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By Andrew Evans 01 Oct It is common practice for lenders to pay a commission to brokers, but issues can arise if that commission is not disclosed to the borrower. This briefing paper is a general introduction to the subject, outlining the position following Wilson v Hurstanger Ltd  EWCA Civ and subsequent cases and highlights some traps for the unwary.
If it is clear from the documentation between the borrower and the lender or the borrower and the broker that the broker is the borrower's agent, it is likely that there will be a fiduciary relationship between broker as agent and the borrower. In this the office of fair trading oft 2011 guidance for credit brokers and intermediaries, the broker would be under a duty to the borrower not to make a secret profit, as this would constitute a breach of fiduciary duty and could also be treated as a special category of fraud in which it is unnecessary to prove motive, inducement or loss, up to the amount of the secret profit effectively treating it as a bribe.
The borrower in this situation would have alternative remedies against both the briber i. In addition, the transaction is voidable at the election of the principal i. If the broker is not paid a fee by the borrower and there is no written contract between the broker and the borrower, it is highly unlikely that there will be an exclusive agency agreement or fiduciary duty between the broker and the borrower. Further, if no fee is paid by the borrower to the broker and any agreement between the broker and the borrower does not state that the broker is the borrower's agent, it is also highly unlikely that there will be a fiduciary relationship between the broker and the borrower.
Wilson v Hurstanger The office of fair trading oft 2011 guidance for credit brokers and intermediaries held that in circumstances where a borrower was advised that his broker might receive commission from the lender, this may be considered to be sufficient disclosure to negate secrecy. This will not however constitute informed consent on the part of the borrower. Consequently, the court ruled that unsophisticated borrowers should be provided with a statement of the amount that the broker will receive from the lender in order that they are aware of any potential conflicts of interest that may arise.
Sealey and Winfield v Loans. This case established that while brokers owe a duty to their clients to act in their best interests and introduce them to a lender who will give them a good deal on the financial accommodation they are seeking, this does not result in them pledging their individual loyalty and hence give rise to a fiduciary duty.
Their obligation is to do no more than fulfil their contractual duty to act in their clients' best interests. In that case the lender's documents said that commission was paid to brokers, but did not define the broker as being the borrower's agent. He was simply acting as an intermediary under the terms of his contract. The court also said that even if the broker had been acting as a fiduciary, the borrowers had given informed consent to the commission even though the amount of such commission had not been disclosed.
It follows that unless the broker is clearly defined as the borrower's agent, the relationship between the parties will be on normal contractual principles and no fiduciary relationship will exist. Moreover even if commission is paid, it will not necessarily be secret even if the amount is not quantified, provided the commission arrangement is brought to the attention of the borrower.
Black Horse Limited there was an appeal by the borrowers that the non-disclosure of the sizeable commission created an unfair relationship under sections A and B of the CCA. This section applies to any credit agreement between a lender and an "individual" whether or not regulated by the CCA. The Court of Appeal unanimously held that the taking of undisclosed commission, no matter how big or small, does not of itself create an unfair relationship.
The case made clear that there is no obligation on a lender or intermediary to disclose the amount of the commission and any failure to do so cannot create an unfair relationship. The Finance Industry Standards Association's Borrower Guide clearly records the fact that a commission will be paid to the broker. If it can be shown that the borrower received a copy of this Guide, this the office of fair trading oft 2011 guidance for credit brokers and intermediaries sometimes satisfy the Court that the requirements for disclosure have been met.
The COBS inducement provisions apply to payments, fees or non-monetary benefits regardless of materiality. There is a requirement that a fee, commission or non-monetary benefit, where paid or provided to or by a third party, must be designed to enhance the quality of the relevant service to the client. A firm must disclose to the client the existence, nature and amount of the fee, commission or non-monetary benefit or the essential details in summary form, and must undertake to provide further information at the request of the client.
A person who introduces "individuals" which includes partnerships of 2 or 3 persons to businesses providing credit is likely to be a "credit broker", which is an activity regulated by the CCA. The Office of Fair Trading the " OFT " published guidance for credit brokers and credit intermediaries in November the " OFT Credit Broker Guidance " which includes guidance upon fees received by a credit broker both from the borrower and from the creditor.
The OFT indicate that a reason to call into question a credit broker's fitness to the office of fair trading oft 2011 guidance for credit brokers and intermediaries a CCA licence includes if the broker fails to make to the borrower sufficiently full and early disclosure of the existence of any commission fee or other form of remuneration payable by the creditor when appropriate to do so.
The OFT would regard it as appropriate to do so if the existence of the commission might potentially impact on the impartiality of the broker in terms of the credit products it promotes to a potential borrower.
If a borrower asks, the broker must inform the borrower of the amount of the commission or, if not ascertainable, the method of calculation. This does have an impact on the creditor. The OFT Credit Broker Guidance makes it clear that the OFT expects creditors to take appropriate responsibility for the actions or omissions of brokers acting as their agents or business associates. Whether a broker is an agent or business associate of a creditor is a question of fact and degree, but is likely that the broker will be at least a business associate of the creditor if the creditor and the broker have an ongoing relationship.
The OFT expects a creditor to take reasonable steps to satisfy itself that such brokers are not engaging in unfair business practices. There are serious consequences for a creditor if it fails to take such steps: It is therefore concluded that claims against lenders and brokers for paying secret commissions can only be successful if a fiduciary relationship exists between the broker and the borrower.
A fiduciary relationship is highly unlikely to exist unless: Private Banking and Wealth Management. Home Publications Alerts and Articles Does a lender have to disclose commission paid to broker?
Publications Does a lender have to disclose commission paid to broker? When is default interest penal? A Chink in the Corporate Veil? The office of fair trading oft 2011 guidance for credit brokers and intermediaries the broker an agent of the borrower? Wilson v Hurstanger Ltd Wilson v Hurstanger Ltd held that in circumstances where a borrower was advised the office of fair trading oft 2011 guidance for credit brokers and intermediaries his broker might receive commission from the lender, this may be considered to be sufficient disclosure to negate secrecy.
UK Ltd 1 and GE Money Secured Loans Ltd 2 This case established that while brokers owe a duty to their clients to act in their best interests and introduce them to a lender who will give them a good deal on the financial accommodation they are seeking, this does not result in them pledging their individual loyalty and hence give rise to a fiduciary duty. Ideally, the lender should therefore consider: Related Sectors Financial Services.