Transparency in Consumer Credit: Key Takeaways from Johnson v Firstrand Bank Ltd

In this article, Anna Roffey (Barrister) gives a precis of the Court of Appeal decision in Johnson v Firstrand Bank Ltd, Wrench v Firstrand Bank Ltd and Hopcraft v Close Brothers Ltd. 

Introduction

The Court of Appeal’s decision in Johnson v Firstrand Bank Ltd t/a Motonovo Finance addressed combined appeals of three cases—Johnson, Wrench, and Hopcraft v Close Brothers Ltd. The appeal clarifies important points in consumer finance, specifically the duties of brokers in disclosing commission payments received from lenders and the circumstances under which lenders may be held liable for insufficient disclosure. This decision provides critical insights into how consumer credit agreements should be handled to protect consumers and ensure transparency.

The court evaluated five main issues, with an additional sixth issue unique to Johnson:

1. 1. Does a general statement in the terms and conditions that a commission may or will be paid negate secrecy if the borrower has neither read nor been directed to the statement?
   2. For accessory liability in partial disclosure cases, is it necessary for the broker to owe a fiduciary duty to the claimant, or is a “disinterested duty” sufficient?
   3. If a fiduciary duty applies in a partial disclosure case, what requirements must be met to establish accessory liability on the lender’s part?
   4. Did the broker owe the relevant duty to the claimants in these cases?
   5. Is the lender liable for the repayment of the commission
   6. Additionally, in Johnson: Was the relationship between Mr Johnson and FirstRand unfair under sections 140A-C of the Consumer Credit Act 1974 (“CCA”)?

Does a Statement on Commission in Terms and Conditions Negate Secrecy?

The first issue considered was whether a general statement in the credit agreement’s terms and conditions, stating that commission “may or will be paid”, negates secrecy if the borrower hasn’t read or been directed to it. The Court concluded that such a clause is insufficient for effective disclosure, as it does not actively inform or ensure borrower awareness of commission arrangements. Effective disclosure, the court explained, requires brokers to direct consumers to commission details so they are aware and understand its potential impact on recommendations [28-31].

Is a Fiduciary Duty Necessary to Establish Accessory Liability?

The Court next examined whether establishing accessory liability on the lender’s part requires a fiduciary duty on the broker’s part or if a “disinterested duty” is sufficient. It held that while a fiduciary duty strengthens claims, it isn’t strictly necessary; a “disinterested duty” can suffice as long as the broker has an obligation to act without favouring the lender’s interests exclusively. This interpretation broadens the criteria for establishing accessory liability in partial disclosure cases, recognising the broker’s role in ensuring fair treatment for the borrower [37-40]

Requirements for Accessory Liability if a Fiduciary Duty Exists

Where a fiduciary duty applies, the Court stated that the lender’s liability as an accessory depends on the broker’s obligation to fully disclose commission information. A lender may be liable if it is aware or should reasonably be aware that the broker failed to provide full disclosure. The Court emphasised that lenders must implement practices to ensure brokers make transparent disclosures, reinforcing the shared responsibility of brokers and lenders to prevent conflicts of interest [45-48].

Did the Broker Owe a Duty to the Claimants?

The Court evaluated whether the broker owed a relevant duty to the claimants and found that it did. Acting as intermediaries, brokers have an obligation to secure fair terms for consumers, a duty that is particularly important in cases involving financial incentives. By affirming this duty, the Court highlighted the need for brokers to act transparently and in the consumer’s best interest, reinforcing accountability in brokerage arrangements [50-53].

Is the Lender Liable for Repayment of the Commission?

The Court addressed whether the lender is liable for commission repayment if disclosure was insufficient. It concluded that if the lender fails to ensure adequate disclosure and the arrangement disadvantages the consumer, the lender may be liable to repay the commission. This decision connects undisclosed commission payments to the “unfair relationship” provisions of the CCA, allowing consumers to seek compensation where hidden commissions create unfair credit terms [54-56].

Additional Issue in Johnson: Unfairness Under the CCA

Finally, in Johnson, the Court considered whether the relationship between Mr Johnson and FirstRand was unfair under sections 140A-C of the CCA. The Court held that the lack of adequate commission disclosure created an imbalance, leading to an unfair relationship. This finding links insufficient disclosure directly to consumer rights under the CCA, reinforcing the need for transparency in credit arrangements to prevent relationships from becoming legally unfair [45-48].

Broader Implications: Fiduciary Duty and Sufficient Disclosure

The fiduciary duty owed by brokers in consumer credit agreements demands transparency and impartiality. In the combined appeals, the Court reinforced the principle that brokers cannot assume a generic statement about potential commission payments meets disclosure obligations. In both Johnson and Wrench, the Court emphasised that for disclosure to be “sufficient”, it must be clear and complete, allowing consumers to understand any potential bias in the broker’s recommendations [19-22, 33-36].

Practical Takeaways for Lenders, Brokers, and Consumers

For lenders and brokers, these decisions underscore the need to implement clear and accessible disclosure practices. Brokers should provide specific information regarding commission arrangements and ensure consumers understand any potential impact on the broker’s recommendations. Lenders, meanwhile, should support brokers in these practices to mitigate accessory liability risks [50-53].

For consumers, these cases highlight the importance of asking questions about commission arrangements when considering finance agreements. Consumers are encouraged to be proactive in seeking clarity on broker incentives to make well-informed choices [54-56].

Conclusion: A Shift Towards Greater Transparency
The combined decisions in Johnson, Wrench, and Hopcraft underscore the Court’s commitment to transparency in consumer credit arrangements. By clarifying the requirements for sufficient disclosure and highlighting the shared liability of brokers and lenders, the Court has reinforced the standards of fairness and informed consent in the finance sector. This decision sets a precedent, ensuring that fairness and transparency remain central to consumer protection in credit agreements [58-60].