Introduction: Relief and Concern After the Ruling
Sitting in my office in Hampshire on 4th August, I could clearly hear the sigh of relief in the City of London as it digested the decision of the UK Supreme Court, in the motor finance appeal (Hopcraft v Close Brothers Limited; Johnson v FirstRand Bank Limited and Wrench v FirstRand Bank Limited).
That sigh of relief morphed into furrowed brows when the fact that the Court had “allowed the lenders’ appeals “in part” sank in. Which part of the appeal wasn’t allowed – and why?
What the Supreme Court Allowed
Let’s get the bit of the appeal that was allowed out of the way first.
The Supreme Court rejected the Court of Appeal’s finding that car dealers, acting as credit brokers, (aka financial service intermediaries) owed a fiduciary or “disinterested” duty to their customers. No lawyer could understand how on earth the Court of Appeal could have ever thought they do –because, at law, the dealer acted as agent of the lender – and had no legal duty to a customer in an arm’s length commercial sales transaction.
Why the Court of Appeal Saw It Differently
What the Court of Appeal judges led to think that car dealers (and by association insurance intermediaries) might owe a legal duty of care to their customers when arranging an ancillary financial service?
Two Types of Law That Shape Financial Services
This where an issue, which affects every financial services provider, comes into play. There are effectively two types of law.
Common Law and the Supreme Court’s Position
First is the law which the Supreme Court recognised and (mainly) made its decision upon. That is the common law – the hundreds of years of decided cases in the courts which guide lawyers to what is lawful and what is not.
The Supreme Court’s finding that car dealers, acting as credit brokers, owed no fiduciary or “disinterested” duty to their customers was based on common law. If somebody acts as the remunerated agent of one party to a transaction, their duty is to their principal, as the party that appointed them, and not to the other party to their transaction.
Statute Law and Regulatory Intervention
But there is another type of law. Statute based law. Here parliament has, over many years, interfered with the common law – imposing legally required obligations (“legislation”) in given scenarios when, otherwise, matters would have been left to common law.
The Rise of the FCA and Consumer Duty
In 2000 (as my previous Articles have explained) parliament thought it would be a great idea to pass legislation (the Financial Services and Markets Act) to allow an independent regulator (now the FCA) to make rules with the force of law about anything it liked – as long as those rules were aimed at delivering stated regulatory objectives. One such objective is “protecting consumers”.
As we all know, the FCA has created a “Consumer Duty” – legally requiring financial services firms to deliver “good outcomes” for consumers.
The Tension Between Common Law and Consumer Duty
Well – that is a conundrum isn’t it?
The common law says that a financial service, provided by a firm acting as the agent of another provider, includes no duty of care to a customer – but the Consumer Duty seems to say that it does.
No wonder the Court of Appeal wine bill escalated as they pondered that!! The Court of Appeal was much swayed by the Consumer Duty – how could a firm, owing that Duty, not be sitting on a massive conflict of interest when being remunerated to act at arm’s length from the customer?
Key Distinction: Duty of Care vs Consumer Duty
Well, there is a big distinction between:
the common law duty of care ; and
the “Consumer Duty”.
This is really important – because the FCA had the opportunity to make the Consumer Duty a legal duty of care akin to the common law duty – in effect ensuring that its legislative based legal rule was in line with the common law. Crucially – the FCA declined to do this.
Legal Basis for Redress in Financial Services
At law there are only two bases upon which someone can sue you (or, in financial services jargon, “get redress”):
you have a contract with that person, which has been breached; or
you owe that person a common law or statutory “duty of care”.
Most insurance intermediaries (assuming that they are not offering advice) will have no contract with a customer which requires them to look after the customer’s interests – but do they owe their customer a common law, or statutory, duty of care?
Understanding When Duty of Care Arises
A duty of care can arise with no contract in place. When I drive my car, I owe a duty of care to other
road users and, if I am careless as to that duty, and somebody suffers reasonably foreseeable
damage as a result, then I am responsible to reimburse them their loss.
The claimants in the motor finance case (put very simply) alleged that a finance intermediary always
has a duty of care towards any customer, because the customer would be trusting them to look after
their interests. After all, isn’t that what the Consumer Duty leads them to understand?
That is what the Court of Appeal thought.
Why the Supreme Court Disagreed
The Supreme Court disagreed, observing that, where somebody sells something to somebody else, in a commercial transaction, there is no duty of care unless the duty is created by a contract or statute.
Key Line From the Judgment
“In our view the dealer remains a separate player in the negotiation from start to finish, free to pursue its own interests at arm’s length from the interests of the customer, subject only to the usual common law constraints (e.g. against misrepresentation), and to such regulatory constraints as may from time to time be imposed”.
Consumer Duty: A Duty to the Regulator, Not the Customer
That judgement is really alien to the concept of the “the Consumer Duty. So had the Supreme Court judges been on too many trips to vineyards?
Not at all.
They, rightly, identified that the Consumer Duty is not a legal duty of care owed to the customer – it is a statute based legal duty of care owed by a firm to the Regulator. The Regulator can fine firms or de-authorise them or whatever, for breaches of the Consumer Duty – but the Consumer Duty gives no legal rights to a customer.
The Supreme Court rightly concluded that the Consumer Duty was, therefore, irrelevant – leaving the common law to decide the case. Put simply, the Supreme Court’s “main” decision means that there is no legal basis upon which any customer can seek redress from a firm where it is clear that the firm has no common law duty of care to the customer.
The Part of the Ruling in Favour of Customers
“Ah” I hear you saying – “but do customers understand this”?
This brings me to the bit of the Supreme Court judgment which was decided in favour of the customer. The Supreme Court found that the relationship between one of the claimants and the lender was unfair due to factors, including:
the size of undisclosed commission (55%);
a false impression given to the customer that the dealer was offering products from a panel
of lenders and recommending the most suitable option (and thus acting on behalf of the
customer); andthe customer’s lack of financial sophistication.
Commission, Fairness, and Customer Sophistication
The middle one of these decisions is straightforward – the Supreme Court found that the lender hadcreated a common law duty of care – and was therefore was legally liable to the customer.
But what about the “unfairness” of a commission of 55% and the question as to whether the customer was sophisticated enough to understand the nature of his/her relationship with the firm?
The commission issue is really a re-run of the Plevin saga. A decision of a Court in a case focused on fairness required in a consumer credit context – and whether that can be read across into the remainder of financial services?
Why Customer Sophistication Matters
The issue of the customer’s lack of financial sophistication is more troubling. We have seen, above, that the core part of the Supreme Court decision, against the claimants, was that they were not owed any legal duty of care.
Here (in the decision in favour of a claimant) the same Court is saying that, if a customer is so unsophisticated as to think they are owed a duty of care, then perhaps they are owed that duty?
That is troubling, because, whilst the Consumer Duty does not create a duty of care (and a right to redress from a firm), if the Consumer Duty is promoted to customers as if it does create such a legal duty, then are not “unsophisticated customers” going to understand that it does? If that is the case, the reassurance given to firms in the core Supreme Court judgment may be compromised.
Conclusion: A Tricky Conundrum for Firms
Never will it be more important to find, and use, clear, understandable, ways of ensuring that your customers really do understand that, whilst you will meet standards of service specified by the Consumer Duty – that does not mean that you are in any manner acting for them.
The Supreme Court has therefore left us all with a really tricky conundrum to solve.
