The conjoined Court of Appeal judgment, Wood v Commercial First Business Ltd & ors and Business Mortgage Finance 4 plc v Pengelly [2021] EWCA Civ 471, handed down on the 31st March 2021, has made it much more probable that borrowers could receive compensation, if the commission paid by the lender to their broker was not fully disclosed to them.
This new ruling confirms that, in a case where a fully secret commission was paid by a lender to a broker, there is no need for a stringent fiduciary duty in order for the court to render the loan unenforceable.
The Court must rather consider whether a duty of loyalty is owed by the broker to the borrower. If it is held that such a duty exists then civil remedies may be applicable, such as, rescission of the mortgage or liability for damages to the borrower. The remedies are in place in order to put both the lender and borrower back into the position they would have been in had the loan not been taken out.
Undisclosed Commission and Fiduciary Duty
Undisclosed Commission claims (UDC) refers to a type of financial claim focussing primarily on the commission payments made by mortgage and secured loan lenders to credit brokers who introduce prospective borrowers to them.
The breach of duty that is subject to scrutiny within a potential UDC matter relates to fiduciary duties owed by such credit brokers. The receipt of a commission in these circumstances without
appropriate disclosure of it to the borrower will result in the broker being in breach of that fiduciary duty.
In accordance with the Office of Fair-Trading Guidance, lenders and brokers must do the following:
- Lender must inform the broker that a commission is to be paid and the amount of that commission.
- They must also confirm the manner in which the commission is calculated and all recipients of the commission.
- Must confirm that by making a commission payment “the broker may not be in a position to give unbiased advice.
- Lender must provide the borrower with a booklet in clear English.
- Commission disclosure must adhere to the overarching transparency rules.
- Even where commission is partially or fully disclosed, the prominence of that warning will be relevant.
The appeals brought by Business Mortgage Finance, concerns two cases in which the borrowers defaulted on mortgage payments and sought to have the mortgages rescinded. In both cases (Wood and Pengelly), the borrowers argued that commission was paid by the lender to the mortgage broker without their knowledge or consent, and this amounted to a breach of the brokers fiduciary duty to the borrowers.
If a "fiduciary relationship" is required as a pre-condition for remedies in respect of bribes or secret commissions the inherent risk is either that civil remedies which should be available will be denied because there is not a fiduciary relationship, or that the term “fiduciary relationship” will be applied so widely as virtually to deprive it of content.
The judge in this case confirmed that it is not necessary for a fiduciary relationship to exist between broker and borrower for there to be an obligation to disclose the commission received from the lender.
Rather, the court decided that it was the content of the duty, not the label attached to it, that was the key issue.
The main point here being whether the “payee was under a duty to provide information, advice or recommendation on an impartial or disinterested basis. If the payee was under such a duty, the payment of bribes or secret commissions exposes the payer and the payee to the applicable civil remedies. No further enquiry as to the legal nature of their relationship is required.”
Court of Appeal Decision
The appeals asked for the following three questions to be considered, in order to provide some clarity within the lending industry:
- Is a fiduciary relationship between the client and the broker a necessary pre-condition to the grant of relief against the payer of the undisclosed commission?
- Did a fiduciary relationship exist between the client and the broker in these cases?
- Are the commissions that were paid properly categorised as half-secret commissions?
The Court of Appeal's decision offers some clarity as to the criteria that needs establishing when considering claims relating to the payment of secret commissions or bribes. Whilst both appeals were unsuccessful, the decisions did confirm that a fiduciary relation does not need to exist in a strict sense but rather a duty of loyalty. This was also applied to half-secret commission cases.
The presiding Lord Justice David Richards clarified that a simpler question to ask is:
“Did the “agent/payee” owe a duty to be impartial and to give disinterested advice, information or recommendations?”
If the answer is “yes”, then the common law and equitable remedies come into play:
- Payer and payee of the bribe or secret commission are liable to pay the bribe as money had and received;
- Payer and payee of the bribe or secret commission are liable as joint tortfeasors in deceit to pay damages for loss suffered by the innocent party;
- Payer liable for rescission as of right provided counter-restitution can be given.
Fully Secret or Half Secret?
Additionally, it was upheld that the commissions paid by the lender to the broker constituted being fully secret, on the basis that a general term in the Broker’s terms of business stating commission may be received, is not sufficient to defend secrecy.
This is important because where the commission is half-secret, the resulting contract is not voidable at the election of the borrowers. However, if there is a breach of the broker’s duty, the court then has a discretion to award the most appropriate remedy, which could (but would not necessarily include) rescission.
In both cases, the broker’s terms and conditions loosely mentioned that the broker “may” receive fees from the lenders. The terms go onto say that the broker “will” tell the borrower of the fee amount. Neither borrower was then informed that commission was being paid to the broker, or indeed the amount being paid. The Court of Appeal upheld that these terms “…imposed an unqualified obligation on the broker to inform the borrower, before a mortgage was taken out, of the amount of the fee”.
The court held that, absent the required notification, the borrowers were not on notice that any commission might be paid and the only conclusion was that no commission was to be paid[. The undisclosed commissions were therefore secret (not half-secret).
Summary
These decisions will no doubt be a stark reminder to lenders of the need to ensure that broker commission payments are sufficiently disclosed.
In both decisions under appeal, it was correctly held that the brokers owed fiduciary duties to the borrowers as principals.
If a broker is under a duty to provide information, advice or recommendations on an impartial or disinterested basis (fact sensitive) and fails to adequately disclose the commission it is to be paid, the law on secret commission payments will apply.
How can Jamieson Alexander Legal Help?
Our Banking and Finance Litigation team have extensive experience acting on undisclosed commission claims.
If you feel you may have a claim for undisclosed commission (either in respect of a second charge loan or a mortgage) and think your lender and / or broker has failed to notify you that broker commissions payments have been made, then please contact our Banking and Finance Litigation team.
Our highly experience legal team can guide you through any potential claim, we are also happy to offer flexible funding options, and where appropriate, assist you on a no win no fee basis.
If you would like to discuss any of the above or would like our help, please contact Danielle Elmy-Liddiard on 0330 460 6096 or danielle@jamiesonalexander.co.uk, or the Head of Banking & Finance Litigation at Jamieson Alexander Anastasia Ttofis on 0330 460 6090 or anastasia@jamiesonalexander.co.uk.
