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The UK financial regulator has told the country’s highest court that a landmark ruling by the Court of Appeal “goes too far” in determining that car dealerships had a fiduciary duty to act in the interests of their customers.
The Financial Conduct Authority’s submission comes as the UK Supreme Court considers whether to reverse last year’s ruling that banks were liable for any failure to properly disclose commissions they paid to car dealerships.
But the FCA also said the judges “should exercise a degree of caution” before accepting the banks’ arguments that they were not covered by bribery law banning the payment of secret commissions or bound by dealerships’ duty to act in a disinterested way with customers.
The three-day Supreme Court hearing, which started on Tuesday, has wide-ranging legal ramifications stretching beyond the automotive market to many areas of consumer finance.
Analysts have said its outcome will determine whether lenders are flooded with consumer claims seeking as much as £44bn in compensation.
Last November, the Court of Appeal stunned the UK financial services market by ruling that it was unlawful for lenders to pay “secret” or partially hidden commissions to car dealerships without ensuring customers had given their informed consent.
The case was brought by a factory supervisor in Wales, a trainee nurse in Hull and a postal worker in Stoke-on-Trent, over second-hand cars they bought with financing from Close Brothers and MotoNovo Finance, which is part of South Africa’s FirstRand Bank.
The trio claimed the dealerships failed in their duty to provide information on a disinterested basis by not telling them at all, or in sufficient detail, about commissions lenders paid them for arranging finance. At £1,650, one commission was just over a quarter of the £6,499 it cost to buy the car.
Mark Howard KC, a lawyer for FirstRand Bank, told the court there were “egregious errors” in the Court of Appeal judgment on whether the dealerships had a fiduciary duty, and if by paying them a commission lenders were liable for any breaches.
The National Franchised Dealers Association, which represents car dealerships, said in written submissions to the court that deriving a new fiduciary duty from a credit broker’s role “has the capacity to cause havoc within an established commercial order, surprising regulators and threatening financial chaos”.
It pointed to a recent claim in the County Court at Exeter, seeking full rescission of a hire purchase financing agreement for a car on which “the commission paid to a credit broker was just a single penny”.
The FCA seemed to agree, at least partly, saying in its submission to the court: “The sweeping approach of the Court of Appeal in (effectively) treating motor dealer brokers as owing fiduciary duties to consumers in the generality of cases goes too far.”
However, the regulator added that “the Court should exercise a degree of caution before accepting the appellants’ invitation to jettison the tort of bribery or the ‘disinterested’ duty, as that may leave a lacuna in the law and lead to the distortion of established principles”.
Lawyers said the FCA’s argument could limit the scope for consumers to pursue legal claims against lenders over a failure to secure sufficient informed consent for commission paid to car dealerships for arranging financing.
“The FCA wants to restrict the disruption caused by a fiduciary duty finding,” said Guy Wilkes, a partner at law firm Mishcon de Reya specialising in financial regulation. “Plus like other experts they believe the Court of Appeal was wrong.”
Julius Grower, a professor at the University of Oxford specialising in commercial law, said that if the Supreme Court judges agreed with the FCA, it would mean that “claimants have to show on a case-by-case basis that a fiduciary duty did exist” at car dealerships before they could pursue claims against lenders.
Lawyers for the consumers, the FCA and the NFDA are due to address the court on Wednesday and Thursday and the judges are expected to rule by the summer.
