What implications could this recent decision have for lenders?
Background to the case’s
In 2005 Mr Pengelly approached UK Mortgages and Finance Services, a broker, to advise on the refinancing of his current loans. The broker arranged an unregulated mortgage of £81,250 with Commercial First Business Limited (later assigned to Business Mortgage Finance 4 Plc), the lender. Under the arrangement with the broker Mr. Pengelly paid them a fee of £2,954.48, financed by the loan, in addition the lender paid a broker commission on completion of the loan, which totalled 3% of the advance.
Mrs. Wood used the same broker as Mr Pengelly when looking to borrow £1.2m to repay two loans secured on one of her properties in 2006 and again in 2007 when arranging two further unregulated loans for £1.4m and £174,474 from the same lender. Fees were paid by Mrs. Wood on the first and third loan (financed by the loans), the broker having waived the fee on loan number two. In addition to the fees received from Mrs. Wood the broker received 3% of the advance as commission on loan number one and 4% of the advance as commission on each of the subsequent loans from the lender.
Court of Appeal Decision
The Pengelly & Wood cases were sent to the Court of Appeal together, with a decision published on the 31 March 2021 having been heard by David Richards, Males and Elisabeth Laing LJJ on the 11-12 November 2020.
The three key issues raised and determined by the court were:
- Is it a necessary pre-condition that there is a fiduciary relationship between the client and the broker to seek relief against the lender for the payment of the undisclosed commission?
The view of the court was that it was the content of the duty and not the label attached to it that was the point that mattered.
The key point to consider was whether the “payee was under a duty to provide information, advice or recommendation on an impartial or disinterested basis. If the payee was under such a duty, the payment of bribes or secret commissions exposes the payer and the payee to the applicable civil remedies. No further enquiry as to the legal nature of their relationship is required.” In a nutshell it wasn’t whether there was a fiduciary relationship between the parties but the duty for the broker to provide disinterested information to the borrower.
With the view being that there were no requirements for a fiduciary relationship to be established between borrower and broker on this particular point, the focus was whether the broker had a role in the decision-making process and was in a position to influence any decision that was made by the borrower.
The courts position was that the broker needed to provide ‘disinterested advice or recommendations’ to the borrower, in other words to be honest and impartial in relation to the transaction.
The court’s view was that the above applies regardless of whether the broker was putting forward or offering a single product or a range of products. The fact that the broker would have access to a panel of lenders through the course of his business therefore the same criteria applies in relation to providing disinterested advice or recommendations.
- In these particular cases did a fiduciary relationship exist between the clients and broker?
On this point the court found that both Wood and Pengelly held trust and reliance on the broker in the course of the various transactions that were completed. The court found that the broker owed duties to the borrowers in relation to the laws applicable to bribes and secret commissions and on that basis held that the broker did owe a fiduciary duty to the borrowers in completing its duties with them.
- Are the paid commissions categorised as half-secret commissions?
This centres on the wording of the brokers terms of business which included “we may receive fees from the lenders with whom we place mortgages” The terms also stated that before the mortgage was taken out, the broker would tell the borrower the amount of that fee in writing; if it was less than £250, the broker would inform the borrower that it would receive up to £250; if it was more than £250 the broker would disclose the exact amount. In both cases the borrower did not receive any subsequent written notification of the fact or amount of the broker’s commission.
The key factor on this point was the brokers failure to make any disclosure in accordance with the terms of business, this meant that the borrowers proceeded on the basis that no commission was paid. Therefore, this was a case of fully secret commission.
The key take away from this judgement is that the remedy in relation to secret commissions does not necessarily need to be reliant on the existence of a fiduciary relationship. What is clear is the reliance on the existence of the duty by the broker to provide ‘disinterested advice or information’ in relation to the commission that it received in these transactions.
This is a key decision that could have a major impact on lenders and brokers across a broad spectrum of transactions, which will undoubtedly lead to some interesting times ahead!
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