Navigating Johnson: New Compliance Standards for Dealers on Finance Disclosures
We are now a week on from the decision in Johnson v FirstRand Bank Ltd, Wrench v FirstRand Bank Ltd and Hopcraft v Close Brothers Ltd. [2024] EWCA Civ 1282, which came down on 24 October 2024. While some hope exists that the Supreme Court will modify the decision on appeal, until such time as it does, Johnson is good law. Consequently, Motor Dealers and Financial Institutions must adapt their processes and documentation in line with its conclusions.
In this article, we focus on Motor Dealers’ initial disclosure documents and consider what changes, if any, are needed to ensure compliance with Johnson.
Post-Johnson Obligations for Dealers When Selling Finance
Following Johnson, Motor Dealers should assume that they now owe two obligations to Consumers when recommending and administering finance agreements
- Disinterested Duty- This is an obligation to provide advice or recommendations without personal financial bias or undisclosed incentives.
- Fiduciary Duty- This is an obligation to act as trusted advisers and recommend options that prioritise the customers’ best interests, even when those interests conflict with the dealers’ own.
To meet these duties, Motor Dealers and Financial Institutions must either comprehensively inform consumers about aspects of the relationship that could influence recommendations, particularly regarding commissions, or sufficiently disclaim these duties. Commissions can only be accepted if the consumer is fully informed of their existence and value (or the method of calculation) or if the consumer is provided with clear information that effectively disclaims the above duties.
Key Takeaways from Johnson
The most impactful aspect of Johnson so far has been the order for repayment of commissions in the cases concerned and the establishment of a higher duty of care towards consumers than previously recognised.
One point that has not yet received significant attention is the Court’s acknowledgment that these duties can, theoretically, be negated if the dealer adequately highlights the limitations of the assistance provided to the consumer during the contracting process. The question now is what qualifies as “sufficient” and whether the risks of this approach outweigh the benefits of maintaining commercial confidentiality, such as not disclosing commission rates.
At paragraph 87 of Johnson the Court states :
“… The very nature of the duties which the credit broker undertook gave rise to a “disinterested duty” unless the broker made it clear to the consumer that they could not act impartially because they had a financial incentive to put forward an offer from a particular lender or lenders. The broker could do this, for example, by saying: “I may offer you a product which may be chosen because it benefits me directly, even though it may not be the best product for you. Are you happy with that?” Of course, in most cases the disclosure would be more subtle than that; but it must be sufficient to bring home to the customer the fact that the person he is engaging to find an offer of finance is free to promote his own self-interest at the customer’s expense.”
Many Motor Dealers currently include a more watered-down version of this, saying something like:
“You will make no payment to us for introduction to finance providers, but we may receive a payment(s) or other benefit from the finance provider if you decide to enter into an agreement with them.”
However, Johnson makes it clear that this level of disclosure is insufficient.
Sufficient Disclosure Post-Johnson
So, what is a sufficient disclosure? To be frank, no-one is quite sure. The Court only mentioned such a disclaimer in passing, concentrating instead on what was (or was not said) in the cases. As lawyers and specialists in the Motor Industry, we have given some thought to a suggested wording for use by our clients, and we are recommending the following as a strong starting point.
“Self-Interest in Financing Recommendations: We act in our own best interests. We are a commercial entity that expects to make a profit from this transaction, including when offering financing or insurance products to you. While we strive to provide you with suitable financing and insurance options, we receive financial incentives, such as commissions, from certain lenders and insurers. These incentives influence the options we present, and our recommendations are based on these arrangements. Accordingly, the options we present to you may not reflect the most competitive or impartial terms available in the market.
Limitations on Our Duty: We do not act as a financial adviser or fiduciary in providing financing or insurance recommendations, and we do not necessarily seek out the most advantageous terms specifically for your financial benefit. Our role is to offer access to financing and insurance options available through our partnerships, which may result in a financial benefit to us. We work only with a limited number of partners, and we have no obligation to seek out or compare our partner’s offerings to other offerings that might be available in the market.
Your Freedom to Explore Other Financing and Insurance Options: You have the right to seek alternative financing or insurance independently. We encourage you to compare our options with those from other lenders and insurers to ensure you find terms that meet your personal needs.
By signing below, you acknowledge that you understand our role as a dealer, the fact that financial incentives will influence our recommendations, and the absence of an obligation on our part to act exclusively in your best financial interest.”
It is our opinion that this disclaimer alone, either in a standalone document or displayed prominently within the IDD where this is given at the very beginning of the sales process, should give members a 50% chance of avoiding the Disinterested and Fiduciary Duties imposed by Johnson.
Additional steps :-
To further minimise risk, we would also recommend some combination of the following additional steps:
- Verbal Sales Checklist. A checklist of things that have been discussed during the sales process verbally with the customer that the customer signs. High on the list is a verbal explanation that the dealer has a self-interested role throughout the transaction, including in offering financing and insurance products. Next on the list is a statement that the dealership verbally encouraged the customer to evaluate and compare other financing offers available through other sources, if the customer has any questions.
- Documented Training. Documented training for sales and financing staff that specifically discusses the language that should be used through the sales process, highlighting that language implying they are providing “best” or “most suitable” financing options must be avoided. Instead, the training should instruct them to say they are providing “available options” or “options within our partnerships.” The documented training should include instruction for staff to use phrases like, “We are here to offer financing products available through our partners, but we encourage you to explore your own options if you’d like to compare terms.”
- Stand-alone Closing Document. A stand-alone document provided during the closing that details any commission, how it was calculated, the specific amount paid to the dealer, and any ties between the dealer and the lender (i.e. a first right of refusal.)
Of these additional steps, by far the most significant is the stand-alone document at the end detailing any commission.
Whilst a disclaimer will never be without risk post Johnson, these additional steps are essential for anyone who is risk averse. If all these steps are followed and documented, the probability of avoiding issues under Johnson increases significantly.
In Conclusion
While Johnson is still being digested, it does not prohibit Motor Dealers from receiving commissions or payments from Financial Institutions. However, such payments must be made under one of two conditions:
- With the fully informed consent of the Consumer, after receiving all details of the existence of the commission, the amount of the commission, and any ties between the Motor Dealer and the Lender; or
- Where the Disinterested and Fiduciary Duties have been sufficiently disclaimed.
The practicalities and effectiveness of these approaches will become clearer with time. Until the Supreme Court offers further guidance, Motor Dealers accepting commissions must comply with one of these routes to avoid liability and compensation claims.
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.