Supreme Court weighs dealer loyalty in landmark car finance case

The landmark legal battle over the responsibilities of motor dealers in car finance transactions ended at the Supreme Court last week with finance giants Close Brothers and FirstRand Bank mounting a robust appeal against an earlier court ruling that found dealers owed a fiduciary duty to their customers.

The Supreme Court now faces the complex task of weighing consumer protection against the operational realities of the motor retail industry. The central question at issue – do dealerships owe their customers undivided loyalty when helping to arrange car loans?

At the heart of the case is the concept of a fiduciary where a party is legally bound to act solely in another’s best interest. The appeal judges will need to consider whether motor dealers should be treated as full fiduciaries when advising customers on finance options - or if they owe a lesser duty to provide impartial advice.

The distinction carries serious implications. Either duty would require motor dealers to obtain customer consent before receiving commission payments from finance companies for arranging vehicle finance.

Close Brothers and FirstRand Bank opened the hearing on April 1 by challenging the notion that a fiduciary relationship exists.

Their arguments leaned heavily on historical legal frameworks including the Hire Purchase Act 1964 and the Consumer Credit Act 1974, which they said long presumed an agency relationship between dealers and lenders – although not dealers and their customers.

Counsel also drew parallels with other industries, warning that overturning the Court of Appeal's decision could significantly disrupt established norms in a wide range of consumer finance transactions.

Liability shift

They traced a complex legal lineage from 19th-century case law through modern precedent, attempting to narrow the scope of liability for finance companies. Interestingly, if accepted, this reinterpretation could significantly reduce the compensation owed by lenders to claimants and by implication, could potentially shift liability onto motor dealers themselves.

Barristers for Close Brothers and FirstRand Bank continued on the second day of the hearing highlighting the 2007 Hurstanger case, arguing that where a dealer discloses the existence of commission - but not the precise amount - a different legal remedy should apply.

They pointed out that, in most modern transactions, standard FCA disclosure documents already make reference to potential commission in required documentation, although acknowledged the importance of wording.

The discussion then turned to the 2014 Plevin case, best known for its role in the PPI mis-selling case. Close Brothers and FirstRand Bank sought to distinguish Plevin’s finding that non-disclosure of excessive commissions could constitute an unfair relationship under section 140 of the Consumer Credit Act 1974.

Counsel here stressed that while Plevin dealt with commissions reaching 70% of a product’s value, commissions in car finance were typically lower and structured differently.

They further argued that removing dealer commissions wouldn’t automatically lower the price of finance for customers, challenging what they claimed was a common misconception.

Dealership perspective

The National Franchised Dealer Association’s (NFDA) intervention on the second day provided a perspective on the practical realities of vehicle sales and finance brokering.

Central to its argument was the rejection of the Court of Appeal’s earlier finding that the sales and finance processes were functionally separate.

Instead, the NFDA likened the relationship to a “stick of rock”, with both vehicle sale and finance featuring prominently throughout customer interactions.

Continuing a theme employed by the finance institutions, the NFDA also pushed back against the implications of imposing fiduciary duties in sales settings, warning that such a broad interpretation could ripple across everyday transactions far beyond the motor trade.

The NFDA also challenged the Court of Appeal’s approach as a sweeping and unprecedented expansion of the law, arguing that by creating a fiduciary duty between dealers and customers, the lower court had ventured too far into uncharted legal territory without fully considering the commercial consequences.

Counsel for the car buyers at the centre of the three cases - Johnson, Wrench and Hopcraft – presented submissions aiming to cast motor dealers in the role of classic finance brokers, aiming to demonstrate that dealers assess customer needs and recommend tailored finance products, a function that, they argued, aligns with a fiduciary role.

A major thrust of their argument rests on bribery law. If successful, that would allow customers to void finance agreements and reclaim funds directly from finance companies, on the basis that undisclosed commissions constituted unlawful inducements although, here,  the judges pressed counsel to clarify the necessary thresholds of dishonesty and knowledge.

Counsel for Johnson, Wrench and Hopcraft also turned to the Plevin case, noting that commissions should be assessed as a percentage of the cost of finance - not the total value of the loan - arguing that this would provide a more accurate basis for determining whether relationships were unfair under the Consumer Credit Act 1974.

Unlike other parties, the intervention by the Financial Conduct Authority (FCA) adopted a more balanced stance. While explicitly rejecting the idea that motor dealers are fiduciaries, the FCA endorsed the imposition of a duty to provide disinterested advice to protect consumers. It also backed the application of Plevin to motor finance, supporting the claimants’ approach to calculating commission.

Closing arguments

Close Brothers and FirstRand Bank closed the hearing by returning to their central argument: that motor dealers have, for over 50 years, been recognised as independent sellers acting in their own interests.

They insisted that commission payments from finance companies are neither hidden nor unlawful, and no regulator - including the FCA -  has sought to ban the practice throughout that period.

Commenting, barrister Christopher Baylis, director of legal services at law firm MILS, said: "After consideration of all three days, it is our opinion that this case could go either way. Whilst uncomfortable and extreme, Johnson, Wrench and Hopcraft’s interpretation of case law and its application to the motor dealer relationship is capable of resulting in a fiduciary relationship being applied. If this is the case, the only way a dealer could have received commissions fairly would have been through informed consent, likely requiring the existence and amount of any commission to be expressly disclosed.

“That said, there are some significant difficulties with this approach, not least of which is that all the case law refers to a traditional finance broker role who is not providing any goods. This is a significant factor. After considering the representations and the court’s approach throughout, we are cautiously optimistic that a fiduciary duty is unlikely.

“Most dealers may however still face a duty to provide disinterested advice which would need to be justified on a case-by-case basis. In this scenario we would likely have an FCA redress scheme whereby disclosure of the existence of commission could be all that would be needed to defend against any wrongdoing. The greatest potential for an upset remains in how the Supreme Court engages with Plevin and the potential for an unfair relationship under section 140A.”

Read more Car loans commission case ends, ruling not likely until the summer