Car Loan Commissions Repayable, Court of Appeal Rules

In a ruling which will have wide implications for providers of finance, the Court of Appeal has ruled that three purchasers of cars are entitled to be repaid the commission paid from the lenders to the dealers in respect of their car loans.

The purchasers had all bought cars under a hire purchase agreement. The dealers arranged the financing and received commissions from the lenders. The fact that commissions were paid to the dealers was not specifically disclosed to the purchasers, although in two cases the lender's standard terms and conditions referred to the fact that a commission may be payable.

The purchasers later brought proceedings against the lenders seeking return of the commissions. Their claims were largely unsuccessful in the lower courts, either initially or on appeal. Given the importance of the issue, the appeals against those decisions were transferred up to the Court of Appeal and listed together.

The Court found that the dealers, in addition to selling the cars, acted as credit brokers on behalf of the purchasers. Their task was to offer the purchasers a suitable and competitive finance deal from their panel of lenders, and they owed the purchasers a duty to provide information and recommendations on an impartial or disinterested basis. In the case where the purchaser had not been informed about the commission at all, this was sufficient for the appeal to succeed: the commission was secret and the lender was primarily liable.

In the two cases where the fact that a commission may be payable was referred to in the terms and conditions, the Court found that, in one case, there had been no disclosure in any meaningful sense and the provision in the terms referring to commissions was not enough to negate secrecy. Primary liability against the lender was therefore established. In the other case, the commission had been sufficiently drawn to the purchaser's attention to negate secrecy, but the documents supplied would have given him the impression that the particular lender had been chosen as the most suitable lender: in fact, the dealer was obliged to give the lender first refusal on offers of car finance. The purchaser had therefore not given his fully informed consent to the payment of the commission. While the lender was not primarily liable, it was liable as an accessory to the dealer’s breach of fiduciary duty.

In all three cases, the Court concluded that the lenders were liable to repay the commission. As the loans were arranged before the Financial Conduct Authority made changes to the regulation of motor finance commission payments in January 2021, it remains to be seen what impact this decision will have on car loans arranged since then.