The UK Court of Appeal recently ruled against Close Brothers and associated dealers in a landmark judgment. This meant a change in commission disclosure practices within the motor finance industry. The issue comes from the concealed arrangement between car dealers and lenders. It is widely known and accepted that a car dealer would profit from the sale of the car, understandably, through the purchase and sale of the vehicle for a higher price. However, the problem was that car dealers also acted as credit brokers and received hidden commissions from lenders.
The court noted that, before recent regulations by the Financial Conduct Authority (FCA), most consumers would not have suspected their dealer was both a vehicle seller and a broker acting on behalf of a lender. By acting in both roles, the court found that dealers had a conflict of interest, as they were incentivised by undisclosed commissions financed through consumer interest charges (Court Ruling Summary, EWCA Civ 2024 1282). The decision means there is an expectation for finance companies and dealers to adhere to much stricter standards. This caused many institutions to stop regulated lending until they made sufficient alterations to ensure they complied with new standards.
Impact on Finance Companies
The Court of Appeal’s final ruling has sent shockwaves through the motor finance industry, with significant implications for transparency and compliance, possibly to the broader asset finance market. The conclusion reached meant that dealers owed consumers a fiduciary “disinterested duty” to act in their best interest when arranging finance. This includes a duty to disclose any commission arrangements that could influence their recommendations. This is where the court ruled that their duty was breached by failing to fully disclose said commission, thus creating a conflict of interest. Due to the lack of disclosure, the court held the lenders directly accountable, finding them liable for concealing commission in the cases. (Court Ruling Summary, EWCA Civ 2024 1282)
The effects of this ruling have had a substantial impact on the lender, including its value in the market. Following the decision, Close Brothers saw its stock plummet by nearly 35%. This reflects investor concerns about the financial and reputational effects of adapting to stricter transparency standards, as well as the flooding of new claimants who are now finding they are eligible for a payout. The market impact has not been isolated to Close Brothers alone—larger institutions like Lloyds and Santander, which also operate within the UK’s consumer finance market, have seen declines in their share values due to concerns that similar transparency standards could be applied across the industry.
For finance companies, the ruling brings both immediate financial consequences and long-term shifts in compliance practices. Beyond stock values, companies like Close Brothers have temporarily halted payouts of regulated deals, and in some cases, all deals, as they adapt their practices to the heightened regulatory demands (Autotrader.co.uk. (2024)). The decision means all contracts and agreements between lenders, brokers and customers will be revised to ensure consumers are fully informed about all commission structures associated with their finance agreements. A precedent may now be set across the asset finance industry creating a new, fairer standard.
Impact on Consumers
This ruling shines a light on how some past practices in the motor finance industry left consumers bearing hidden costs. In many cases, consumers unknowingly paid extra for their car finance due to undisclosed commission arrangements. Dealers, acting as brokers, often received concealed commissions from lenders. The customers saw a higher interest rate or larger instalment amounts without understanding the source of these costs. Without clear disclosure, consumers effectively financed the dealer’s commission without informed consent.
Future Implications for Consumers and the Asset Finance Industry
This ruling sets a new standard for transparency; if upheld on appeal, every commission and fee must be disclosed in clear, accessible language. (Gonzalez, A. (2024)). This means there will be a better understanding of each component in their finance agreements from the consumers, empowering them to make more informed choices based on transparent costs. Eliminating hidden commissions is expected to foster trust and confidence, potentially leading to more competitive, straightforward deals.
Regulators are likely to view this ruling as a benchmark, setting the stage for stricter standards on conflict of interest and fair treatment of consumers. Transparency and informed consent are now evolving from best practice to mandatory regulation, ultimately benefiting consumers by creating a more straightforward, equitable financing environment.
Reference List
- Autotrader.co.uk. (2024). Court of Appeal ruling on finance commissions: What does it mean for car buyers? | AutoTrader. [online] Available at: https://www.autotrader.co.uk/content/news/court-of-appeal-ruling-on-finance-commissions? [Accessed 4 Nov. 2024].
- Gonzalez, A. (2024). Close Brothers and FirstRand to appeal UK court ruling on motor finance disclosure duties. [online] Motor Finance Online. Available at: https://www.motorfinanceonline.com/news/close-brothers-and-firstrand-to-appeal-uk-court-ruling-on-motor-finance-disclosure-duties/ [Accessed 4 Nov. 2024].
- IN THE COURT OF APPEAL (CIVIL DIVISION) ON SECOND APPEAL FROM THE COUNTY COURT AT CARDIFF HIS HONOUR JUDGE JARMAN KC ON APPEAL FROM THE COUNTY COURT AT NEWPORT DEPUTY DISTRICT JUDGE SANDERCOCK Claim No J03YX090 Between : MARCUS GERVASE JOHNSON Appellant/ Claimant -and - FIRSTRAND BANK LIMITED (London Branch) T/A MOTONOVO FINANCE Respondent /Defendant AND Case No: CA-2024-00353 IN THE COURT OF APPEAL (CIVIL DIVISION) ON SECOND APPEAL FROM THE COUNTY COURT AT BIRMINGHAM HIS HONOUR JUDGE WORSTER ON APPEAL FROM THE COUNTY COURT AT STOKE ON TRENT DEPUTY DISTRICT JUDGE HARROP Claim Number J00SQ921 Between : ANDREW WRENCH Appellant/ Claimant -and - FIRSTRAND BANK LIMITED (London Branch) T/A MOTONOVO FINANCE Respondent /Defendant AND. (2024). Available at: https://www.judiciary.uk/wp-content/uploads/2024/10/Johnson-v-Firstrand-Bank-and-Hopcroft-v-Close-Brothers.pdf [Accessed 4 Nov. 2024].
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