What does Johnson v FirstRand Bank Ltd mean for the consumer finance industry?

The recent Court of Appeal judgment in Johnson v FirstRand Bank Ltd (t/a Motonovo Finance) has significant implications for the consumer finance sector. Broadly, it relates to situations where a retailer introduces the customer to a broker or lender to finance a purchase. But the decision is highly fact-specific and might not fit situations where, for example, a credit broker simply makes an introduction and leaves the lender and borrower to contract between themselves.

In this article, our financial services partner Simon Deane-Johns explains the circumstances in which the judgment will be relevant and the potential consequences for credit brokers and lenders.

The Appeal judgment  

The decision will be applicable where:

1. The supplier is acting both as a seller of goods or services as well as a credit broker (‘supplier-broker’), and the consumer relies on the supplier-broker to obtain an offer of finance from a panel of lenders to which the supplier-broker, but not the consumer, has access;
2. The supplier-broker both makes a profit on the sale item and receives commission for introducing the consumer customer to the lender;
3. The supplier-broker communicates with a panel of lenders and enters into any necessary discussion or negotiation with them on behalf of the consumer (with a view to finding the most suitable lender to finance the consumer’s purchase at the price the supplier-broker is charging for the goods); and
4. The consumer has no direct contact with the lending panel or with the chosen lender: the consumer entrusts the supplier-broker with information about their financial circumstances and leaves it to the supplier-broker to pass that information on to prospective lenders and procure an offer of finance to the consumer.

In such cases, the Court of Appeal decided that:

1. The supplier-broker, in its capacity as a credit broker (a type of agent), owes the consumer a ‘disinterested duty’ and a ‘fiduciary duty’.
2. The supplier-broker, in its capacity as a credit broker, is in breach of both the disinterested duty and the fiduciary duty by receiving commission from the lender. This then creates a conflict of interest, unless the borrower fully consents to the supplier-broker receiving the commission (in other words, the supplier-broker discloses both the fact and the amount of commission). It is not enough to disclose the fact of commission (‘partial disclosure’). The amount must also be disclosed, regardless of what the FCA rules might say.
3. The existence of a ‘right of first refusal’ (ROFR) in favour of one lender on a panel can create an additional conflict of interest, unless the supplier-broker explains to the borrower that the broker will approach one of the lenders on the lending panel first, to see if it will make an offer (regardless of whether that offer is competitive or the most suitable or the best offer that the supplier-broker could obtain for the borrower).
4. The lender brings about the supplier-broker’s breach of duty by making the payment to the supplier-broker in circumstances in which fully informed consent for the payment of commission had not been obtained by the supplier-broker. In other words, the lender’s liability is not caused by the lender failing to obtain the borrower’s consent. That is the supplier-broker’s Informed consent is simply the supplier-broker’s defence to the consumer’s primary claim for breach of fiduciary duty; lack of consent is not an ingredient of the cause of action. The lender would not be able to defend the consumer’s secondary claim against it (for assisting the supplier-broker in the breach of duty) on the basis that the lender had genuinely tried (but failed) to obtain the consumer’s informed consent.
5. The lender’s secondary, or ‘accessory’, liability for assisting the supplier-broker in a breach of fiduciary duty arises because the lender acts dishonestly by knowing about, or deliberately turning a blind eye to, the breach of the supplier-broker’s fiduciary duty to their principal. Once the lender is aware that the supplier is also acting as credit broker for the consumer, the lender knows that the supplier-broker cannot receive payment of a commission or fee from the lender unless there has been full disclosure and the consumer/borrower has consented. The lender cannot simply rely on the supplier-broker’s obligation to make full disclosure, but has to make sure that full disclosure is actually made.
6. A claim of ‘unfairness’ under section 140A of the Consumer Credit Act 1974 can also arise in this type of situation, particularly where there is a ROFR, or where the (secret) commission paid was disproportionately large (since fairness is a matter of degree). In the Johnson claim, for example, Trade Centre Wales had a ROFR deal with FirstRand where the commission was 25% of the sum borrowed, which meant that the overall amount paid to the dealer was much more than the car was worth.

If you have questions or concerns about how this judgment could impact you, please contact Simon Deane-Johns.