Secret commissions and indemnity policies: Insurance implications of Court of Appeal broker commissions decision in Johnson v FirstRand

The Court of Appeal recently handed down its decision in Johnson v FirstRand Bank Ltd (London Branch) (t/a MotoNovo Finance) [2024] EWCA Civ 1282, finding that lenders who pay an undisclosed (or insufficiently disclosed) commission to brokers can be liable to customers both directly and as an accessory to the broker's breach of duty. The Supreme Court has given the lenders permission to appeal, and will list the hearing during the 2025 Hilary Term (January - mid-April 2025). If the Supreme Court follows the approach of the Court of Appeal, the decision has significant implications for any institution engaged in brokered finance given its potentially broad application. Our detailed analysis of the Court of Appeal's decision can be found here.

The Supreme Court will have an opportunity to provide definitive guidance relevant to the industry and the FCA about the state of the law in this area.

In the meantime, given the potential loss exposure, this blog considers the ramifications of the Court of Appeal decision from an insurance perspective. In particular, institutions will need to consider whether and how to preserve their ability to make an insurance claim under their professional indemnity and other liability insurance policies, if they are faced with future liability exposure.

KEY TAKEAWAYS

• The Court of Appeal approach opens the door to institutions facing a range of potential exposures, such as consumer (class) actions, shareholder class actions and regulatory scrutiny including redress schemes.

• Potentially exposed institutions which hold professional indemnity and D&O policies should consider whether they need to take steps to preserve their ability to make future insurance claims. This may include notifying claims or potential claims (known as circumstances) to their insurers.

BRIEF RECAP OF COURT OF APPEAL DECISION

In short, the Court of Appeal found that:

• The car dealers, when acting as a broker, owed both a 'disinterested duty' (a duty to provide information, advice or recommendations on an impartial or disinterested basis) and an ad hoc fiduciary duty to customers, to advise them impartially. The ad hoc fiduciary duty arose in tandem with and in consequence of there being a "disinterested duty". This meant that the dealer, when acting as broker, had to act in the best interests of the customer and not put themselves in a position of conflict. If dealers were to receive a commission from lenders in this situation, consumers needed to provide their fully informed consent to the arrangement. A term buried in the contractual documentation to the effect that an undisclosed amount of commission 'may' be paid would not be sufficient to discharge the duties on dealers.
• The lenders who pay commissions to dealers can be liable both directly (as a payer of a secret commission) and as an accessory to the dealer's breach of duty (by procuring the breach). Lenders cannot simply assume that brokers will ensure that customers have provided informed consent to the commission arrangements. In the absence of that informed consent, lenders may be exposed to claims for equitable compensation, disgorgement of profits, recission or restitution (depending on the circumstances of the case).

In December 2024, the Supreme Court allowed the lenders' application for permission to appeal. The appeal is due to be heard by mid-April 2025, and the outcome will be closely watched by both industry participants and the FCA.

POTENTIAL CLAIMS AGAINST LENDERS

Class action risks 

If the decision stands, lenders may be exposed to class action risk both from: (i) consumers who purchased goods or services from brokers who received an undisclosed (or insufficiently disclosed) commission from those lenders; and (ii) shareholders of the lenders.

We have already seen an English Court permit a claim for the repayment of secret commissions to proceed as an opt-out representative action. Commission Recovery Ltd v Marks & Clerk LLP [2024] EWCA Civ 9 involved a law firm which was alleged to have received secret commissions from a third-party agency, whose services the firm had recommended its clients use for intellectual property renewals.

Although the case has settled the Court considered that the case could proceed in a bifurcated manner, using the CPR 19.8 procedure (see our detailed update here).

It's worth noting also that two class actions have already been brought in Australia for the repayment of unlawful "flex commissions" paid by lenders to car dealers. One proceeding (against ANZ Bank) has now settled for AUD$85 million, while the second proceeding (against Westpac & St George and Macquarie Leasing) is currently awaiting judgment from the Supreme Court of Victoria.

Institutions also need to be alive to the possibility of shareholder class actions, on the back of reports that the Court of Appeal decision has already affected share prices.

Shareholder claims could be brought in a variety of ways, including:

• Under sections 90 and 90A of the Financial Services Act 2000, which allow investors to bring claims against listed companies for misleading statements or omissions in documents such as listing particulars and annual reports.

• Common law tort claims for breach of the duty owed by company directors to shareholders, to use reasonable skill and care when communicating with shareholders.

Regulatory exposure

The FCA had already commenced a review into motor finance commissions, prior to this decision, specifically "Discretionary Commission Arrangements" (which had been banned in January 2021). That review has effectively been paused to allow both the FCA and the industry to consider the impact of the decision, including the appeal (see FCA statement here).

If the Court of Appeal's decision stands, the FCA has indicated that it may seek to implement a structured redress scheme with regulated entities pursuant to section 404 of the Financial Services Act 2000 (see the FCA's letter to the Supreme Court here).

It would also be open to the FCA to pursue individual enforcement action against particular regulated entities.

INSURANCE IMPLICATIONS

So what does this all mean from an insurance perspective: could impacted institutions be covered, and ought steps to be taken now to secure coverage? Some headline comments are as follows:

What policies may be relevant?

The Court of Appeal decision exposes institutions to a range of different claims.

Liabilities to consumers (such as for equitable compensation), and the costs of defending claims, regulatory enforcement action or putting in place redress schemes, could be covered under PI or other general liability policies.

Liabilities to shareholders, and the costs of defending shareholder claims, may be covered under D&O insurance, including securities claims against the company if 'Side C' coverage is purchased.

What about restitutionary claims?

Coverage issues may arise in insurance claims relating to fees or commissions as to what kinds of liabilities are indemnifiable. Damages or compensation liabilities to consumers arising in the context of services provided would typically be covered under PI insurance (absent proven fraud). However, the question of restitutionary liabilities can be more complex.

A number of authorities have held that where a potential claim could be characterised in a number of different ways, the insurance policy will respond if any one of those characterisations is insured: Capel-Cure Myers Capital Management Ltd v McCarthy [1995] L.R.L.R. 498. Thus a co-terminous liability in damages and unjust enrichment may well be covered. The Court of Appeal also recently left open the possibility that 'pure' restitutionary claims (i.e. where there isn't a co-terminous liability for compensation or damages) could be covered if the wording is sufficiently broad – see Royal and Sun Alliance Insurance Ltd & Ors v Tughans [2023] EWCA Civ 999. Put simply, coverage for consumer claims will require assessment of the bases of liability and scope of the policy wording.

Notification under current policy and when renewing

PI and D&O insurance policies usually operate on a claims-made basis – i.e. the responsive policy will be the one in place when a claim is made or the insured learns of circumstances in respect of potential claims. Institutions potentially impacted by the Court of Appeal decision will need to consider whether they are already on notice of claims or circumstances in respect of potential claims. If they are, there are likely to be time-sensitive notification provisions. Even if they are not, views should be updated once the Supreme Court outcome is known.

Disclosure or notification obligations in relation to actual or potential claims as informed by the Court of Appeal's decision may arise in different contexts. They could arise:   

• Now, under current policies, if the insured is on notice of claims or circumstances. If so, it will be important to give notice to preserve the ability to make a future insurance claim under those policies as a result of the decision.

• At renewal, to ensure compliance with the duty of fair presentation.

Any further clarification from Supreme Court might also constitute an additional circumstance which warrants notification to insurers. However, what does or does not constitute a circumstance will depend on the facts and policy language used.  

The key message for institutions with possible exposure to claims in view of the Court of Appeal's decision is: consult policy terms now to determine whether notifications are required or advisable, and discuss with your broker what disclosures may be required at any upcoming renewals.

TAKEAWAYS

The impact of the Court of Appeal decision is not yet known. It could represent a significant exposure for the insurance market. Any firms/institutions potentially impacted by the Court of Appeal decision may wish to consider whether steps are appropriate now to secure their insurance position. In the meantime, all stakeholders will be watching out for the Supreme Court's decision.