On 1 August 2025, the UK Supreme Court delivered its judgment in the combined appeals of Johnson and Wrench v FirstRand Bank and Hopcraft v Close Brothers. This landmark decision was generally considered to be a positive outcome for the auto industry but will nevertheless have far-reaching implications including in the consumer credit markets, and securitisation transactions.
The judgment clarified key legal principles including the absence of fiduciary duties for car dealers, the scope of unfair relationships under Section 140A of the Consumer Credit Act 1974 (CCA), and was followed shortly by the regulatory response to these issues. This article explores the judgment in detail, its implications for the motor finance industry, and its broader impact on securitisation markets and consumer credit practices.
Key Findings of the Supreme Court Decision
Fiduciary Duties and Bribery Claims
The Supreme Court ruled that car dealers arranging finance do not owe fiduciary duties to customers. Fiduciary duties arise only when a party consciously undertakes to act with loyalty and in the best interests of another. The Court found that car dealers act in their own commercial interests and do not undertake such obligations. Consequently:
- Claims of dishonest assistance against the lenders, which require a fiduciary relationship between the dealers and the borrowers, cannot succeed.
- The common law tort of bribery applies only where the recipient of the alleged bribe is a fiduciary, which car dealers are not.
This decision overturned the Court of Appeal’s earlier finding that car dealers owed a “disinterested duty” to customers and were in a fiduciary relationship when arranging finance. The Supreme Court emphasised that a relationship of trust and confidence alone is insufficient to establish fiduciary duties.
However, the Supreme Court upheld the appeal in the case of Johnson v FirstRand on the basis the circumstances in that case (including the dealer commissions) gave rise to an unfair relationship under Section 140A of the CCA.
For a detailed analysis of the judgment more generally, please refer to the article by Simmons & Simmons as follows: Motor finance: Supreme Court allows lenders’ appeals in part | Simmons & Simmons.
Unfair Relationships under Section 140A of the CCA
The Court1 highlighted that determining whether a lender–consumer relationship is unfair under Section 140A of the CCA is a highly fact-sensitive exercise. Factors influencing unfairness include:
- Size and nature of an undisclosed commission: high commissions, or commissions which are linked to dealer discretion, which may incentivise higher interest rates.
- Disclosure: The clarity, prominence, and extent of disclosure regarding commissions and preferential arrangements.
- Borrower Characteristics: The sophistication and vulnerability of the borrower.
- Regulatory Compliance: Adherence to applicable rules, such as those under the FCA’s Consumer Credit Sourcebook (CONC).
In Johnson v FirstRand Bank, the Court found the relationship unfair due to:
A high undisclosed commission (55% of the total charge for credit).
Lack of transparency about the commission (which was found to constitute a breach of the regulatory obligations then in force).
Undisclosed preferential arrangements between the dealer and lender and misleading documentation that gave the false impression of impartiality.
The borrower’s commercial unsophistication (which was relevant to the level of disclosure).
Conversely, in Hopcraft v Close Brothers, the Court dismissed the unfairness claim as the commission was low, the interest rate was reasonable, and disclosure would not have altered the outcome.
Regulatory Response: FCA’s Proposed Redress Scheme
The Financial Conduct Authority (FCA) responded swiftly to the Supreme Court’s judgment, announcing plans to consult on an industry-wide redress scheme for motor finance customers. The scheme will address both discretionary commission arrangements (DCAs) and other motor finance commissions which were not DCAs. It will therefore cover a wide range of commission arrangements although the FCA is likely to impose parameters on eligibility for redress based on factors such as those identified by the Supreme Court as indicative of an unfair relationship and whether harm has been suffered by the consumer. Note that while the redress scheme will not extend beyond the motor industry the parameters for unfairness established by the FCA will influence and inform the broader consumer lending market.
Key elements of the proposed scheme include:
- Scope: coverage of agreements dating back to 2007, aligning with the Financial Ombudsman Service’s (FOS) jurisdiction.
- Compensation: likely capped at the value of the commission paid, with interest calculated annually.
- Implementation timeline: consultations to begin in October 2025, with the scheme expected to launch in 2026. However, given the potential for legal challenges from both originators and consumer groups before the FCA's Upper Tribunal there is a risk the timeline will be delayed.
- *Consumer Access: Consumers have generally been encouraged by the FCA and the media to use the FCA redress programs rather than law firms or claims management companies to access compensation.
The FCA estimates the cost of the scheme to be between £9 billion and £18 billion, with most consumers expected to receive less than £950 per agreement. The scheme will rely on the factors identified by the Supreme Court to determine unfairness, but its design will need to balance simplicity with fairness to avoid legal challenges.
See also the relevant FCA webpage for further information: https://www.fca.org.uk/news/statements/fca-consult-compensation-scheme-motor-finance-customers.
Implications for the Motor Finance Industry
Enhanced Disclosure Practices
The Supreme Court’s decision has reinforced the importance of clear and prominent disclosure of commissions. In addition to Section 140A of the CCA there is a hard obligation in CONC for credit brokers to disclose commissions and the FCA Consumer Duty is also relevant. Following the Court of Appeal’s earlier judgment, originators of auto receivables (and other consumer products) generally updated their customer documentation and procedures to clearly disclose the existence, amount and calculation of dealer commissions and in some cases also requiring customers to expressly acknowledge such arrangements.
Post the Supreme Court judgment, although there are no additional hard legal obligations to disclose information, increased disclosure practices are expected to continue and originators are expected to revisit their customer documentation and practices once more to take into account the additional factors raised by the Court including:
- Explicit disclosure of commissions: clear statements about the existence, amount, and calculation of commissions.
- Explicit disclosure of preferential arrangements: information about any arrangements between dealers and lenders that could influence terms offered to customers.
- Additional protections for vulnerable customers: enhanced measures to ensure that vulnerable or unsophisticated customers are adequately informed and protected for example through making disclosures prominent.
- Express acknowledgement of arrangements: enhanced means, particularly for vulnerable customers, of recognising the customer’s express recognition and acceptance of the disclosure.
This is the case for any product subject to Section 140A of the CCA and so will be reflected across the broader consumer lending market.
Impact on Securitisation Transactions
The obligation to pay compensation remains with the originator and so the main considerations from a securitisation perspective are:
- Set-off risk: potential asset losses and set-off risks, where customers offset compensation against payments due under receivables.
- Financial strain on Originators: the FCA’s redress scheme could impose significant costs on originators.
Industry will be better able to assess the extent of such risks once the FCA’s initial proposals for the FCA redress scheme and what constitutes unfairness are released which will be eagerly awaited. The Court of Appeal is also due to deliver its judgement in Clydesdale Financial Services Limited (T/A Barclays Partner Finance) v FOS shortly, a judicial review of a FOS decision relating to the use of DCAs which will also be relevant and may impact on the FCA’s proposed approach to DCA's.
The judgments will of course result in a material increase in claims. Section 140A of the CCA is at least a known quantity from a securitisation perspective and we would be optimistic that the majority of claims will be settled privately by the originators via the FCA redress schemes without impacting on the securitisation in any material respect. However, in the event a securitisation is impacted, for example, as a result of a customer set-off, there are two common protections typically included in securitisation structures to address this risk.
Asset warranties and eligibility criteria: these often require that the origination of the asset complies with all applicable laws and regulations, including Section 140A of the CCA. Breaches of these warranties typically result in the originator being required to repurchase the asset concerned and/or (on a private transaction) the relevant asset potentially falling out of any borrowing base and being funded by the subordinated debt held by the originator. Alternatively, the originator may be subject to a requirement to indemnify the securitisation vehicle for any losses arising as a result of the breach of asset warranty. The latter approach is more common and suitable on auto securitisations given technical (but fairly innocuous) breaches of the CCA are common where the size of the losses is low compared to the value of the asset.
Indemnities for Set-off risk: while not common on auto securitisations prior to the Court of Appeal decision, such indemnities have become more prevalent and are common in the broader consumer securitisation market.
There is a risk that in developing the redress scheme the FCA could propose set-off as an alternative to cash compensation which from a securitisation perspective should be resisted if possible.
It is worth noting that the impact on legacy transactions may be limited by the fact that auto and consumer receivables generally have a relatively short term and portfolios thus turnover relatively quickly and it may take time for the FCA redress scheme to be implemented.
Future Transactions
For new securitisations, the focus will remain on robust protections, including those outlined above. The market is expected to stabilise quickly as participants gain clarity on the scope of the FCA’s redress scheme, the factors influencing unfairness and the exposure of different originators. However, lenders and securitisation participants must remain vigilant in monitoring regulatory developments and adapting their practices accordingly.
Conclusion
The Supreme Court’s decision has clarified key legal principles regarding fiduciary duties, bribery claims, and unfair relationships under Section 140A of the CCA. While the judgment is broadly positive for the motor finance industry, it highlights the need for enhanced disclosure practices and careful management of lender–consumer relationships. The FCA’s forthcoming redress scheme will play a critical role in shaping the industry’s response, and stakeholders should actively engage in the consultation process to ensure their perspectives are considered.
For securitisation markets, the decision provides greater certainty but underscores the importance of robust protections against risks arising from unfair relationships. As the industry navigates these changes, the focus will remain on balancing compliance with maintaining a healthy and competitive market for motor finance and other consumer credit products.
