Examining Court of Appeal judgments give an insight into mortgage broker and customer relations and the duty of the broker.
Wood v Commercial First Business Limited/Business Mortgage Finance 4 PLC v Pengelly  EWCA Civ 471 (31st March 2021)
The Court of Appeal (CA) has recently attempted to reconcile conflicting lower court decisions in the line of cases leading back to its own judgment in Wilson v Hurstanger Ltd  EWCA Civ 299.
As anyone familiar with the intermediated finance market will know, Hurstanger set a benchmark for claims based on the allegation that a commission payment made to a broker by a lender should be treated as a ‘secret commission’. Essentially, unless the customer had received full disclosure of the nature and amount, and given consent to it being retained by the broker, the payment should be treated as equivalent to a ‘bribe’. If that were the case, the customer could potentially rescind (unwind) the loan agreement and/or require the funder to pay the amount of the commission to them
This decision opened up previously unrecognized differences between secret and half-secret commissions, based on limited disclosure of the commission (essentially, disclosing the fact that it would be paid, but not the amount). However, one thing at least seemed clear; the need for there to be some form of ‘agency or other fiduciary relationship’ between the customer and the broker, as part of which the latter owed the former a duty to make full disclosure and seek consent to accept the payment.
Much of the clarity this ruling brought to the consideration of Hurstanger claims has now been swept away. In fairness, the application of the ruling was not always easy. Indeed, the two cases in which the CA has now given judgment represented conflicting approaches to the question of whether the necessary ‘agency or other fiduciary relationship’ existed on the facts. However, at least the need for a definitive ‘relationship’ to exist was a start, even if there was some residual uncertainty about when that might be the case.
In Wood, the CA have now decided that there is no requirement for an ‘agency or other fiduciary relationship’ to exist. In many cases, such a relationship may exist, but it is not a pre-requisite to the application of the law on the treatment of ‘bribes’, which in civil cases is certainly not limited to payments made with any corrupt intention. Instead, the real question is whether the broker 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.
If the duty does exist, then it is a fiduciary duty; hence the remedies for rescission of the loan and/or recovery by the customer of the ‘bribe’ from the lender will apply automatically to any complete failure to disclose.
The CA also confirmed the application of the Hurstanger approach to partial disclosure. Accordingly, it is still the case that disclosing the fact, but not the amount of the commission, will not automatically engage the same remedies as a total failure to disclose. Instead, a court will be able to make such order as it thinks fair in the wider context of the making of the payment.
Unfortunately, this all immediately begs the question of when and how such a duty comes into existence, not least because the CA spent much of the judgment analysing the duty in terms of cases involving fiduciary and agency relationships, with frequent references to need to interpret such things “in a wide and loose sense”.
It still clear from the judgment that the duty must be owed as a result of the nature of the relationship between the broker and the customer. It is also clearly implicit in the judgment that not every relationship between a broker and a customer will give rise to such a duty; if the CA had felt that to be so, it would have been easy to say as much.
However, beyond saying that the relationship did not necessarily need to be technically defined in law as an ‘agency or fiduciary relationship’, the CA have given us few clues as to where to draw the line between those relationships which do impose the relevant duty and those which don’t. As a result, it is likely that further litigation will follow in an attempt to clarify the issue.
What should lenders take note of
In the meantime, lenders can only look to the underlying facts of the two cases for guidance. In both, the same mortgage broker was formally appointed by the customer in writing, on terms which stated that:
- the broker was instructed to ‘endeavour to re-structure/re-negotiate [the customers’] existing finance arrangements and provide ongoing advice’;
- it would be ‘acting on [their] behalf‘, to ‘enable [them] to select the appropriate lender and mortgage product to meet [their] individual circumstances and needs’;
- it had authority to contact their ‘Bank, Accountant, Solicitors, past or present employer or any other person regarding information which may be required to fulfil [its] instructions’;
- it would provide the customers with ‘information relevant to [their] mortgage needs’;
- it would be giving them ‘appropriate advice’ on their ‘mortgage requirements‘;
- that ‘advice‘ would be confirmed in writing;
- it had ‘full authority to negotiate on [their] behalf’;
- it would be paid a substantial fee for its services by the customer; and
- any fee that it received from a lender would be disclosed.
Given this factual nexus, it is easy to see why the CA felt in both cases that the broker was under a duty to ‘provide information, advice or recommendation on an impartial or disinterested basis’, regardless of whether the relationship could technically be categorised as being of an agency or fiduciary nature. It is also reasonably clear from the judgment that any relationship based on similar facts would inevitably give rise to the relevant duty.
What remains unclear is whether, and if so the extent to which the judgment should be taken to have implications for broker/customer relationships based on substantially different facts. Looked at objectively, there is nothing in the judgment to suggest that the CA considered that they were doing anything more than releasing cases of this nature from the straightjacket of needing to establish an agency or fiduciary relationship. This would in itself suggest that the judgment should be taken very much on the facts of the cases themselves, rather than being intended to set any wider ranging precedent
That said, it would be surprising if disgruntled or impecunious customers, or perhaps CMC’s looking for a substitute for PPI claims, do not try to argue that the judgment is of general application to all areas of the intermediated finance market, including areas as diverse as retail HP and business leasing. There are good grounds to argue otherwise, but that doesn’t mean they won’t try!
For more detailed advice on the issues set out in this note, please contact Richard Humphreys.
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