This case has ruled on last week following an appeal bought by Mortgages For Business.
The case was about the payment of commissions by a lender to a broker and where that left the responsibility of the broker and the lender. In essence, if the lender pays a commission to the broker, does the broker then have a duty of care to the borrower given the borrower hasn’t paid them and should that duty of care be between the broker and the lender.
This case follows a ruling in Commercial First Business Ltd v Pickup & Vernon where the High Court ruled that a fiduciary duty didn’t exist and that a borrower could not have “reasonably expected undivided loyalty” from the broker given they did not have a contract with the broker or pay them a fee for their services.
The court also ruled that the borrower was aware that the possibility of the payment of a commission from lender to the broker existed.
The case came about following two borrowers defaulting on their mortgages then seeking to have the agreements rescinded because of the commissions being paid and where responsibility lay. In each case it was argued that a ‘secret commission’ was paid by the lender to the broker and because of this the broker had a ‘duty of loyalty’ to the borrower.
Two Clients, Two Loyalties
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.
In reality, it is good practice for a broker to be transparent and if there is an underlying message here it is about transparency.
Most good brokers will look at the options and make the right recommendation for the client, not all will fully disclose what they may be paid. They should.
For the broker, there are always two loyalties. To the lender there is the need to be open, honest and act with their interests in mind. To the borrower, it is about looking at the options, being fair and making a balanced recommendation. For any broker that doesn’t see both sides, it is time they did something different.
The appeals court was asked to rule on three questions;
- 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, summarised this as:
“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.”
Whichever way you look at this, it brings us back to transparency.
Whatever financial service you are taking advice on remember that transparency should exist. For a borrower, you will always be liable for what you borrow and responsible for what you commit to, there is no easy get-out clause here.
The key message. If you are using a broker then they should be transparent with you about what they get paid. There is nothing wrong with being paid commissions, it happens in everyday life all the time, just be open about it.
By Dave Farmer