The recent Court of Appeal ruling has provided greater clarity on the circumstances under which undisclosed commissions paid by lenders to their brokers will be deemed illegal.
However, lawyers said it also exposed a ‘vulnerability’ for lenders who paid commissions to brokers and did not tell the customer.
The case
It comes following the ruling in Wood v Commercial First Business Ltd & Ors [2021] EWCA Civ 471 last week.
Lord Justice David Richards, presiding over the hearing, confirmed, when considering a case where a fully secret commission was paid by a lender to a broker, it was not necessary for there to be a strict legal duty owed by the broker to the borrower for the court to render the loan unenforceable.
Instead, they must consider whether a ‘duty of loyalty’ was owed by the broker to the borrower. If such a duty existed, the payment of a secret commission would expose both lender and broker to applicable civil remedies, including cancelling the mortgage agreement and liability for damages to the borrower.
The appeals, brought by Business Mortgage Finance, concerned two cases where borrowers defaulted on mortgage payments and subsequently sought to have the mortgages rescinded.
In each case, the borrowers argued that commissions were paid by the lender to the mortgage broker, UK Mortgage and Financial Services Limited, without their knowledge or consent – a secret commission
The law surrounding the payment of secret commissions has been in a state of flux following two conflicting High Court judgments handed down in Commercial First Business Ltd v Pickup & Vernon [2017] CTLC and Wood v Commercial First Business Ltd (in liquidation) [2019] EWHC 2205.
In the Pickup and Vernon case, the High Court was persuaded that there was no fiduciary duty on the basis the borrowers could not have “reasonably expected undivided loyalty” as they did not have a contract with the broker or pay them a fee for their services. What’s more they were aware of the possibility of the payment of a commission.
However, the judge in the recent Wood case ruled it was not necessary for a fiduciary relationship to exist between the broker and borrower for there to be an obligation to disclose commissions received from the lender.
It was hoped that the recent appeals would provide some much-needed clarity for the lending industry following conflicting High Court decisions.
The appeals asked for the following three questions to be considered by the Court of Appeal:
- Is a fiduciary relationship between the buyer 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 buyer and the broker in these cases?
- Are the commissions that were paid properly categorised as half-secret – when the broker makes clear that it may receive a commission but doesn’t disclose the exact amount?
Susannah Marsh, financial services litigation partner at law firm Moore Barlow, acted for the appellants.
She said: “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.”
Claims from borrowers
Marsh said it was positive some clarity and greater certainty could be drawn in this complicated area of law.
She added: “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 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.”
Clarity
Whilst both appeals were unsuccessful, the Court of Appeal decision offers some clarity as to what needs to be established when considering claims relating to the payment of secret commissions or bribes.
The decision confirms that it is not necessary for there to be a fiduciary duty in the strict sense but a duty of ‘loyalty’. The presiding Lord Justice David Richards clarified that the 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 – the parties who committed the wrongdoing – 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.
The Court of Appeal also upheld that, the commissions paid by the lender to the broker were fully secret commissions on the basis that a general term in the Broker’s terms of business stating that commission may be received was not sufficient to negate secrecy.
The Judgment also confirmed that if the bribe or secret commission is a “half-secret commission” case it is necessary for there to be a fiduciary duty, but that would only need to be a fiduciary duty of loyalty.
Stuart Cutting of Three Stone, junior counsel for the appellants, echoed Marsh’s comments and added: “This is a significant judgment and clarification of the law for the lending industry and something that has been eagerly awaited.
“This will now allow lawyers to better advise their clients following the clarification by Lord Justice David Richards.
“Whilst a complex review of the relationship between the broker and the borrower was actively discouraged by the Court, there will be specific cases arise where the terms of engagement of the broker require a proper consideration as to the duties owed by the broker to the borrower.
“However, as Susannah says in most cases the focus must shift to settling the issues of remedy and agreeing figures for counter-restitution.”
