A judgment by the Court of Appeal yesterday has made it much more likely that borrowers could be compensated if commission paid by the lender to their broker was not fully disclosed to them, according to a law firm.

Moore Barlow represented the owner of loan books originated by Commercial First Business (now in liquidation) in its unsuccessful appeal against two earlier conflicting rulings.

In both cases the borrowers had gone into default and then challenged whether their loans were enforceable due to commissions they did not know about.

One of the earlier cases ruled in the lender’s favour on the basis that there was no contract with the broker and the borrower had not paid a fee therefore they could not have “reasonably expected undivided loyalty”.

In this case it was argued that the borrower would have been aware of the possibility that the broker was earning a commission, even though the amount was not disclosed.

In the other conflicting case the court found in the borrower’s favour, ruling that it was not necessary for there to be a “fiduciary”  relationship between the broker and the borrower in order for there to be an obligation to disclose commission.

While yesterday’s Appeal Court judgment (Wood v Commercial First Business Ltd & Ors 2021) went against the loan book owner, the law firm says it provides much-needed clarity for the industry.

It confirms that both the broker and lender are likely to be liable in cases where commission is not disclosed, which in turn means the mortgage may be unenforceable.

In such cases the mortgage could be rescinded, which would mean that the courts would try to put the borrower back into the position that they would have been had the loan not been taken out.

That is unlikely to result in the mortgage being written off, but it could mean that all the fees and interest earned by the lender would have to be paid back, the law firm explains.

Moore Barlow financial services litigation partner Susannah Marsh says: “This ruling will make it more difficult, albeit not impossible, in future cases to prove that a broker did not owe their customer a duty to provide information and advice impartially, which will in turn expose both the broker and the lender to the applicable civil remedies. 

“Whilst payment of commission is commonplace in the lending industry, the appeal judgment undeniably highlights a vulnerability for lenders who paid commissions to brokers and did not tell the customer.

“The positive we can draw is that the ruling provides some clarity and greater certainty in this complicated area of law.

“We now know that undisclosed commissions leave both lenders and brokers susceptible to claims by borrowers and in cases where the amount of commission is not disclosed by either the broker or the lender, there is a substantial risk that a court will rescind the loan subject to the borrower being able to give counter restitution.”

In these types of cases counter restitution is likely to mean the borrower being able to repay the amount of money originally borrowed minus any charges or gains made by the lender or broker.

Marsh adds: “In circumstances where the borrower cannot give counter restitution the loan cannot be rescinded. 

“Therefore, the focus must now shift to settling these issues and agreeing the figures, rather than getting bogged down in costly and time-consuming arguments about defining the broker/borrower relationship.”