Alerter by Toby Riley-Smith KC, Ben Norton & Jack Castle – Heaping Pelion on Ossa: unsuccessful challenge of FOS decision on motor finance commission

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In R. (Clydesdale Financial Services Ltd) v Financial Ombudsman Service Ltd [2024] EWHC 3237 (Admin) Mr Justice Kerr considered Clydesdale’s application for judicial review of a Financial Ombudsman Service decision in respect of a motor finance commission complaint. The Ombudsman had found in favour of a borrower, Ms Lewis, who purchased a vehicle on finance in circumstances where the lender, Clydesdale, paid a commission to a car dealership, Arnold Clark, acting as credit broker. All three grounds of challenge were dismissed. The decision comes hot on the heels of the Court of Appeal’s judgment in the conjoined appeals of Johnson v FirstRand Bank Ltd (t/a Motonovo Finance) [2024] EWCA Civ 1282, the appeal of which is due to be heard by the Supreme Court on 1-3 April 2025.

BACKGROUND

The underlying facts are of a type well known in the consumer finance world. In November 2018 a Ms Lewis bought an Audi from a car dealership, Arnold Clark, financed by a conditional sale agreement with Clydesdale Financial Services (trading as Barclays Partner Finance).

Clydesdale paid Arnold Clark a commission, calculated pursuant to two different models:

1. A ‘discretionary commission model’ whereby the broker received a higher level of commission where the interest rate offered to the consumer was higher than a set minimum – the higher the interest rate offered, the higher the commission to the broker. The interest rate was at the “discretion” of the broker and could be set from 2.68% to 15.25%. Discretionary commission arrangements were banned in 2021 by an amendment to CONC 4.5.6R.
2. A fixed percentage of the amount borrowed (2%).

Commission was mentioned in an “Initial Disclosure Document” (“IDD”), which stated that “We act as a credit broker sourcing credit to assist with Your purchase from a carefully selected panel of lenders […]. Lenders typically pay Us a fee for these introductions”. Ms Lewis signed a declaration to say Arnold Clark had provided her with a copy of this document prior to signing the credit agreement [44]-[45].

Instead of suing, Ms Lewis complained to Clydesdale then raised the matter with the FOS. Her complaint was upheld and she was awarded the difference between (i) the payments she made under the finance agreement at the rate of 4.67% and (ii) the payments she would have made if the interest had been set at the lowest rate permitted of 2.68%, plus interest on her overpayments.

A summary of the Ombudsman’s (“FOS”) decision is set out at paragraph 83 of the Judgment. In short, the FOS found that a Court was likely to conclude that the relationship between the parties was unfair under s.140A of the Consumer Credit Act 1974 (“CCA”) for any or all of three reasons, namely the fact that:

1. Clydesdale operated a discretionary commission model which created an inherent conflict of interested between the broker and Ms Lewis. This created an unfair relationship both generally and because it meant Clydesdale failed to comply with Principle 6 (requirement to pay due regard to the interests of Ms Lewis and treat her fairly) and CONC 4.5.2G.
2. Clydesdale failed to disclose the basis on which it would pay commission and the fact that the broker could determine the interest rate, which created an inequality of knowledge and understanding.
3. The broker failed to disclose the structure of the discretionary commission arrangement in accordance with regulatory requirements and guidance (in particular, CONC 4.5.3R, CONC 3.7.4G(2) and Principles 7 and 8) in circumstances where this failure is, under s56(2) CCA, deemed to be a failure of Clydesdale.

THE ISSUES

Clydesdale accepted the outcome in Ms Lewis’ case but challenged the principles the FOS used to arrive at its decision – those principles being likely to be applied to the many thousands of other motor finance commission cases.

There were three Grounds of challenge:

• Ground 1(i): the FOS made an error of law in finding that Arnold Clark should have disclosed to Ms Lewis what its commission arrangements with Clydesdale were.
• Ground 1(ii): the FOS made an error of law in deciding the discretionary commission arrangement was caught by CONC 4.5.2G and infringed Principle 6
• Ground 2: the FOS reached an irrational result on quantum, i.e. on the amount of compensation Ms Lewis should receive.
• Ground 3: the FOS erred in law by concluding that the pre-contractual negotiations between the broker and Ms Lewis in relation to the commission were caught by s.56(1)(b) CCA, such that the broker was Clydesdale’s deemed agent in respect of those negotiations. Stemming from this error, the FOS made a second error of law by finding that Clydesdale was responsible for the broker’s acts and omissions regarding the commission under s.140A(1)(c) CCA.

Arnold Clark was an interested party. In its own detailed Grounds, it raised a new ground of public law challenge to the FOS’ decision, alleging procedural unfairness in that the FOS should have invited it to make representations or supply evidence, or that the FOS should have used the “test case” procedure in DISP 3.4.2R. The Court held that an interested party would need permission, but that could be given under the Court’s general case management powers in CPR Part 3 (at [131]–[133]). In the event, the procedural unfairness ground was not allowed, because it was not arguable.

Ground 1(i): should the commission arrangements have been disclosed?

Clydesdale’s argument was that in 2018 CONC 4.5.3R only referred to the “existence” of commission needing to be disclosed (rather than the post-2021 version which requires disclosure of the “existence and nature” of commission). The interpretation of the FCA Handbook is a question of law for the Court, and if the FOS misinterpret the FCA Handbook the FOS will have failed to take it into account.[1]

The IDD did disclose that commission would likely be paid. There was no breach of the specific rule.

Further, because there was no breach of the specific rule, the FOS had overstepped the proper limits of the application of the Principles. In any event, the broker was not a financial adviser and assumed no disinterested duty to advise, the IDD and other documents were clear, fair and not misleading, and the discretionary commission model was operated in a fair way.

The Administrative Court essentially rejected these submissions. It is for the FOS to decide whether a rule or principle has been breached on the facts, subject to the Court’s supervision where a FOS decision proceeds from a misinterpretation (at [186]). There can be a breach of a Principle without breach of a rule and vice versa. Where there is an overlap between the content of a rule and a Principle the rule does not exhaust the application of the Principle (at [187]-[188]). In Ms Lewis’ decision, the FOS was considering overlapping provisions, which should be read together, adopting a holistic approach (at [189]).

There was therefore no pleaded challenge to the FOS’ decision on the Principles, so that element of the decision would stand (at [190]-[191]).

On CONC 4.5.3R, the Court declined to find that disclosure of the “existence” of commission meant that, in all circumstances, only the bare fact of commission would be disclosable. The rule had to be read in harmony with its neighbours (Principles 7 and 8, CONC 3.3.1R and CONC 3.7.4G(2)). It was open to the FOS to decide this was a case that fell short of what CONC 4.5.3R required.

Ground 1(ii): is the discretionary commission arrangement “differential commission rates” within conc 4.5.2g?

Clydesdale’s case was that 4.5.2G was intended to prevent brokers promoting an unsuitable product to a customer instead of another, more suitable, product, and the discretionary commission model is different from differential commission rates. As such, the arrangements here did not contravene CONC 4.5.2G, and the product was suitable because the cost of credit was as low or lower than any other product available on the market (at [213]).

Clydesdale also submitted that the correct approach to Principle 6 is to ask whether Ms Lewis was treated fairly by reference to the alternative options open to her in the market at the time – and there were none (at [220]-[222]).

Both positions were rejected. “Differential” was treated as an ordinary English word, meaning “not fixed” (at [236]–[246]). It covered the DIC Model (at [251]). As to Principle 6, Clydesdale’s position was mere disagreement with the FOS, not an error of law (at [253]–[254]).

Of note, however, is the Court’s agreement with the FCA’s position that “the accusation of unfair treatment is not satisfactorily answered by invocation of market forces and a claim to have served the customer handsomely in the market place while ensuring no more than reasonable remuneration for the broker. The customer’s borrowing costs are increased by the broker’s choice of an elevated interest rate. That is so whether or not, in the self-serving view of the lender and the broker, she is more than compensated for that by other features of the transaction” (at [255]).

It is not clear how this sits with the usual principles that consumer law is concerned with providing informed choices to customers[2] (rather than retrospectively regulating markets),[3] as well as the established approach to, for example, orders where an unfair relationship under section 140A CCA has been found that should “not give the Claimant a windfall, but should approximate, as closely as possible, to the overall position which would have applied had the matters giving rise to the perceived unfairness not taken place”.[4]

Ground 2: Irrational result on quantum

The second ground of challenge was that the FOS reached an irrational result on quantum (considered at [257]-[313]).

The bar for Clydesdale to overcome was a high one; the autonomy of the FOS was protected “short of an indefensible decision resting on untenable reasoning or an indefensible conclusion verging on the outrageous” [304].

Mr Justice Kerr found that the bar was not met in this case:

1. First, the FOS applied s.229 of the Financial Services and Markets Act 2000, under which the FOS has power to award against a respondent to a complaint “such amount as the ombudsman considers fair compensation for loss and damage”. S.229(3) provides that a money award may compensate for “financial loss; or … any other loss, or any damage, of a specified kind” [305].
2. Second, he rightly treated as a question of fact and causation whether Ms Lewis suffered financial loss in consequence of the regulatory breaches he had found [306].
3. Third, he applied the right test when considering whether Ms Lewis had suffered financial loss, namely what would have happened but for the regulatory breaches, and with what financial consequences, if any, for Ms Lewis [307].
4. Fourth, he had sufficient evidence to determine this issue, namely written evidence from Ms Lewis and Clydesdale, although there had been no oral hearing [308].
5. Fifth, it would have been unfair if he had based his decision entirely on market forces [310].
6. Further, he was not obliged to accept Arnold Clark’s evidence as to what it would have done [312].

Ground 3: deemed agency under the CCA

The third ground of challenge was that the FOS erred in law by concluding that the pre-contractual negotiations between Arnold Clark and Ms Lewis in relation to the commission were caught by s.56(1)(b) CCA, such that Arnold Clark was Ms Lewis’ deemed agent in respect of those negotiations.

“Antecedent negotiations” with a debtor in a case falling within s.56(1)(b) are “deemed to be conducted by the negotiator in the capacity of agent of the creditor as well as in his actual capacity” under s.56(2).

Clydesdale submitted that Arnold Clark was only Clydesdale’s agent in respect of any pre-contractual representations it made about the vehicle, not about the transaction for motor finance more generally [323].

Mr Justice Kerr disagreed. The FOS had found that Arnold Clark recommended to Ms Lewis a finance agreement with Clydesdale, and this conduct was part of its antecedent negotiations “in relation to the goods sold or proposed to be sold”, within section 56(1)(b) and 56(4) of the CCA [364] (Forthright Finance Ltd v. Ingate [1997] 4 All ER 99 and Scotland and Reast v. British Credit Trust Ltd [2014] EWCA Civ 790, [2014] Bus LR 1079 considered).

Notably, the judgment does not refer to the fact that in Johnson FirstRand conceded that, as a consequence of the personal loan, the broker was to be treated as the agent for the lender for the purposes of s.140A because of s.56(1)(c) and (2) (paragraph 145).

COMMENT

Motor finance commission complaints are a hot topic following the Court of Appeal’s judgment in Johnson v Firstrand Bank and the Supreme Court’s decision to grant the lenders permission to appeal, which is currently listed to be heard on 1-3 April 2025 (click here for Alerter on the Court of Appeal judgment).

It is important to place the present judgment in context. Unlike Johnson, it is not an appeal of a County Court decision. It concerns a judicial review of an award by the FOS under s.228(2) FSMA “by reference to what is, in the opinion of the ombudsman, fair and reasonable in all the circumstances of the case”.

The FOS’ broad judgment as to what is fair and reasonable is different from common law actionability [116]. The FOS must adequately explain the reasoning but that does not mean that, if the FOS departs from the common law, the decision must include a detailed analysis of what causes of action at common law were not available or were departed from and why [117]. There is no right of appeal against such a decision; the only remedy is judicial review. While this case shows the FOS’ likely approach to these issues (and approves that approach as lawful), this approach is likely to be different from that taken by a court.

Accordingly, for a pronouncement on the availability of claims in bribery, procuring breach of fiduciary duty, and under s.140A of the CCA we must wait for the decision of the Supreme Court.

Notably, the present judgment provides an overview of the regulatory environment surrounding motor finance deals and analysis of the FCA Handbook. This is a subject on which the Court of Appeal was surprisingly reticent in Johnson. As noted by Mr Justice Kerr, the Court of Appeal judgment contains just one cross-reference to the regulatory regime; a mention of CONC 4.5.3R at [94]. It may be that the Supreme Court revisits this in more detail following the hearing in April 2025. All concerned will be hoping judgment is handed down sooner rather than later – not least the FCA, which plans to set out next steps in its discretionary commission arrangement review in May 2025.

Toby Riley-Smith KC
Ben Norton
Jack Castle
23 December 2024

This alerter is available to download as a PDF below. 

[1] R (Norwich and Peterborough Building Society) v. Financial Ombudsman Service Ltd [2002] EWHC 2379 (Admin), at [71]

[2] See the Judgment of Lady Hale in OFT v Abbey National plc [2009] UKSC 6 at [93]

[3] And in the PPI context the FCA went so far as to say: “We are not trying to regulate prices retrospectively or to redress economic detriment caused by high prices in an uncompetitive market” (CP16/20, FCA response at paragraph 5.67)

[4] Kerrigan v Elevate Credit International [2020] EWHC 2169 (Comm) at [214]

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