Our CEO’s Insight: Daniel weighs in on Landmark 2024 Finance Case Judgement

In the distant days before QV Systems took over my life, I spent four years gaining a law degree and I dusted off my interpretation skills earlier this week to read the judgement in Johnson v FirstRand Bank Limited (London Branch) T/A MotoNovo Finance and Wrench v FirstRand Bank Limited (London Branch) T/A MotoNovo Finance and Hopcroft v Close Brothers Limited [2024] EWCA Civ 1282. For anyone in the leasing sector, the case provides some interesting takeaways. If you can spare an hour, I’d highly recommend reading the full judgement.

Disclaimers: This analysis is focused on brokers operating in the UK leasing market. Daniel is not a lawyer and this is not legal advice.?

Introduction

I don't think this case is as much of a blow to our industry as some have made out. The judgement is, to these eyes, a balanced one with solid grounds in precedent and I see no evidence of the justices being "out to get the industry" or similar. Yes, if I was on the executive team of a funder I would be worried about the potential financial impact, but given the provisions already made for discretionary commission claims, I would want to undertake analysis to establish the potential incremental exposure.

The events in all three cases took place some time ago, and the issue of fully secret commissions will no longer arise in business conducted according to FCA guidelines, so I will not discuss that.

I understand that an appeal to the Supreme Court will be made. I do not think the chances of a successful appeal are high - but I've been wrong many times before. In any case, the fact of the appeal should not delay responsible brokers and lenders from making changes: this is a binding judgement of the Court of Appeal and will be followed by lower courts as of now.

Conflict of Interest

The inherent conflict of interests of a broker acting for both the applicant and their principal (the funder) was, when I read the headlines on the case, where I thought the fireworks would be found. In fact, the justices had nothing dramatic to say on this point. As long as a broker makes the applicant aware of their dual role and provides the information necessary for the applicant to make an informed decision, this is sufficient to mitigate the conflict.

The justices were most fundamentally displeased by the facts of the Firstrand cases where the broker agreements in question required Firstrand to have first refusal on all proposals, a fact that was at odds with both the information that was given to the applicant (in Johnson) and the broker's duty (the word fiduciary deliberately omitted) to act disinterestedly in the best interests of their client (in both cases).

Commission Quantum

Where a commission is large in relation to the value of the deal, this is a risk factor for both the broker and the funder. Based on our data at QV Systems, this is not a widespread problem in the UK leasing broker market.

What Will Funders Do??

Funders are, in my opinion, likely to react to this judgement by:

1. mandating disclosure at the point of application of:

> the type of relationship between them and the broker (i.e. is the broker able to introduce business to just them or to other funders?)

> the fact that a commission is being paid to the broker

> the amount of that commission

> possibly how that commission is calculated

2. Requiring brokers to obtain a signature from the applicant on the above disclosure.

3. Updating their contracts to repeat the above disclosures.

Funders may also feel it prudent to move to a fixed-commission model sooner rather than later.

What Should Brokers Consider?

Brokers might want to consider:

1. providing, as well as the disclosures mandated by the relevant funder/s, a document outlining to the applicant:

> how the broker fits into the transaction

> whether the broker can introduce to only one or multiple funder/s

> how the broker gets paid for proposals it successfully introduces

> the amount of commission it expects to earn on that particular transaction and whether this is fixed or variable

> that they recognise the conflicted nature of their position

> the steps they take to mitigate the risks of the conflicted position

2. if they are still serving funders with a variable commission model, keeping detailed records of the amount of work done on each case and how that is reflected in the amount of commission paid.

3. making provisions for a possible need to repay some of all of the commission received for variable commission deals.

Final Thoughts

The UK leasing broker market could feel less impact from this than the used vehicle motor finance market, where consumers may not expect the dealer to be making money as a finance broker, as well as from the buy/sell margin on the vehicle. However, UK leasing brokers are able to influence the rental payment with some funders by incorporating more or less commission on a given deal, and an ordinary consumer may not expect this, nor be aware of it.

The FCA has already given notice that discretionary commission in hire transactions is in its sights and I would expect it to be banned at that point, although again, I may well be wrong.

I hope this analysis has provided a clear perspective on the recent judgement and its likely implications for the UK leasing broker market. While I believe the impact won’t be as severe as some predict, it’s clear that transparency and proactive measures are essential for both brokers and funders to uphold trust and regulatory standards. For brokers, taking steps now with thorough disclosure and careful documentation could prove prudent as the industry adapts to these changes.

Let me know what you think in the comments, and please share this with anyone who might find it helpful.

Daniel Layne