Long Read: Hopcraft, Wrench and Johnson
31/01/2025
If it ain’t broke, don’t fix it!
James Baird, Partner at Gateley Legal, writes: Sadly, the Court of Appeal in a recent case (yes that case)(the Case) fixed the broker market, finding that it was broken. The Case has sent the intermediated market into a tailspin.
So, what happened? Here are the highlights. The case involved three individual (crucially, financially unsophisticated) consumers (Hopcraft, Wrench and Johnson) who each signed regulated hire purchase agreements for the supply of used motor cars. The car dealerships introduced the customers to the funders (with whom the dealerships had existing trading relationships) for the purposes of obtaining the relevant finance in each case. The funders paid the dealers (a commission - but it does not matter how it is labelled) for the introduction of the customers.
In each case, the customers alleged they were unaware of the commission and sued the funders for the return of the commission and/or to tear up (rescind in the jargon) the relevant hire purchase agreements. The Court of Appeal awarded the customers the commissions be repaid to them but did not expressly rescind the hire purchase agreements.
It may help by stating first what the Case did not say. The Court did not decide that payments per se, for introducing customers to funders by dealerships or brokers are unlawful or illegal. It just set out how, according to the (existing) law, such payments have to be made. The Court did not make its decision based on any FCA’s regulatory rules (“CONC"). The Court did not make its decision on the commission models deployed by the relevant funders, whether DIC or RSA for example, even though the FCA banned DIC models in 2021.
In each case, the common allegation was the payments to the dealership by the funders was not disclosed, at all (in the case of Hopcraft), or sufficiently, in the cases of Wrench and Johnson. The relevant applicable law is in connection with agents’ duties, and secret payments or inducements to, or bribery of, agents. Heavy stuff!
So, what’s the law? Is the car dealership a credit broker and an agent of the customer in these circumstances? The Case said yes to both. A car dealership (or for that matter any broker) when it introduces a customer to a funder and (crucially) undertakes additional duties to assist the parties in concluding an agreement, is acting as a credit broker and is, in law, an agent. There is a legal disinterested duty on an agent, undertaking relevant duties, so that the dealership/broker must not act in its own self-interest but in the (best) interests of the customer.
By receiving a commission or payment, the dealership is receiving a benefit which gives that dealership a self-interest in placing the business with the paying funder. If that dealership does not tell the customer of the fact, it has or will receive payment from the funder for introducing the customer, then the broker has broken the duty of disinterest. Unless, that is, the dealership expressly tells the customer that it may not be acting in the customers’ best interests, and does not owe such duties. There is also a higher duty in these circumstances called a fiduciary duty which is to act loyally and honestly and without a conflict of interest. Were the dealerships fiduciaries on the facts in each case? Answer - yes.
In this Long Read, we’ll just focus on the Wrench and Johnson cases [the full length version of this article in Leasing World magazine also looked at Hopcraft, but space is tighter here…]. For Wrench and Johnson, the commission payments were £179.85 and £1,650 respectively.
The funders’ documentation did refer to the fact that commission might (as opposed to will) be paid by the funder to the dealership. The question then arose as to the effect of this disclosure on the payments. Was it sufficient for the purposes of the law to enable the dealership to keep the commission? Answer – no.
How come? Well, the disclosure in Wrench and Johnson was not full. By that I mean the customer did not actually know a commission was going to be paid, how much it would be and how it was calculated and that they would, in effect, be paying it back themselves to the funder, via the rental payments under the hire purchase agreements.
In Wrench, the Court decided that although there was reference to the possibility of commission payments being made to the dealership, it was buried in the terms and conditions and not brought to the attention of Wrench. Therefore, the Court held there was non-disclosure and that the payment was secret. The Court awarded the disgorgement of the commission and interest but did not (in the Judgment) order legal recission of the agreement.
Partial disclosure, on these facts to these unsophisticated customers via car dealerships, was not sufficient in this Case. However, partial disclosure of commission payments has been held (in another case) to be sufficient in other circumstances, where the customers were financially sophisticated….as ever, context is everything in the law.
Put another way; disclosure is dynamic and it depends on the sophistication of the customer as to how much is required.
*The full length version of this column first appeared in Leasing World issue 202*
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