 lenders but was referred to FirstRand on a first refusal basis, regardless of whether it was the cheapest finance provider or not.

Pulling the threads together, a disclosure sufficient to escape fiduciary obligations would need to have at least most, if not all, of the following:

  • The rate of the commission;
  • The basis on which it was calculated; and
  • Details about the level of connection between the dealer and the lender, including whether or not the lender was given a first right of refusal on lending.

Most motor dealers’ disclosures will not go into such details.

What We Still Don’t Know

While Johnson answers questions, it also raises a lot more.

First, we’re really only at halftime. We don’t know what the Supreme Court will say. Importantly, one of the defendants has already confirmed that the case is bound for the highest court. Given the significant implications of this decision and the dramatic shifts to existing law that it proposes, there is a reasonable chance that the Supreme Court will at least rework or clarify points in ways which make it premature to consider final status.

Second, as noted above, we do not yet have clear guidance about what constitutes “sufficient disclosure.” While the decision stresses the need for transparency, it leaves room for interpretation about just how detailed disclosures need to be. Is an itemised statement of commissions enough? Or will courts demand even more granular breakdowns?

Third, while we have some general guidance about remedies for breaches by a dealership, these cases were all focused on lender liability. Confusing matters even more is the fact that the case refers only vaguely to the remedies available for breach of the new fiduciary obligation: Compensation for losses or financial harms that the consumer can show as a direct result of the incomplete disclosure, or contractual adjustments that could include disgorgement of the commissions entirely.

What Happens Now

As stated, the financial institutions concerned have already expressed a desire to appeal this case to the Supreme Court. We should expect an announcement on an appeal in due course.

We should also expect an appeal to the Supreme Court to take around six months since, as detailed above, there are several aspects to the decision that are capable of being challenged.

Of course, the FCA’s long-awaited report and decision is also pending. The FCA was scheduled to report in September this year, but because of this case the report was postponed to May 2025. While it would not be obligated to do so, we strongly suspect that the FCA will not issue any further decisions until the Supreme Court has had its final say on the matter.

Until the Supreme Court has considered the arguments and provided it’s ruling on the matter, court cases will therefore remain on hold.

All that said, we see two big ramifications for the Johnson case in the immediate term.

First, prospectively, the Johnson decision is likely to mark the beginning of stricter expectations for dealerships acting as brokers. Courts will increasingly view dealerships as fiduciaries (owing the highest duty of loyalty) so long as they are involved in any way in offering financing. This trend suggests that dealerships should expect heightened scrutiny of their disclosures and fee structures.

Second, retrospectively, the Johnson decision suggests that dealerships may be exposed to significantly greater risk of both direct actions by consumers related to the DIC commission model and actions by lenders to recoup losses that they might incur as a result of consumer claims.

What is This Likely to Cost My Business?

The court was not asked to consider the compensation due in this case, and so, in a large part this is still yet to be decided. That said, it has provided guidance on the likely remedy that would be awarded, and has valued this at the value of the commission paid, plus any interest of the commission incurred through the life of the finance agreement.

It is likely that this amount will initially be borne by the Financial Institutions concerned. However, we can expect an attempt to claw back this amount. How successful this will be depends on a number of factors, including;

  • the terms of the agreement between you and the Financial Institution concerned
  • who produced the documentation to be provided to the customer, and
  • who dictated the sales processes to be followed.

Any Hopeful News?

As always, there are lines of defence potentially available.

Most significantly, in two of the three consolidated cases on appeal, the court focused on a breach of the disinterested duty because it concluded that the commissions were, in fact, secret. Most of our members are unlikely to have ever kept commissions entirely secret.

In the third, where the new fiduciary duty was the basis for liability, there were some uniquely bad facts. Essentially, in that case, the dealership’s combined practices crossed from mere insufficient disclosure into misleading representation. While the court talks about the law in a broader way, the holding is tethered to these particularly bleak facts, and that might offer us paths for limiting the impact of Johnson.

Additionally, the lack of detail and clarity about the remedies available for a breach of the fiduciary obligation may present some good grounds for defences.

Finally, to the extent that dealerships face claims from lenders seeking to recover sums that they have paid to consumers, there may be specific defences related to the dealerships following the lender’s instructions.

What to Do Right Now

First, don’t panic. Most importantly, we are here to help you navigate these challenging times.

In some respects there is not a great deal to do. DIC arrangements were banned by the FCA from January 2021, and as such the complaints are largely a historic issue. That said, we’re recommending these steps for future compliance:

  • Continue to maintain deal files and records: We advise that you make sure you are keeping all dealer files and paperwork for sales between 2013 and 2021, and particularly details of any disclosure (PID documents etc…), at what stage of the deal these were provided, and whether these were signed by the customer.
  • Enhance Your Contractual Disclosure Language: Go beyond “fine print” language. Clearly explain to customers any commissions, how they’re calculated, and any limitations or ties with specific lenders (particularly if there are any obligations to give a lender a first-right of refusal or similar preferential treatment). Transparency is not just a safeguard; it’s a trust- building tool.
  • Train Your Team: Ensure that your sales and finance teams understand the importance of disclosure and can clearly explain commission structures to customers. Demonstrating clear commitment to training and commitment to verbally explaining commissions to customers will reduce risk and strengthen your position should any disputes arise.
  • Formalise Policies and Procedures: Have clear internal policies for structuring and disclosing commissions. Documenting these policies can be valuable if you need to demonstrate good faith in compliance.

More Transparency is Better: Johnson heralds a new phase in the relationship between consumers and dealerships, particularly when dealerships are selling any third-party products. While the cases on appeal were focused on commissions, there are other circumstances where you may effectively be acting as a broker or intermediary. The same principles could be extended to these areas.

With respect to exposure to claims by consumers or banks for past practices, we are advising all of our members to be proactive. In the coming days, we are going to be putting together a checklist of specific things that you can start doing to audit your own risks and help prepare yourselves for any future disputes.

In Conclusion

This issue has been ongoing since at least January 2021. While the conclusions of Johnson are challenging for dealers, remember this is only half time. This will be referred to the Supreme Court who will have the final say.

In the meantime, Johnson provides useful guidance as to what may well be a worst-case scenario. This can be used for planning going forward to assess your likely maximum liability and how this may be managed and reduced.

Don’t forget, this advice is general in nature and will need to be tailored to any one particular situation. As a MILS member you have access to the MILS Legal advice line, as well as a number of industry experts for your assistance. Should you find yourself in the situation above, contact us at any stage for advice and assistance as appropriate.

For those of you that want to read the decision, this can be found at:
https://caselaw.nationalarchives.gov.uk/ewca/civ/2024/1282?query=johnson&court=ewca
%2Fciv