The UK Supreme Court has been hearing the landmark case of Johnson v FirstRand Bank Limited[1]this week and the hearing finished yesterday. The judgment, which the Court indicated should be expected in July, could be a pivotal moment for the motor finance sector and the broader financial services industry. The Financial Conduct Authority (FCA) has said it will confirm within six weeks of the judgment if it is proposing a redress scheme and if so how.
We have been closely monitoring the hearing over the past three days, and we set out below key points that may be of particular interest.
The existence of a fiduciary duty
- The lenders, FirstRand Bank Limited (FirstRand) and Close Brothers Limited (Close Brothers), collectively the Lenders, argued that a fiduciary duty and a disinterested duty both require complete loyalty and a commitment to act in the principal’s best interest, putting aside one’s own interests. Car dealers, however, have their own interests in selling both the car and the finance. Therefore, they cannot change the consumer’s legal position, and a fiduciary relationship does not exist.
- The customers, Ms Hopcraft, Mr Johnson and Mr Wrench (collectively the Customers), argued that a fiduciary duty means the agent must be involved in the customer’s decision-making process. If the agent has this role, they will have made choices on behalf of the customer. Because of this, the agent must provide impartial and disinterested advice. Paying a commission to a dealer breaches this duty.
The common law tort of bribery
- The Lenders argued that the law took a wrong turn - the common law tort of bribery goes against principles based on the equitable rules of no conflict and no profit. The right to rescind a contract comes from breaching a fiduciary duty. Therefore, liability for bribery only arises if the person receiving the bribe owed a fiduciary duty to the claimant. Further, there should be no automatic right at common law to recover a bribe without proving loss, gain, or dishonesty. Recovery should be pursued through other means, like dishonest assistance. Rescission should be discretionary and only allowed when consent to enter a contract was impaired.
- The Customers argued that the common law tort of bribery is well-founded and justified. It should not be tampered with in the slightest without compelling justification. Paying a commission to a dealer is considered a bribe because it creates a potential conflict of interest between the agent and the principal. This tort applies unless the principal has full knowledge and gives informed consent, which is not the case here.
Dishonest assistance
- The Lenders stated that they can be held liable for dishonest assistance only if the court determines that the dealer owed and breached a fiduciary duty, and the lender knew about this duty. This test includes both a subjective and objective limb.
- The Customers contended that the Lenders were dishonest for the purpose of the dishonest assistance test. They knew the dealer was acting on behalf of the customer, which is enough to prove dishonesty. Contrary to the lenders’ position, the test for dishonesty is purely objective and does not include a subjective element.
The CCA 1974
- The Lenders argued that the Court of Appeal incorrectly found that the relationship between Mr. Johnson and FirstRand was unfair under s.148 of the Consumer Credit Act 1974. It also wrongly identified the commission as the reason for the car’s inflated price. The similarity between the commission and the price discrepancy was purely coincidental. The issue regarding the CCA 1974 ought to be remitted.
- The Customers stated that the Court should determine if there is an unfair relationship under s.148 of the Consumer Credit Act 1974. The size of the commission matters. The key question is whether a reasonable person would want to know the commission amount in order to make an informed decision.
The FCA’s position (as intervener)
The FCA made clear its position that:
- The FCA is responsive to the issues in this case. It is currently undertaking a review of the motor finance market and will likely consult on a consumer redress scheme if the judgment indicates widespread failings. It also emphasised the importance of a swift decision by the UK Supreme Court.
- The Court should have regard to the existing regulatory framework.
- The FCA disagrees that all dealers are fiduciaries. However, it supports having a separate disinterested duty to prevent gaps in the law.
- The FCA did not support abolishing the common law tort of bribery, arguing that doing so would create gaps in consumer protection laws.
The National Franchised Dealers Association’s position (as intervener)
The NFDA submitted that:
- Commercial considerations are integral to selling a car on finance. Since most cars are bought using finance, selling the car and the finance are part of the same transaction. Dealers do not undertake to act with single-minded loyalty, so they cannot be considered fiduciaries.
- It adopted the submissions made by Close Brothers Limited (see above) in relation to remedy – i.e., that there should be no automatic entitlement to recission.
- It agrees with the FCA that it will be a sweeping change if credit broking creates a fiduciary duty and pointed out the importance of predictability in the industry.
The UK Supreme Court’s decision is poised to have profound and wide-ranging implications, including potential liability for lenders and heightened regulatory oversight.
In the meantime, we are continuing to monitor developments and would be delighted to discuss related aspects in more detail. Please feel free to reach out with immediate comments or questions.
[1] This case is linked with Wrench v FirstRand Bank Limited and Hopcraft v Close Brothers Limited. All three cases were heard together by the Supreme Court.
