A HIDDEN COST?
COMMISSION CLAIMS AND THE DECISION IN WOOD AND PENGELLY

Walker Morris

We are seeing a growing number of claims by borrowers concerning alleged undisclosed commission payments by lenders to brokers/agents/introducers. If the borrower was not aware that commission would be paid at all, such payments may be classed as ‘secret commission’. If they were aware that commission may be payable but not of the amounts, such payments may be classed as ‘half secret commission’. In both scenarios, the broker and lender may face claims from the borrower.

NO FIDUCIARY RELATIONSHIP REQUIRED IN SECRET COMMISSION CLAIMS
The Court of Appeal confirmed in Wood and Pengelly that a fiduciary relationship between broker and borrower is not a pre-condition for relief against the lender in respect of secret commissions, which the court treats as a form of bribe/special category of fraud. The question is whether the broker owed a duty to be impartial and to give disinterested advice, information or recommendations. This appears wide enough to cover non-advised sales.

Subject to limitation, successful borrowers in such claims are entitled to recover (from broker or lender) the amount of commission paid (without having to show loss) or damages for actual loss suffered as a result of entering into the agreement. Importantly, the borrower is also entitled to rescind the agreement as of right, subject to making any necessary counter-restitution (i.e. returning any benefits received under the agreement).

WHEN IS A COMMISSION ‘SECRET’ OR ‘HALF SECRET’?
In Wood and Pengelly, the borrowers entered into loan agreements and mortgages via a broker. The broker’s terms said that it may receive commission from the lender and the borrower would be told the amount in writing, before taking out a mortgage: if less than £250, the broker would confirm that it would receive up to that amount; if £250 or more, it would tell the borrower the exact amount. The lender paid commission. The borrowers were not informed.

It was argued that the payments were half secret because the terms put the borrowers on notice that a commission might be paid. The court disagreed. The terms imposed an unqualified obligation on the broker to inform the borrower, before a mortgage was taken out, of the fee amount. The only conclusion from the absence of any notification as required was that no commission was to be paid. These were therefore secret, not half secret, commissions.

In Hurstanger v Wilson, the leading authority on half secret commissions, the court described them as a half-way house between a wholly secret commission and one which is sufficiently disclosed to negate secrecy but insufficiently disclosed to obtain the borrower’s informed consent.

The court in Wood and Pengelly stopped short of overruling the conclusion in Hurstanger that a fiduciary relationship is required in such claims. The key difference compared with wholly secret cases is that the court has a discretion to award the most appropriate remedy in the circumstances, which can but will not necessarily include rescission. While Hurstanger is still good law, it remains to be seen how the interpretation of a broker’s fiduciary duty will evolve in future half secret cases.

PRACTICAL STEPS
Lenders and brokers should ensure a joined-up approach to disclosures made through the customer journey and how they are communicated. Risk levels will vary. However, given that in most cases a successful claim is likely to impact the lender’s ability to recover sums due under the loan agreement it would be prudent for lenders to undertake a risk analysis. This included reviewing the individual broker’s customer-facing terms and the lender’s commercial terms in place with their broker network and whether these include indemnity protection.

Notwithstanding that CONC permits half secret commissions provided the customer is furnished with the amount of commission payable on request, in light of these claims it is likely that consumer credit commission disclosure will evolve to mirror the mortgage market in giving full and frank disclosure of the fact and amount of any commission payable.