Appeal Court went ‘too farʼ in motor finance judgment, FCA tells Supreme Court

The UK Financial Conduct Authority (FCA) said the Court of Appeal went “too far” in its October 2024 decision that motor brokers owed a fiduciary duty to customers. However, the regulator also urged the UK Supreme Court to “exercise a degree of caution” before deciding to “jettison” the lower court’s judgment in its entirety.

The Supreme Court is hearing an appeal by two banks — Close Brothers Group and FirstRand — in which car dealers received commission in relation to finance that customers used to purchase vehicles. The FCA said earlier this month it would take the outcome of the case into account when deciding when deciding on an industry-wide redress scheme.

The Supreme Court is being asked to decide if car dealers owe customers a “disinterested” and/or a fiduciary duty to provide information, advice or recommendation and if so, were the payments of commissions by the two banks to the car dealers secret such that the “lenders become the primary wrongdoers”.

The FCA has been granted permission to intervene in the case, and will appear on April 3. Its written submission was made public this morning, on the opening day of the hearing, at which Mark Howard KC and Laurence Rabinowitz KC addressed the court on behalf of FirstRand and Close Brothers respectively.

National Franchised Dealers Association, which like the FCA has been granted permission to intervene, also said the Court of Appeal had erred. “The Judgment makes an error in deriving a fiduciary duty from the nature of a credit broker’s basic tasks. It effectively establishes a new settled category of fiduciary,” the NFDA said in its written submission, made public today.

Vulnerable customers

The FCA raises several points on which the Court of Appeal diverged from its practice including on the definition of vulnerable consumers. All three cases before the Supreme Court involve financially unsophisticated consumers on relatively low incomes.

“The Court of Appeal regarded the respondents’ relative lack of financial sophistication, and the need for borrowing (particularly brokered finance), as indicia of vulnerability, which informed its analysis,” the FCA said in its written submission.

This was different from its own approach, the regulator said, as it would not deem someone as vulnerable “merely because they required finance” to purchase a car.

“To the contrary, the [Financial Services and Markets Act] provides that, in considering the appropriate extent of consumer protection, the FCA must take into account different levels of transactional risk, differing degrees of consumer experience and expertise, and the general principle that consumers should take responsibility for their decisions,” it said.

Financial Ombudsman

The FCA cites a separate case involving Barclays Bankʼs judicial review of a decision by the Financial Ombudsman Service (FOS) in its written submission.

That case — which Barclays has been granted permission to take to the Court of Appeal — found that, because the lender operated a discretionary commission arrangement that allowed the car dealer to earn a higher rate of commission if they set a higher rate of interest on a loan, this had been a breach of FCA principles 6,7 and 8, as well as various conduct rules and section 140A of the Consumer Credit Act.

“However, the FOS rejected arguments relying on secret commissions and fiduciary duties,” the FCA said in its written submission.

One interpretation that follows from last year’s Court of Appeal decision was that unless a car dealer provided an exact monetary amount when disclosing a commission arrangement, they could be found to have “hidden” the commission arrangement. This “extreme” interpretation led to analysts revising their initial estimates of what lenders could end up paying out in redress upwards, to £40 billion.

The FCA said in its view, the “precise content” of disclosure required by CONC 4.5.3R may vary but it was unlikely to be sufficient where it is “not clear, transparent, and prominent” and says only that commission “may be payable”.

Today, the Supreme Court heard that the disclosure document in FirstRand v Marcus Gervase Johnson said commission “may be payable”.

The case continues.