The Supreme Court judgment: next steps for leasing brokers

A personal view by Daniel Layne, CEO of QV Systems

A recap of the Supreme Court decision

The justices in Hopcraft et al overturned the decision of the Court of Appeal in all but one respect: rejecting the lower court’s imposition of a fiduciary – or a disinterested duty – on credit intermediaries, but reaffirming the unfairness of one of the transactions (Johnson) and ordering the refund of commission and associated interest to that consumer.

Initial reaction to the judgment from the industry was overwhelmingly positive – understandably. The reaffirming of the Court of Appeal’s disinterested duty onto all credit intermediaries would have opened the floodgates for the building tsunami of claims against funders and intermediaries and cost the industry billions of pounds and a lot of effort. Conversely, the Claims Management Companies (CMCs) were undoubtedly disappointed to read the decision.

However, two days later the FCA’s subsequent announcement of the details of the compensation scheme related to motor finance has no doubt tempered both the relief of the lenders and the disappointment of the CMCs.

The judgment is a fantastically clear and detailed exploration of the law; in my opinion the press summary does not do a good job of communicating the justices’ work and for that reason I would implore anyone interested to skip straight over the press summary and go for the full judgment.

What can we learn by reviewing the case from the perspective of the leasing industry?

First, all the cases addressed in this judgment were purchase transactions governed by the Consumer Credit Act of 1974.

The role of the dealer acting as a credit intermediary

The justices were presented with two visions of the motor dealer’s role in the tripartite transaction involving the dealer, the consumer and the lender.

For the respondents Robert Weir KC submitted that the dealer takes part in two separate transactions:

First, the sale of the car to the consumer;
Second, acting as an introducer for the consumer in procuring the necessary finance to support the purchase.

The justices preferred an alternative – that the transaction should be considered as a whole and in that context it is unrealistic for the dealer to be acting disinterestedly as they obviously have an interest in the sale of the car.

From the perspective of common sense and legal practicality, I can see why the justices decided as they did: the dealer’s primary business is the purchase and sale of motor vehicles; the finance is merely an aid to that trade. The principle of the tripartite transaction is well understood and grounded in the history of consumer credit.

The justices therefore found it impossible that the dealer could on the one hand be required to display the selfless position of a fiduciary, while on the other hand having a commercial interest in the completion of the sale.

Therefore, the law is settled for now: a dealer engaged in the sale of items supported by credit does not have a fiduciary or disinterested duty to the consumer.

Scope of decision

The justices were clear that they recognised that the transactions they were dealing with were purchase transactions and did not make any attempt to broaden their consideration into hire.

They also distinguished between the role of the dealer as described above, and that of a pure finance broker.

They touched on, but did not delve into the sophistication of the consumers and how (if at all) these principles could apply to a purchase undertaken by a business.

Therefore, the position for pure finance brokers remains unclear and thus lessors and leasing brokers would do well to absorb the ruling in detail before deciding on what action to take.

I submit it unlikely that the court would find in a future hearing that a leasing broker is acting as a fiduciary in relation to their consumer, but without the presence of the broker’s interest in the sale of their asset there may be grounds for distinguishing between the hypothetical future case and Hopcraft.

Commission disclosure – still required?

It feels as though the commission disclosure measures hurriedly introduced after the Court of Appeal’s ruling could now be unwound somewhat – although there may be some reticence in lessors’ legal teams to do that. Hopefully the market will resolve this itself. Generally the measures are cumbersome, do not appear to provide any consumer benefit and in some cases bordered on the bizarre!

Next steps for leasing brokers

For leasing brokers my focus would be on keeping the necessary records showing that the selected product was not an outlier in terms of the rental paid by the customer and/or the commission paid by the lessor: as the scale of commission paid to the dealer in the Johnson transaction was the primary reason that the justices upheld the Court of Appeal’s finding that the transaction was unfair.

I would certainly be alive to the fact that the business model of a leasing broker is not the same as that of a motor dealer (or other vendor) when making introductions for the purpose of credit. Careful consideration should be given to how leasing brokers weigh up the benefits of each of their lessors before making recommendations.

The ultimate decision on how to respond is for the management team of each leasing broker, but the use of a purpose-built platform, such as QV Systems’ Accelerate, offers a suite of assistance in ensuring that processes are adhered to now and in the future, while also aiding detailed analysis of historical deals whether at the macro level or to deal with an individual complaint.