Secret Commissions – What’s new?
The single judgment for the cases of Johnson v FirstRand Bank Limited, Wrench v FirstRand Bank Limited and Hopcraft v Close Brothers was handed down by the Court of Appeal on 25 October 2024. The Court ruled in favour of the motor finance customers and found that motor brokers owed customers a high level of transparency when it came to commissions being charged on finance arrangements, opening the door for those who have been charged secret commissions to seek to recover this from finance providers.
What are Secret Commissions?
A secret commission is a commission, i.e. a financial advantage, that is given to an agent without the knowledge or consent of their principal (in this case the customer).
Secret Commissions can be:
- Fully-secret where nothing is disclosed; or
- Half-secret where the existence of commission may be disclosed but the amount is kept secret.
What happened in Johnson, Wrench and Hopcraft?
Each of the Claimants purchased a vehicle through a motor dealership using finance, and these credit agreements were arranged by the dealerships.
The dealerships received commission from the lenders, and the higher the interest rate of the credit agreement, the higher the commission received by the dealerships. The dealerships themselves had a level of discretion to fix the interest rate, but the documentation relating to the finance agreements either did not mention any commission being charged, or said there was a possibility of commission but provided no specific details.
What the Court considered
Secrecy
The Court found that where there was no disclosure at all of commission, then this would result in it being a fully secret commission (Hopcraft). Where the possibility of commission being charged was mentioned in the lenders terms and conditions, this was not enough for it to not be considered secret – it had been buried in the paperwork in such a way that the average consumer would not have read it (Wrench).
Johnson was found to be half-secret, as two documents mentioned the possibility of commission but were misleading. The documents did not prioritise information that was important for the consumer to know, such as whether the dealer prioritised a particular lender, the commission amount and the basis for the commission calculation.
Unfair Relationship
In Johnson’s case, the Court considered whether there had been an unfair relationship, pursuant to section 140 of the Consumer Credit Act 1974. It was argued that the dealer was incentivised by the undisclosed commission, and as Mr Johnson was unaware of this commission, he was unable to make an informed decision and agreed to pay higher levels of interest. The Court found this to be unfair and held that Mr Johnson was entitled to be repaid the sum of the commission, plus interest.
Conclusion
The Court has clearly said that lenders and brokers are expected to disclose clearly and fairly to consumers any amount of commission that may be paid so that they are able to make a fully informed decision before entering into an agreement. It was also made clear that
“burying a statement in small print which the lender knows the borrower is unlikely to read will not suffice.”
What this means
This case has established that dealers play two separate roles when selling a car and arranging finance, and owe consumers a duty to provide information, advice or recommendations on an impartial or ‘disinterested’ basis. The presence of commission which is affected by the finance sold, gave the dealers an interest, and therefore they were unable to provide this on a disinterested basis.
Whilst the dealers were found to not owe the consumers a fiduciary duty (an obligation to act in someone else’s interest over your own) when selling a car, it was found that they did owe one when arranging finance.
Related news
Following the publication of the Judgment, Santander UK Group Holdings plc has delayed the announcement of its third quarter 2024 results, which was scheduled for 29 October 2024, and has stated that it disagrees with the conclusions reached by the Court. The bank is taking time to consider the Judgment and the potential exposure it may have created.
Barclays Bank launched legal action in relation to a Financial Ombudsman Service (‘FOS’) decision that was made in June 2023. The FOS concluded that a bank had not acted fairly and reasonably when it failed to make a customer aware of a loan agreement that contained a commission of nearly £1,600. The Financial Conduct Authority (‘FCA’) also announced in January 2024 that it was commencing a review into whether motor finance customers had been overcharged, and would be considering the Barclays judicial review. The FCA is expected to set out next steps in May 2025. Complaints for motor finance mis-selling have been paused until December 2025.
How Ellis Jones can help
Our Banking and Finance Litigation team have successfully acted upon several high-profile mis-selling scandals in recent years, recovering millions of pounds for commercial and individual clients alike. We will always consider your individual circumstances to provide tailored advice at an affordable cost. For more specialist advice, guidance and help, please get in touch on Banking@ellisjones.co.uk or give us a call on 01202 525333 for a no obligation consultation.
About the authors
Henrietta is a Senior Associate Solicitor in the Banking & Finance department and is based in our Bournemouth office.
"From initial contact to our eventual success my case was conducted with utmost professionalism and efficiency. Underlying the deep technical knowledge, experience and legal nous was a calm assuredness and empathy which made me feel that Henrietta was truly in my corner."
Savannah is a Paralegal in the Banking & Finance department and is based in our Bournemouth office.
"The team at Ellis Jones has a fantastic knowledge of their subject and a real empathy for clients, I would always recommend them."
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