Brokers’ duties and secret commissions

The recent Court of Appeal decision in Johnson, Wrench, and Hopcraft has been hailed as a win for consumer justice amidst the Financial Conduct Authority’s (FCA) ongoing review of historic discretionary commission payments in the motor finance industry.

Johnson has set a legal precedent that motor finance brokers owe fiduciary duties to their clients, requiring them to act in their clients' best interests and fully disclose commissions received. Failure to do so can result in liability, both for the commission payer and for the broker.

While the Supreme Court is likely to grant permission for an appeal leading to a definitive pronouncement on the precedents set by Johnson, the Court of Appeal’s decision remains current law. The motor finance industry would therefore be well advised to review their current disclosure documentation and practices in light of Johnson.

What did the Court of Appeal find?

Where car dealers also act as credit brokers to arrange finance for their customers, they owe those customers both a fiduciary duty to act in the customer’s best interests and a “disinterested duty” to provide information, advice and recommendations on an impartial and disinterested basis.

Under the Consumer Credit Act 1974, an unfair relationship can be created between brokers and customers by the terms of the credit agreement (or any related agreement), the creditor’s exercise or enforcement of their rights, or any other conduct by the creditor. The court will assess relationships between debtors and creditors on an individual basis, considering all relevant circumstances.

Car dealers (and lenders) may therefore find themselves liable where commissions have been paid under the following circumstances:

Fully secret commissions: 

• No disclosure as to commission was made.
• The broker owed their customer a disinterested duty.

Half-secret commissions:

• The broker owed their customer a fiduciary duty.
• There was a disclosure in relation to commissions, but it was not sufficient to obtain informed consent from the customer in respect if the broker’s conflict of interest.
• The lender acted dishonestly in paying the commission.

Brokers’ and lenders’ positions

Brokers should conduct a review of their current disclosure practices. To avoid “secrecy”, it may not be sufficient to include a statement that commission may or will be paid in the terms and conditions. Johnson established that the customer should be made aware of “all the salient facts pertaining to the payment of the commission”. This is likely to include the amount and the basis on which the commission will be calculated. It is worth noting that these requirements go beyond the FCA’s current requirements for disclosure of commissions in the consumer credit rules.

Lenders could find themselves liable as principal wrongdoers where secret commissions have been paid in breach of the broker’s disinterested duty. Lenders could also be liable as accessories to breach of fiduciary duty where a partial disclosure of the commission has been made, if they were aware that the broker was acting as a fiduciary and yet did not satisfy themselves that the customer gave fully informed consent (which the Court of Appeal found was not possible based on partial disclosure).

What now?

Claims and complaints

The FCA’s deadline for considering complaints on discretionary commissions has been paused until December 2025.

The county courts will now be bound to follow the Court of Appeal’s decision, until such time as the issue is decided by the Supreme Court (assuming permission is granted).

Given the decision in Johnson, an increase in claims and complaints is to be expected. In respect of any new / ongoing complaints / claims, there may well be other grounds on which to defend / resist, for example:

• Differentiating the disclosures made in your own documents from the disclosures made in the Johnson (eg, if more detailed information is provided in a more prominent way).
• Differentiating the status of the relevant customer, if possible (as the customers in Johnson were unsophisticated).
• Asserting limitation defences (if available).
• Applying to stay claims pending any Supreme Court decision.

New sales

For sales going forward it would be worth:

• Conducting a review of current commission disclosure documents and practices in light of Johnson.
• And engaging with sector peers and trade associations to consider appropriate steps. Potential options are set out below:
  • Obtaining informed consent (requiring disclosure of, and consent to, all material facts (rate, methodology, relationship between lender and broker).
  • Brokers making it expressly known to the customer that they are not acting in the best interests of the customer and are not impartial.

While the decision in Johnson specifically related to commissions paid to car dealers in motor finance arrangements, it could have a wider impact on broker commission arrangements in other sectors (including, for example, insurance and energy). It would therefore be advisable for those in other sectors also to consider a review of their commission disclosure practices.

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