The recent case of Johnson v FirstRand Bank Ltd t/a MotoNovo [2024] EWCA Civ 1282 was part of a broader Court of Appeal judgment on car finance agreement practices. It centred on undisclosed commissions paid by lenders to car dealers or brokers, which were not transparently disclosed to customers.

Johnson v FirstRand Bank Ltd t/a MotoNovo Finance Claim

In a pivotal case involving two other claimants, the Court of Appeal ruled in October that the finance company must refund the hidden commission, along with interest, to Mr. Johnson. He is set to receive just over £3,200 in compensation.

Marcus Johnson, 34, from Cwmbran, Torfaen, purchased his first car, a Suzuki Swift, in 2017. Unbeknownst to him, the dealership received a 25% commission from the finance company, which was added to his repayment amount.  It is the issue of the undisclosed commission which was central to this appeal, and such “secret commissions” in various areas of financial deals have been subject to intense scrutiny in recent years.  Commission payments are common for introducers however, full and frank disclosure of said commissions needs to be provided to the customer so that they can provide any informed consent as to contributing any payment towards the same.

In the subject case,  the Claimant Mr. Johnson expressed his anger upon learning about the undisclosed charges. He stated, “I paid £1,650 essentially for being shown around the showroom for 10 minutes and having some documents printed. I signed a few papers and drove away with the car.”

“At the time, I didn’t have the option to pay cash. For companies to charge such excessive commissions without disclosing them to customers like me is deeply unfair. This has likely affected thousands of others.”

Mr. Johnson purchased the £4,600 car from Trade Centre Wales, with financing arranged through Cardiff-based MotoNovo Finance. The undisclosed £1,650 hire purchase commission, amounting to about 25% of the borrowed amount, and 70% of the cost of credit of the agreement. The amount was included in the Claimant’s repayment terms without his knowledge and vastly inflated the cost of the credit terms.

The court ruled that such undisclosed commissions breached fiduciary duties owed by brokers to consumers. Specifically, brokers must act in the best interest of customers when arranging finance agreements. Lenders are also accountable if they enable such practices without ensuring informed consent.

The judges found that mere references to possible commissions in contractual terms, without clear disclosure of amounts and calculations, were insufficient. This practice was deemed both unfair and a conflict of interest. This was especially true given the significant additional costs incurred by consumers due to these hidden commissions​.

As a result, the Court of Appeal ruled in favour of Mr. Johnson. The Court emphasised the importance of transparency in commission disclosure during financial transactions. The financial sector anticipates significant implications, including potential liabilities for many similar cases​.

Conclusions detailed in the judgment stated specifically that:

1. Even if disclosure of a commission is contained within the small print of the finance agreement, which the Claimant was known not to have read, would not have fulfilled informed consent.  The degree of informed consent would fall on each individual case’s circumstances, but the mere presence of text in a large and complex credit agreement was not sufficient to fulfil the broker’s fiduciary duties.

2. That the broker did owe the Claimant/borrower of credit a fiduciary duty, and that the lender should ensure that informed consent has been obtained prior to making any commission payment to the broker.

3. It was the lender, not the broker, which should refund the secret commission to the Claimant.

Mr Johnson’s and the two accompanying appeals were ultimately permitted.  This ruling could lead to large-scale consumer compensation claims across the motor finance industry and beyond, with lenders now revising their disclosure practices.  It is likely that if these secret commissions were standard practice for some time across the car industry, that any individual has purchased a vehicle under a finance agreement in recent years, will be able to claim for a refund of any secret commission paid between the lender and broker.

In response to the case and its implications, the car finance industry has begun setting aside significant sums to address similar potential claims in the future.

Since 2021, there have been significant updates to the rules surrounding commission practices, including the Financial Conduct Authority’s (FCA) ban on discretionary commission arrangements.

Costs implications moving forward

The cost implications moving forward from the Johnson v FirstRand Bank Ltd t/a MotoNovo finance claim and related rulings on motor finance commissions are likely to be substantial. Not only will the Claimants likely be recovering their costs of the appeal (pursuant to CPR 44.2, the general rule is that the successful party recovers their costs from the unsuccessful party), but there will be substantial costs relating to the main claims, and any group litigation action brought against the car finance industry.  As such, whilst individual claims for damages may only be small amounts running to several thousand pounds, cumulatively the damages to be paid out are likely to be £millions or even £billions, and the costs in investigating such cases are likely to be significant. This appeal case highlights the liability lenders and brokers face when commission arrangements are not adequately disclosed, and the consequences they will now face as a result.

Future PCP claims may arise from consumers arguing similar breaches of fiduciary duty or unfair relationships under the Consumer Credit Act 1974 and it will only be a matter of time before any potential group litigation claim will be brought/settled.

There may also be retrospective claims from customers who believe they were not properly informed of commissions. Firms may face substantial costs if required to refund commissions, especially for high-value or long-standing transactions​.

How can ARC Costs assist?

ARC Costs are not Solicitors and cannot advise regarding car finance secret commission claims, but our team work closely with a number of Solicitors who may be able to assist you.

ARC Costs specialise in the increasingly complex area of legal costs which follow the conclusion of a legal action.  In matters such as the subject appeal, costs are likely to be substantial and we can assist in either quantifying and recovering such costs, or challenging the amounts claimed and seeking to reduce the financial exposure to such costs claims.

We are an experienced and independent team of specialised Costs Draftsmen and Costs Lawyers who can assist either paying or receiving parties in resolving costs disputes. We are adept at preparing Costs Budgets and Bill of Costs for receiving parties, as well as providing legal costs negotiations services and preparing Points of Reply.

For paying parties, we are adept at preparing Points of Dispute, and ensuring that a proportionate level of costs is recovered. Proportionality is a subjective issue, and it is therefore important you have the right legal costs representative on your side during detailed assessment. This is to ensure you make the most persuasive submissions on the issue.  

If you would like more information on any of our services or wish to speak to a member of our costs team about your case, then please do not hesitate to contact us. Please call us at 01204 397302, or email one of our costs experts direct on info@arccosts.co.uk.

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