On 17 December 2024, the High Court handed down its judgment in The King (on the application of Clydesdale Financial Services Ltd) and Financial Ombudsman Service Limited v (1) Arnold Clark Automobiles (2) Jenna Lewis (3) Financial Conduct Authority[1], the latest development in the ongoing saga of car loan commissions. While the decision underscores the importance of transparency in commission arrangements and consumer protection, its practical impact remains uncertain until the Supreme Court rules on the issue next year.
Background
The case originated from a complaint by Jenna Lewis, who purchased a second-hand Audi from Arnold Clark’s showroom in Liverpool, financed through a conditional sale agreement with Clydesdale Financial Services Limited (trading as Barclays Partner Finance Barclays PF). The conditional sale agreement between Ms Lewis and Clydesdale recorded the amount of money borrowed by Ms Lewis, plus the cost of the borrowing at a flat rate of interest of 4.67% (i.e. based on an equal apportionment of interest on the full amount over the loan term), and the annual percentage rate (the APR) of 8.9% (i.e. the effective rate charged over the term given the depreciating balance).
According to the brokerage agreement between Clydesdale and Arnold Clark, Arnold Clark could set a flat interest rate payable by the customer to Clydesdale, within the range of 2.68% to 15.25%. The amount by which that rate exceeded 2.68% was payable as a commission by Clydesdale to Arnold Clark. Accordingly, Clydesdale paid Arnold Clark £1,326.60 of commission calculated by reference between the minimum 2.68% and the 4.67% Arnold Clark required Ms Lewis to pay.
Essentially, this commission model meant that Arnold Clark could set the interest rate the customer had to pay (within the range), and in doing so, was able to determine the amount of commission it would receive.
Ms. Lewis complained to the Financial Ombudsman Service (FOS) that her car finance had been mis-sold, that Arnold Clark had received undisclosed commission, and sought compensation for the mis-selling. The FOS considered the consumer credit provisions and the Financial Conduct Authority’s (FCA) Principles for Businesses, and on 10 January 2024, ruled that Barclays PF did not act fairly, and should compensate Ms Lewis.
Barclays PF sought to challenge the FOS decision by way of judicial review.
Key legal issues and findings
The High Court dismissed the challenge and upheld the FOS decision on all grounds. The High Court analysed the meaning of the relevant provisions and considered that the FOS had interpreted the rules correctly.
It held that the commission arrangements had not been adequately disclosed, and that the relationship between the broker (i.e. Arnold Clark) and the lender (Clydesdale) was therefore unfair in the circumstances.[2] It held that a broker must disclose the commission models (including discretionary commission), and where differential commission rates, and those based on volume and profitability apply, the commission must be based on extra work, which was not evident in this case.[3]
The High Court also upheld the FOS’s attribution of Arnold Clark’s conduct (as broker and deemed agent) to Clydesdale (as lender), agreeing that the negotiations about the financing of the car formed part of the negotiations in relation to the goods sold or to be sold.[4]
Industry implications
The FCA has issued a press release in which it anticipates a high volume of complaints against motor finance companies following the judgment. However, the judgment is distinct from the Court of Appeal’s decision against three other car finance lenders which is being appealed and will be heard in the Supreme Court next year.
Therefore, while this latest judgment reinforces the necessity for lenders and brokers to ensure full transparency in their commission arrangements and to manage conflicts of interest diligently, its practical impact remains in flux. Until the FCA publishes its review in 2025, and the Supreme Court provides a definitive ruling, the industry will need to operate with some caution.
James Evison
Miranda Joseph