A number of members who have complaints pending with the Financial Ombudsman’s Service (‘FOS’) regarding the selling of finance products have recently received correspondence referring to the recent cases of Wood v Commercial First Business Limited and Pengelly v Business Mortgage Finance 4 plc. These letters ask a number of additional questions and provide members the opportunity to add to or amend any representations if they wish.
As we have received several questions, we have decided to provide a briefing note regarding this recent caselaw and to explore the area in a bit more detail.
Commission disclosure
Any member who sells finance products should be familiar with the FCA regulations and particularly CONC 4.5.3. which states :
“A credit broker must prominently disclose to a customer in good time before a credit agreement or a consumer hire agreement is entered into, the existence and nature of any commission or fee or other remuneration payable to the credit broker by the lender or owner or a third party, where the existence or amount of the commission, fee or other remuneration could actually or potentially:
(1) affect the impartiality of the credit broker in recommending the credit agreement or the consumer hire agreement; or
(2) if made known to the customer, have a material impact on the customer’s transactional decision to enter into the credit agreement or the consumer hire agreement.”
Wood v Commercial First Business Limited and Pengelly v Business Mortgage Finance 4 plc.
The facts in both cases were similar. Mrs Wood and Mr Pengelly had obtained loans secured against their properties. Both had been charged a fee for this service and their broker in each case had also received commission from the relevant lender which had not been disclosed. Unfortunately, Mrs Wood and Mr Pengelly defaulted on the loan repayments and the Lenders commenced enforcement proceedings against Mrs Wood and Mr Pengelly. In their defence Mrs Wood and Mr Pengelly brought counter-claims for rescission and for recovery of the payments based on the secret profits and the failure to disclose the commissions.
In both cases the courts allowed the finance to be cancelled, but for different reasons, as such the matters were passed to the Court of Appeal, the UK’s second highest court.
In the appeals the court considered 3 main points:-
- 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?
Is there a need for a fiduciary duty?
No. The main question was whether the broker was under a duty to provide information, advice or recommendation on an impartial or disinterested basis. The court summarised this as “the duty to be honest and impartial”[1] .
“To ask in cases of this kind whether there is a fiduciary relationship… is, in my judgment, an unnecessarily elaborate, and perhaps inaccurate, question. The question, I consider, is the altogether simpler one of 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.”[2]
In any event, the court went on to find that in each of the cases a fiduciary duty in fact did exist.
What is Half-secret Commission?
The concept of a Half-secret commission is nothing new and was considered in the case of Hurstanger Ltd v Wilson [2007] EWCA Civ 299. The facts of the case were that Mr and Mrs Wilson had fallen behind on their mortgage and approached a broker to arrange a second loan. The broker held themselves out as acting on behalf of Mr and Mrs Wilson and charged a commission of £1,000 (on an £8,000 loan) to do so. However, when arranging the loan they also received a commission of £240 from Hurstanger Ltd. To cover this eventuality, the broker’s terms and conditions expressly stated that “in certain circumstances [the lender] does pay commission to brokers/agents…”. Crucially the terms did not identify whether any commission had been paid or the amount. The question before the court was whether this clause was enough.
The court held that where a broker acts for both the customer and the lender the only way they could act without breaching their fiduciary duty would be if the borrowers had consented. Where, the clients are vulnerable and unsophisticated, such as consumers, or perhaps even small businesses, this case suggests that only disclosure of the actual amount will do.
“Borrowers like the defendants … are likely to be vulnerable and unsophisticated. A statement of the amount which their broker is to receive from the lender is, I think, necessary to bring home to such borrowers the potential conflict of interest.”[3]
Why is this important?
With a secret commission (or bribe) the court has a limited discretion and is likely to consider cancelling the contract and awarding compensation (along with restitution to the lender for any benefits received). Where a commission is ‘Half-secret’, the court would have a broader discretion as to the relief it should grant and against whom (in Hurstanger the court decided it would be sufficient to require the lender to pay the borrowers the amount of the commission, plus interest from the date it was paid).
Coming back to Wood v Commercial First Business Limited and Pengelly v Business Mortgage Finance 4 plc the Lenders’ argued that a clause in the broker’s terms and conditions referring to the possibility of a fee being paid, rendered the commissions Half-secret. The clause further provided that if a fee were to be paid, the broker would inform the borrowers in writing in advance. As no such notice was provided, the Court of Appeal concluded the commissions were fully secret. Within the Judgement Lord Justice Richards noted that:-
“… in my view, the broker could place reliance on this term only if it expressly drew the client’s attention to it.”
In Conclusion
A fiduciary duty arises when a broker acts on behalf of their client and as such is required to act in the client’s best interests and not their own. Whether as a result of legal decisions such as Wood v Commercial First Business Limited and Pengelly v Business Mortgage Finance 4 plc and Hurstanger Ltd v Wilson [2007] or the FCA rules at CONC 4.5.3, a fiduciary should not put themselves in a position of conflict or make a secret profit.
Where a broker acts for both the customer and the lender the only way they could act without breaching a fiduciary duty would be if the borrowers had given informed consent. Where the clients are vulnerable and unsophisticated, such as consumers, only disclosure of the actual amount will do.…and this perhaps is the point.
All of these cases relate to brokers whose sole role is to make a profit advising consumers on finance products and assisting in the selection and application process. This is not, generally, what happens in the motor industry. In the motor industry members make a profit when selling the car to the customer. RMI members do not generally provide an independent brokerage for finance products, but only have a limited, sometimes a single lender, to whom a customer applies. Provided the RMI member honestly states that they are not an impartial advisor, but a very partial one acting only for the lender, it is arguable that the existence and amount of any commission does not need to be disclosed and has no actual or potential material impact on the consumers decision to enter into the finance for the purposes of CONC 4.5.3.
As always, this advice is general in nature. How this develops only time will tell. We are still to fully understand the outcome of the recent FCA consultation and the FOS’s willingness to raise these points on ongoing complaints only goes to show that this is a developing area. As an RMI member you have access to the RMI Legal advice line, as well as a number of industry experts for your assistance. Should you find yourself in the situation above, contact us at any stage for advice and assistance as appropriate.
[1] Lord Justice Richards; Wood v Commercial First Business Ltd & Ors [2021] EWCA Civ 471, Para 92
[2] Lord Justice Richards; Wood v Commercial First Business Ltd & Ors [2021] EWCA Civ 471, Para 48
[3] Lord Justice Tuckey; Hurstanger Ltd v Wilson [2007] EWCA Civ 299, para 37
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