Introduction
The intersection of motor finance commissions and fiduciary relationships has become an interesting legal discussion point in recent times. The recent judgment of HHJ Jarman KC in Johnson v FirstRand Bank Ltd (unreported), 6 July 2023, (Cardiff County Court) underscores the evolving landscape of fiduciary duties, especially when set against the backdrop of transactions involving motor finance commissions. This article will explore the nature of fiduciary relationships, their relevance in motor finance commissions, and the unique position of dealers in this intricate web.
Defining a Fiduciary Relationship
A fiduciary relationship, in its most basic form, is characterised by a bond of trust and loyalty between two parties. The law has historically recognised and imposed a duty on the fiduciary to act with utmost good faith, ensuring the interests of the principal are paramount.
Lord Millett in Bristol and West Building Society v Mothew [1998] Ch. 1 captured the essence of this duty when he stated that:
“The distinguishing obligation of a fiduciary is the obligation of loyalty. The principal is entitled to the single-minded loyalty of his fiduciary. This core liability has several facets. A fiduciary must act in good faith; he must not make a profit out of his trust; he must not place himself in a position where his duty and his interest may conflict; he may not act for his own benefit or the benefit of a third person without the informed consent of his principal.”
Thus, the relationship between a fiduciary and their principal requires the fiduciary to sideline personal interests and act solely in the best interests of the principal. The fiduciary must act with single-minded loyalty and good faith towards the principal and must not use their position to either benefit themselves or act against the interests of the principal.
Fiduciary Duties in the Context of Motor Finance Commissions
In Johnson, the claimant bought a car from a dealership. This purchase was facilitated through a finance agreement. While the agreement alluded to the possibility of a commission for the dealer, it did not specify the actual sum. Later revelations showed that this commission was not merely a trivial amount, but rather the sum of £1,650.45, which represented 25.8% of the total advanced.
Delving deeper into the judgment, HHJ Jarman KC's observations at [19] shine a spotlight on the dual roles a dealer plays:
“…the dealer was wearing two hats, one when it was selling the car, and the other when it was dealing with the finance. In my judgment, this is the essential distinction with the broker cases, where brokers do not themselves offer what their client wants, but offer the service of obtaining it, namely finance. It is difficult to see how in practice or in principle a car dealer could offer single-minded loyalty to a customer when dealing with the finance, but not when selling a car to the same customer which gives rise to the need for finance. Finance is incidental to the purchase of the car for those who need to borrow.”
This observation is profoundly significant in understanding the nuanced fiduciary responsibilities in the world of motor finance. A car dealer, unlike a finance broker, inherently operates in a dual capacity. On one hand, the dealer is looking to sell a car, which is fundamentally a commercial transaction. On the other, they are facilitating finance, an act that treads the waters of fiduciary obligations. This duality makes the dealer's position unique.
Furthermore, HHJ Jarman KC's distinction between car dealers and finance brokers also highlights an essential differentiation in their respective fiduciary obligations. While finance brokers, in their role, owe a duty of loyalty to ensure their clients secure the best finance terms, car dealers navigate a more complex path. Their primary goal is selling the car, and while facilitating finance is a part of the service they provide, it remains ancillary to the primary transaction.
Drawing from Relevant Case Law
In Hurstanger Ltd v Wilson and another [2007] 1 WLR 2351 the borrowers sought a loan which was arranged through a broker. The loan agreement informed the borrowers that the broker might receive a commission from the lender but did not reveal the exact amount of commission. It later emerged that the broker received a commission for arranging the loan and the borrowers paid the broker both the arrangement fee of £1,000 but also a commission of £240.
The Court of Appeal affirmed that there was, indeed, a fiduciary duty owed by the broker to the borrowers at [33], where it stated:
“Certain things are clear. The defendants retained the broker to act as their agent for a substantial fee. The contract of retainer contained the usual implied terms, but the relationship created was obviously a fiduciary one. As a fiduciary the agent was required to act loyally for the defendants and not put himself into a position where he had a conflict of interest. Yet he agreed that he would be paid a commission by the other party to the transaction which his clients had retained him to procure. By doing so he obviously put himself into a position where he had a conflict of interest. The defendants were entitled to expect him to get them the best possible deal, but the broker's interest in obtaining a further commission for himself from the lender gave him an incentive to look for the lender who would give him the biggest commission.”
This ruling illuminates the deep-rooted expectations of loyalty and transparency that come with fiduciary relationships, even in commercial contexts. The broker's undisclosed incentive was viewed by the court as a clear conflict of interest, potentially compromising the loyalty owed to the borrowers. Such a conflict can influence the broker to prioritise their financial gain over securing the best deal for their client.
In contrast with Johnson, where the dealer's role in facilitating finance was considered secondary to their primary role of selling a car, in Hurstanger, the broker's sole function was to secure the best possible financial deal for the borrowers. The undisclosed commission, therefore, assumed more significance because it directly impacted the core function of the broker.
In Wood v Commercial First Business Ltd [2021] EWCA Civ 471 the focus, again, was around undisclosed commissions between a broker and a lender. Interestingly, the Court made a distinction between “secret” and “half secret” commissions. While the former pertain to payments made by a third party which is entirely undisclosed to the principal (akin to a ‘bribe’), the latter relate to commissions where the principal is aware that a commission is being paid to the agent, but remains unaware of the specifics, including the exact amount. David Richards LJ, as he then was, reviewed the authorities and clarified a key difference between the two at [21] where he stated that:
“The basis for this difference is that half-disclosure means that the payment is not, in law, a bribe, but equitable remedies are available if the disclosure is insufficient to satisfy the need for informed consent where there is a fiduciary relationship.”
Thus, in instances of payments of “secret” commissions, it is not necessary for a fiduciary relationship to exist to find civil liability. On the other hand, in order to argue a “half-secret” commission, there needs to be a finding of a fiduciary relationship.
The subtleties articulated in Wood are material when considering the broader implications of undisclosed or partially disclosed commissions. They emphasise the necessity of complete transparency in financial transactions, especially when fiduciary relationships come into play.
This then circles back to the Johnson case. As observed in Johnson, the car dealer inherently occupied a dual role—selling a vehicle on one hand and facilitating a finance agreement on the other. While the Hurstanger and Wood cases principally dealt with brokers whose primary obligation was to secure the best financial terms for their clients, in Johnson, the dealer's obligation wasn't as transparently defined. The delineation between a dealer's two roles became crucial in understanding the fiduciary expectations placed upon them.
In Johnson, the non-disclosure of the exact commission amount—much like in Hurstanger—introduced an ambiguity. Could the dealer, acting as a facilitator for finance, be subject to the same stringent fiduciary obligations as a broker who is solely acting in the client's financial interests? The distinction pointed out by HHJ Jarman KC suggests that while a broker's role (as in Hurstanger and Wood) revolves predominantly around the financial interest of their client, a car dealer's primary allegiance is to the sale of the vehicle, with finance being a supplementary service.
What becomes evident from these cases is the nuanced nature of fiduciary duties and the varied expectations that arise from different commercial settings. The presence or absence of a fiduciary duty, as showcased in these cases, often hinges on the specific dynamics of the professional relationship and the inherent roles and responsibilities attached to it. The intertwining of commercial imperatives with fiduciary expectations makes it pivotal for professionals, whether they are brokers or dealers, to tread with caution and transparency.
Conclusion
The landscape regarding fiduciary duties in the realm of motor finance commissions is evolving. While the roles and responsibilities might seem straightforward on the surface, the case law shows layers of obligations and expectations that professionals must navigate. The Hurstanger and Wood cases emphasise the paramountcy of loyalty, transparency, and the avoidance of conflicts in fiduciary relationships, particularly where financial interests are at the forefront.
However, the Johnson case adds a layer of complexity, highlighting the dual roles car dealers often play — merchants first, and finance facilitators second. Thus, their fiduciary obligations, when facilitating finance, might not be as transparent or stringent as those of brokers.
Returning to our central question— "Is there a fiduciary duty in motor finance commissions?"—the answer is nuanced. While fiduciary duties undoubtedly exist in the realm of motor finance, their extent and nature vary based on the specific role a professional plays. Brokers, as showcased in Hurstanger and Wood, are bound by clear fiduciary responsibilities. In contrast, dealers, as illuminated by Johnson operate in a more intricate web of obligations, where their fiduciary duties may not be as well-defined or robust. The case of Johnson, despite not being binding, signifies that the landscape continues to evolve and therefore, professionals in the motor finance domain would be well-placed in remaining alert and informed about the evolving legal expectations and obligations placed upon them.
This write-up was composed by 25 Canada Square Chambers First-Six Pupil Abdul Qadim.