FirstRand Limited has welcomed a judgment by the Supreme Court of England and Wales clarifying that motor vehicle dealers do not owe fiduciary duties to customers when arranging finance – a ruling that limits widespread compensation claims.
In December last year, FirstRand Bank London Branch obtained permission from the Supreme Court to appeal a Court of Appeal judgment against it in respect of two motor finance commission cases. The Supreme Court handed down its decision on 1 August.
The motor finance commissions dispute originated from concerns over transparency in how dealers earned commissions from lenders. At the centre of the dispute were discretionary commission arrangements (DCAs), a practice banned in 2021, which allowed dealers to adjust interest rates and increase their commissions – often without customers’ knowledge. This lack of disclosure sparked legal challenges, questioning whether such commissions breached legal or fiduciary duties owed to consumers.
The issue came to a head with three test cases: Wrench v FirstRand Bank Limited, Johnson v FirstRand Bank Limited, and Hopcraft v Close Brothers Limited.
In October 2024, the Court of Appeal ruled that undisclosed commissions were unlawful unless customers gave informed consent. This decision suggested that dealers acted as fiduciaries, potentially entitling millions of customers to compensation for secret commissions or bribery.
Alarmed by the ruling’s broad implications, lenders, including FirstRand (via its MotoNovo Finance arm), appealed to the Supreme Court, arguing that the Court of Appeal had misinterpreted dealers’ legal obligations, and the decision could destabilise the £40-billion motor finance industry.
The Supreme Court’s overarching finding was that car dealers do not owe fiduciary duties to customers when acting as credit brokers, reversing the Court of Appeal’s stance in two of the three cases. However, the ruling in the third case introduced a nuanced exception.
In Wrench v FirstRand Bank Limited, the claimant, Sarah Wrench, alleged that FirstRand Bank failed to disclose a commission paid to the dealer arranging her car finance. The Supreme Court rejected her claim, aligning with its broader finding that dealers are not fiduciaries. The court reasoned that dealers operate in a commercial capacity, not as agents obliged to prioritise customers’ interests. As a result, FirstRand faced no liability for undisclosed commissions.
Similarly, in Hopcraft v Close Brothers Limited, the court dismissed the claimant’s case. Robert Hopcraft had argued that the commission paid to his dealer by Close Brothers breached fiduciary duties or constituted a secret profit. The Supreme Court disagreed, reinforcing that dealers’ roles do not extend to fiduciary responsibilities. This ruling further limited the scope for compensation claims based on undisclosed commissions.
The case of Johnson v FirstRand Bank Limited diverged from the others. Marcus Johnson challenged FirstRand over a commission amounting to 55% of the total charge for credit – a notably high proportion, specifically £1 650.95. The Supreme Court found that the relationship between Johnson and FirstRand was unfair under section 140A of the Consumer Credit Act. The court highlighted inadequate disclosure of the commission and Johnson’s status as a “commercially unsophisticated” customer, unable to fully understand the financial arrangement.
FirstRand was ordered to pay compensation, including the commission plus interest from 29 July 2017. However, this finding was specific to the case’s facts and not a blanket precedent for all undisclosed commission claims.
FCA’s proposed redress scheme
Following the ruling, the Financial Conduct Authority (FCA) announced its plan to consult on an industry-wide redress scheme to address unfair motor finance practices. This initiative builds on the Supreme Court’s findings and the FCA’s prior investigation into DCAs, which were banned in 2021 after evidence showed they cost consumers £165 million annually in inflated interest rates.
The scheme will focus on customers affected by DCAs before 2021, although the Johnson ruling suggests non-discretionary commissions with poor disclosure may also be considered. The FCA will evaluate unfairness based on factors such as commission transparency and customer vulnerability.
Eligible customers could receive repayments of commissions plus interest, calculated at the average base rate plus 1% (about 3% annually). A de minimis threshold may exclude small claims to simplify administration.
Covering agreements from 2007 onward, the scheme’s estimated cost ranges from £9bn to £18bn, with most individuals receiving less than £950 per agreement.
The FCA aims to launch its consultation by October 2025, with the scheme operational in 2026 and payments starting in 2027.
A six-week public consultation is expected to begin by early October, with the final rules to follow. Lenders will be responsible for identifying and notifying eligible customers.
FirstRand’s response to the ruling
In a voluntary shareholder update on Monday, FirstRand expressed a positive view of the Supreme Court’s core ruling, while addressing the potential implications of the FCA’s redress scheme.
FirstRand stated that its main ground of appeal – that car dealers do not owe their customers a fiduciary duty – was upheld, saying the court’s rejection of fiduciary duties for dealers was “the most important and substantive issue” in the Johnson case. This finding aligned with the bank’s argument that dealers operate commercially, not as fiduciaries, reducing the risk of widespread claims for bribery or secret commissions.
It said FirstRand Bank London Branch sought to comply with the regulatory framework (and common industry practice) as it was understood at the time.
The group noted that the court’s decision in Johnson was “based on the specific facts of the case” and does “not necessarily create a precedent for other courts to follow”.
The shareholder update said the Supreme Court reinforced that unfairness under section 140A of the Consumer Credit Act is considered on a facts-specific basis.
“The mere fact that there has been no disclosure or only partial disclosure of the commission will not necessarily suffice to make the relationship between lender and customer unfair. It is a factor to be taken into account in the overall balancing exercise.”
FirstRand also highlighted that Johnson’s arrangement with the dealer and the 55% commission were “due to a number of specific characteristics related to the transaction, and the level of commission is not indicative of the level of commissions paid across the overall motor finance book”.
Potential impact of the redress scheme
The group said it is committed to “working through the full implications” of the FCA’s proposals and maintaining dialogue with the regulator.
FirstRand’s SENS announcement also included an assessment of the redress scheme’s potential financial impact.
The group’s internal data indicates that, over 18 years, agreements with a commission as a percentage of the cost of credit of 55% or above represented only 4% of total agreements and only 7% of the total commissions paid over the period.
Based on early assessments of the data and assuming that all such customers fall under the FCA’s unfairness criteria for the redress scheme, the group said it might have to update its accounting provision for the year to the end of June. This would include updating its various probability weighted scenarios and using the FCA’s proposed interest rate of the average base rate per year plus 1%.
FirstRand may need to revise its initial R3.3bn provision for the litigation, depending on the final scope of the redress scheme.
If this is the case, normalised earnings growth for the year would trend closer to the bottom end of the current guidance range provided in the trading update on 25 June, which stated, “The group now expects to deliver full year earnings growth of low double digit to mid-teens.”
The ruling has implications beyond FirstRand, with Investec also setting aside a R684m provision for possible compensation in the vehicle finance probe.
