The Supreme Court has recently handed down its much-anticipated judgment in the ‘Motor Finance litigation’.1 The three joined appeals had become one of the most closely followed cases of this year and last. Overturning the decision of the Court of Appeal, the Supreme Court ruled largely in favour of the lender appellants in a decision which is set to have far-reaching implications for both consumers and service providers in the motor finance sector. Having significantly cut back the potential scope of the Court of Appeal’s decision, the Supreme Court’s ruling will also provide considerable comfort to broker/dealers and other financial intermediaries more generally who are paid by way of commission.
The cases concern the so-called ‘secret commissions’ paid to car dealerships by lenders for arranging the purchase of vehicles on finance. In 2024 alone, roughly 2.1 million car purchases were financed, with individual customers borrowing on average over £12,000. It was estimated that year that the total value of the motor finance sector stood at around £39 billion.
It is therefore easy to understand why the appeals generated so much attention – and unease: had the Court of Appeal’s decision been upheld, millions of customers were reputed to be waiting in the wings to bring a swathe of claims which, all told, could have had tens of billions of pounds’ worth of consequences for the motor finance sector as a whole. Mindful of such an eventuality, some of the bigger lenders set aside hundreds of millions of pounds for potential compensation payments, while many smaller lenders faced the looming threat of insolvency. The Financial Conduct Authority (the “FCA”), which intervened in the appeal, was ready to consider implementing a major redress scheme if the customers’ claims were upheld. Whilst the Supreme Court’s decision will likely substantially influence its next steps, the FCA still intends to consult on a compensation scheme for motor finance customers based on “unfair relationships” in the context of the Consumer Credit Act due to commission arrangements.
Background to the case
The tri-partite relationship common to the three appeals will be familiar to many. A car dealer offers a car for sale to a customer. At the same time, the dealer, in its capacity as a broker/intermediary, offers to the customer a financing arrangement on behalf of a lender to enable the customer to buy the car. The lender pays the dealer a commission for introducing the customer and completing the financing deal on its behalf. In many cases, the customer is wholly unaware of the fact of the commission and almost none are told what the amount of the commission is. Sometimes called a ‘secret commission’ if their disclosure to the paying party is inadequate, these types of payments (which are common across various industries) are considered by the Courts under the civil law of bribery.
Concern over commissions in the motor finance industry came to a head when, in January 2021, the FCA prohibited the use of discretionary commission arrangements (“DCAs”) in the sector, a particular form of motor finance where the car dealer was free to negotiate the interest rate on behalf of the lender and was paid by reference to the rate agreed i.e. the dealer was thereby incentivised to negotiate a higher rate and the consumer was likely unaware.
A number of claims were subsequently brought against motor finance lenders in the County Court by consumers who had purchased their vehicles with a finance arrangement prior to 2021.
Among these claims were the three actions brought by the individuals comprising the respondents in the present appeal before the Supreme Court (the “Customers”) against lenders Close Brothers Ltd and FirstRand Bank Ltd (the “Lenders”). Each of the Customers had, prior to the FCA prohibition of DCAs coming into force, purchased a vehicle from a dealership which had also brokered the financing of the purchase. Following a long line of English case law set against the payment of bribes, the original claims were brought by the Customers on the basis of the tort of bribery and for dishonest assistance by the Lenders in the dealers’ breach of a fiduciary duty said to be owed to the Customers.
In the case of two of the Customers, the financing had involved DCAs. The third Customer’s (Mr. Johnson’s) claim concerned a hire-purchase agreement (“HPA”). Mr. Johnson’s claim also included an argument that his HPA was unfair under the Consumer Credit Act 1974 (the “CCA”). Pursuant to section 140 of the CCA, certain credit agreements may be unfair on the basis of, inter alia, their terms or the manner in which the creditor has exercised its rights under it.
Each of the Customer’s claims were dismissed by the County Court, and subsequently, each appealed to the Court of Appeal.
Judgment of the Court of Appeal
The three appeals were heard together in the Court of Appeal in July 2024.
In what was widely regarded as a consumer-friendly judgment, the Court of Appeal determined that the Lenders were liable, in the tort of bribery and for dishonest assistance in a breach of fiduciary duty (by the dealers) and were ordered to repay the amount of the commissions to the Customers. The judgment of the Court of Appeal had several important implications.
First among them was the issue of whether, in order to be liable for the tort of bribery, it was necessary for the dealer to owe the customer a fiduciary duty. The Court decided that it was not, and, instead, determined that the car dealers (when acting as brokers) could be liable for bribery if they breached a lesser, “disinterested duty” owed to the Customers: i.e. they had a responsibility only to advise the Customers impartially and could be liable for not upholding such responsibility.
Secondly, the Court of Appeal found that, in any event, car dealers also owed a fiduciary duty to customers because the relationship between them was one based on trust. Therefore, the Customers (indeed, all purchasers of vehicles from dealerships) were reasonably entitled to expect that the dealers, when also acting as brokers, were acting in their best interests when it came to sourcing and advising on financing options. This meant that the Lenders could also be held liable for dishonest assistance as accessories to the dealers’ breaches of fiduciary duty.
A third implication was the issue of disclosure. Although the Court of Appeal held that partial disclosure to a customer of a commission (i.e. the fact of it but not its amount) could be sufficient to eliminate the Lenders’ liability for bribery (in tort), only full disclosure would avoid liability to the Customers based on a breach of fiduciary duty.
Arguments before the Supreme Court
The Lenders appealed to the Supreme Court and the combined appeal was heard in April this year. It centered on two key questions:
- whether dealers (when acting as brokers) owe a fiduciary duty to their customers; and
- whether it is necessary for the recipient of a bribe to owe a fiduciary duty to their principal in order for the payer of the bribe to be liable in the tort of bribery to the principal.
The Lenders went further and also invited the Supreme Court to find that the tort of bribery does not exist.
Judgment of the Supreme Court
Unusually, the Supreme Court handed down its judgment after market hours on a Friday afternoon. That timing was specifically requested by the FCA to give the markets time to react to the decision, such was its anticipated impact. The FCA was concerned particularly of the possibility that the Court may uphold, or perhaps even expand upon, the consumer-friendly judgment of the Court of Appeal and the financial fall-out that might follow.
However, the Supreme Court largely overturned the decision of the Court of Appeal.
The crux of the matter before the Supreme Court was whether dealers owed the Customers a fiduciary duty; from that determination flowed the answers to the questions concerning the Lenders’ liability (other than under the CCA). If dealers did not owe a fiduciary duty to their customers, then lenders cannot be liable in equity for any dishonest assistance in a breach of fiduciary duty.
As to the tort of bribery, the Supreme Court first held that it should not be abolished. It is too well-established in the common law and provides for clear remedies designed to deter the “corrosive” effect of bribery on society. However, the Court confirmed that liability under the tort can only arise in circumstances where the recipient of the ‘bribe’ owes a fiduciary duty to the payer of the bribe (a lesser duty to provide “disinterested advice” is not sufficient).
Applying these findings to the facts, the Court determined that the car dealers did not owe fiduciary duties to the Customers. The Court made clear that although fiduciary duties will most often arise in well-known relationships (e.g. director/company and trustee/beneficiary relationships), the situations where they can arise are not closed. However, the essential element of any fiduciary relationship is a duty of single-minded (or undivided) loyalty, such that they will only arise in situations where there is an expectation that the fiduciary will always act in the best interests of its principal to the exclusion of their own interests.
This was absent from the dealer/customer relationship in these cases. Rather, the relationship is an arm’s-length commercial one in which dealers are not expected to exclude their own interests. The court noted that the structure of a HPA or conditional sale agreement (i.e. the financing arrangements in this case) is inherently inconsistent with the existence of a fiduciary duty. Under such arrangements, the dealer acts as a credit broker, introducing the consumer to the finance company. The dealer is not acting solely in the consumer’s interest, since it sells the car and is paid by the finance company for arranging the financing.
Further, the Court held that the relevant regulatory backdrop was a part of the context in which the question of any fiduciary relationship fell to be assessed. HPAs and conditional sale agreements are regulated credit agreements, and so lenders and dealer brokers fall within the FCA’s regulatory regime and must therefore comply with the provisions of the FCA’s rules in its Consumer Credit sourcebook. The Supreme Court found that the regulatory regime is not premised on car dealers (when acting as credit brokers) being subject to the types of full disclosure obligations required of fiduciaries. Instead, the Court found that the regulatory regime seeks to provide consumer protection in a nuanced way by requiring the car dealer to disclose information to assist the customer only where the information would materially affect their decision to enter into the transaction.
By analogy, the Court noted that when providing ‘advice’ to the customer on a financing arrangement, the dealer is acting much like a shopkeeper or a wine waiter in a restaurant does when recommending to a customer what to purchase. The Customers nonetheless sought to draw a distinction between the dealer’s role as car salesperson, on the one hand, and their role as broker in arranging finance on behalf of the Lenders, on the other, so as to argue that there was at least a fiduciary relationship in relation to the latter (even if not the former). The Supreme Court found that this was unrealistic and that the circumstances were those of a “sale transaction from start to finish”. However, a fiduciary duty would arise if dealers, whilst acting in a brokerage capacity, provided separate undertakings or promises to their customers to the effect that they would act in their best interests in sourcing and advising on financing arrangements.
Given its conclusion that dealers did not owe the Customers a fiduciary duty, the Court left for another day issues of what constitutes adequate disclosure to avoid, and the available remedies for, bribery liability.
The singular claim that the Supreme Court did not overturn was that based on the finding that the relationship between one of the Customers (Mr. Johnson) and the Lender in his case was unfair under the CCA. This meant that the Lender in this particular case was liable to repay the commission to Mr. Johnson. The Court of Appeal’s determination of this issue in favour of Mr. Johnson had been on the basis that, inter alia, the commission paid to the broker was “very high” (25% of the sum advanced) and the amount which was borrowed and paid to the dealer exceeded the value of the car which was purchased.
However, the Supreme Court focused on the abnormally high commission and the fact that there had been no disclosure to Mr. Johnson of the commercial link between the dealer and the lender in holding that the relationship with the lender was unfair.
Implications
The Supreme Court’s judgment appears to have obviated the need for HMG to legislate retroactively to shut the floodgates to a raft of claims against motor finance lenders (as it had considered doing). Motor finance lenders (and brokers) will breathe a collective sigh of relief that their business model is not under existential threat and that the tens of billions of pounds which might have been claimed by aggrieved former customers if the Court of Appeal’s decision had stood, are now unlikely to materialise. More generally, broker/dealers, financial intermediaries and others elsewhere in the economy who are paid by commission will take considerable comfort from the Supreme Court’s more strict exposition of the nature and role of the fiduciary relationship and the law concerning secret commissions and bribes.
That said, the Supreme Court’s decision specifically in respect of Mr. Johnson’s CCA claim means that many customers may be entitled to compensation on the basis that their relationships with lenders are or were unfair, although each case will turn on their specific facts, as is clear from the types of factors the Supreme Court took into account in Mr. Johnson’s case.
As a result of this, the FCA has announced the launch of a consultation on a motor finance compensation programme. The programme that it has proposed is intended to compensate customers whose relationships with motor finance lenders at the time of their respective purchases were unfair. It is not yet clear how “fairness” for this purpose will be determined by the FCA, as it will only issue its initial proposal in October 2025. The programme would cover financing arrangements potentially dating back nearly two decades to 2007. The FCA has estimated that the pay-outs and associated administrative costs could cost lenders between £9 billion and £18 billion. Substantial figures no doubt, but with an upper limit at just over half the £33 billion which some had estimated compensation claims could have reached had the Supreme Court sided with the Customers in full, still a more limited fallout for lenders than might have been.
The FCA’s six-week consultation is due to start by early October, and it is expected that the first payments under the programme will be made in 2026, should it ultimately be implemented.
- Hopcraft v Close Brothers Limited; Johnson v FirstRand Bank Limited; Wrench v FirstRand Bank Limited [2025] UKSC 33
