Locke Lord

Legal News | 22/07/21

The failure by a broker to disclose to a borrower that the lender will be paying commission to the broker can in certain circumstances enable the borrower to unwind the loan, without having to pay interest and the lender having to pay the commission to the broker.

In March 2021, the Court of Appeal lowered the bar for borrowers seeking such relief.

The appeal raised three issues: (i) Is a fiduciary relationship between borrower and broker a necessary pre-condition for the grant of relief against the lender? (ii) Did a fiduciary relationship exist between the borrower and the broker? (iii) Are the commissions that were paid ‘half-secret commissions’ (i.e. where the borrower knows that a commission may be paid but not the amount)?

The CoA confirmed that it is not necessary to establish a fiduciary relationship where the broker is under a duty to provide information, advice or recommendation on an impartial or ‎disinterested ‎basis.

On the broker’s terms and conditions and the court’s findings of fact, the broker “…was under a duty to make a disinterested selection of product to put to its clients in each case”.

‎The borrowers knew, or would have known, had they read the broker’s terms of business, that the broker might be paid fees by the lender. The borrowers were not told the amounts.

Where commission is half-secret, the court has a discretion to award the most appropriate remedy, which could (but would not necessarily mean) unwinding the loan.

The broker’s terms and conditions stated the broker “may” receive fees from lenders and the broker “will” tell the borrower of any such amount. The Court concluded that these terms “…imposed an unqualified obligation on the broker to inform the borrower, before a mortgage was taken out, of the amount of the fee”.

The court held that, absent the required notification, the borrowers did not know that commission might be paid and were entitled to conclude that no commission was to be paid.

This decision is a reminder to lenders of the need to ensure that any commission payable to a broker is adequately disclosed to the borrower.

If a broker is under a duty to provide information, advice or recommendations on an impartial or disinterested ‎basis and fails to adequately disclose commission payable by a lender, a court may unwind the loan with the result that: (i) the borrower will have to repay the loan to the lender (without interest); (ii) the lender will have to repay any payments made by the borrower together with the commission paid by the lender to the broker.

Lenders should: (i) review their process to ensure that any commission payable to a broker is adequately disclosed to the borrower; and (ii) consider whether their trading agreements with brokers afford adequate protection (e.g. by way of an indemnity) should a borrower claim rescission following a broker’s failure to disclose.

The decision related to a secured loan but applies to all credit, including hire purchase, leasing, conditional sale (and is not limited credit is regulated by the Consumer Credit Act).

Kevin Heath
Partner, Head of Banking Litigation (UK)
Locke Lord LLP