Secret or undisclosed commissions, and half-secret, halfway house or partially disclosed commissions

Johnson v. Firstrand Bank Limited [2024] EWCA Civ 1282 is the latest in a long line of case law on commissions and serves to clarify the principles around: 1) secrecy of a commission, 2) the fiduciary relationship, and 3) accessory liability on the part of a lender/provider in a relevant transaction.

A relevant transaction is one characterised by a customer obtaining finance via a broker, while unknown (or partially unknown as the case may be) to the customer, the broker is being paid a commission by the lender.

Johnson concerned the appeals of customers who had purchased cars through car dealers using third party finance. In each case, the car dealer arranged the finance. In each case, that dealer received a commission from the finance company for arranging the finance with them.

Dual role

The commission in Johnson was paid under a side agreement between the dealer and the finance provider. The Court of Appeal held that the car dealers in the transactions therefore served a dual role as both car dealers and credit brokers.

Car dealers are entitled to act in their own self-interest as salesmen subject to applicable legislation.

Credit brokers owe the customer a disinterested duty to get them the most suitable finance arrangement.

There is then clearly tension in this dual role.

Fiduciary duty

Following Wood v. Commercial First Business Limited [2021] EWCA Civ 471, for the lender to be directly liable in a secret commission case, the credit broker must owe the customer “a duty to provide information, advice or recommendation on an impartial or disinterested basis.” It is not necessary to establish a fiduciary relationship between broker and customer if that is the case. Merely a disinterested duty.

Conversely, in a half-secret case, the broker must owe the customer a fiduciary duty to found liability on the part of the lender.

The Court in Johnson found that the car dealers as credit brokers “clearly did” owe fiduciary duties to the customers. The Court considered that “These relatively financially unsophisticated individuals undoubtedly placed trust and confidence in the brokers to secure an agreement which was affordable and which was, at the very least, competitive.”

This decision is a controversial one and may be the subject of scrutiny in the Supreme Court. The Court of Appeal did not fully explain why it is that a car dealer as a credit broker owes a customer a fiduciary duty on an ad hoc basis.

Half-secrecy

Where some of the surrounding paperwork or the standard terms and conditions of an agreement mention that a commission might be paid but do not state, for example, the amount, the calculation or whether a commission is in fact paid, does this negate secrecy? The answer in Wilson v. Hurstanger [2007] EWCA Civ 299 is that it does, to an extent:

“If you tell someone that something may happen, and it does, I do not think that the person you told can claim that what happened was a secret. The secret was out when he was told that it might happen.

…

Was the defendant’s informed consent obtained? I do not think it was.”

So-called, this gives rise to the halfway house/half-secret commission.

The Court in Johnson appears to have gone a step further in holding that “the presence of a term in either the lender’s or the broker’s terms of business which makes reference to the possibility that a commission may be paid by the lender to the broker is not necessarily fatal to a finding that the commission was secret.”

Again, this is potentially a controversial decision. One might reasonably ask – what then is the point in the standard terms and conditions if a Court is going to decide which points are and are not suitable simply to be contained therein?

Where there is partial disclosure, the broker needs to have obtained the customer’s informed consent to the commission in order not to breach their fiduciary duty in accepting it.

Liability of the lender

Where a commission is fully secret, it is tantamount to a bribe and the lender is directly liable with the car dealer (Hurstanger).

Where a commission is half-secret, the lender is an accessory to the broker’s breach of fiduciary duty. Johnson departed from Hurstanger on this point.

In the latter, it was held that the lender knew that the broker was the customer’s agent and so the lender had to show that it had the customer’s informed consent to the commission in order to escape liability. In the former, the Court has reduced the threshold in holding that the lender brings about the broker’s breach of duty by paying the commission in circumstances in which it knows that informed consent thereto has not been obtained. Not by not obtaining that consent.

The next steps

Overall, the decision is very pro-consumer. There are some difficulties with the rationale on a number of points. Indeed, the Court of Appeal may be interpreted as having seen this by the final line of its judgment:

“… it may be that on some future occasion, it will be felt desirable for the Hurstanger and Wood lines of authority to be considered in greater depth, and for a definitive pronouncement to be made by the Supreme Court about the circumstances in which the payment of a commission by a third party to another person’s agent or fiduciary will give rise to a liability … on the part of the payer.”

As things stand, the case is on appeal to the Supreme Court to be heard in April 2025.

Billions of pounds potentially hang in the balance of this decision. It will have seismic ramifications. The Chancellor of the Exchequer even took the exceptional, albeit unsuccessful, step of attempting to intervene in the appeal. 

To consult William regarding commercial or insolvency work, or to check his diary availability to attend a hearing, please contact Rob Johnstone.