Specialist law firm Auxillias has published a detailed report for brokers and lenders to provide some support to assess the ramifications of a key Court of Appeal ruling on undisclosed commissions.
The report, produced in association with the International Asset Finance Network, aims to provide some clarity for the industry following the recent Wood v Commercial First Business decision.
Commission is how brokers and dealers make a living. However, in many instances, brokers are seen as having divided loyalties particularly where one obtains a broker fee from the client and commissions from the lender. This is not new and it’s likely that further caselaw will be necessary to deal with other challenges arising out of this particularly difficult area of law.
The case relates to a broker in the mortgage sector who failed to disclose commission to borrowers, which allowed for the recission of credit agreements. In each case the broker had received a fee from the borrower and commissions from the lenders. The broker’s terms of business disclosed the fact commissions may be received from the lenders and that the broker would disclose the amount of the commission. The broker failed to do this. The Court of Appeal decided that a fiduciary relationship was not necessary to find civil liability for the payments of bribes or secret commissions. It established that it was more relevant to consider whether the broker owed a duty of loyalty to the borrower (ie a duty to be impartial and give disinterested advice, information or recommendations), and, if he did, which common and equitable remedies come into play. The question then is whether the broker owes a duty to the borrower to provide disinterested advice or recommendations or information. It is important to note that such a duty may depend on the type of broker and in going forwards brokers should do so work to establish this, which might be something that they need to discuss with their lenders.
In the two appeals before the Court on the facts of the relationship of the broker in this case, it was found that the broker did owe such a duty – a duty to make a disinterested selection of mortgage products to the borrower – and, as the commissions from the lenders had not been disclosed, the appeals failed. However, whether the duty exists in other cases will very much depend on the facts. In some situations it may well be that the borrower is not relying on the broker for advice, so arguably no duty exists.
For most brokers and lenders, the best advice is to be as transparent as possible about commissions. To date, many brokers - in their terms of business and within their practices and procedures - disclose that they may receive commissions and will provide details of amounts received from a lender if requested in writing by the borrower. As a consequence of this new ruling by the Court of Appeal, brokers may want to take a more cautious approach to be as transparent as possible about the commissions they receive from lenders.
The analysis by Auxillias warns: “Brokers would be wise to undertake a review on the impact of this case decision.
“To the lender, the broker must act with the lender’s interest, honestly and openly, but equally to the borrower in ensuring that the recommendations and advice given is fair and balanced and that it is in the best interest of the borrower.”
Auxillias co-founder Jo Davis was a member of an expert panel during a recent IAFN online seminar on the case, which attracted hundreds of delegates from throughout the industry.
Auxillias is currently working with clients looking at the facts of the case versus how brokers in the industry operate in practice. Auxillias have established a framework to assess if a duty exists and to what extent. It is providing advice on the impact of the case, which includes carrying out a review to ensure its clients have the right level of disclosure tailored to their broker practice.
You can download a copy of the Auxillias case review by completing the form below.