Does a credit broker owe a borrower a fiduciary duty?
The Court of Appeal have recently clarified the duties owed by credit brokers towards borrowers in the case of McWilliam & McWilliam v. Norton Finance (UK) Limited T/A Norton Finance (in liquidation).
Mr & Mrs McWilliam were seeking a loan of £25,000 in order to refinance existing debts and to fund the building of a conservatory for their house. Norton arranged a loan on their behalf of £25,500 from Money Partners Limited. They also opted for payment protection insurance (PPI) and the premium of £3,745 was added to the loan. Mr & Mrs McWilliam had to pay Norton a broker fee of £750 and a completion fee of £500. Two further commissions were paid to Norton out of the total amount advanced, one being £2,675 paid by Money Partners and a second commission of £1,685.25 paid to Norton by the insurer providing the PPI, Pinnacle Insurance. A further commission of £659.84 was paid by Pinnacle to Money Partners. Accordingly, 18.4% of the amount advanced represented fees or commissions. The loan was paid in full in 2007.
Proceedings were commenced by Mr & Mrs McWilliam in August 2009 in the Chester County Court for a variety of relief from Money Partners and Norton, including a claim that Norton should account to them for the two additional commissions which they had received. The matter proceeded to a trial in May 2011, by which time Money Partners had gone into liquidation. At the trial, the claim was dismissed, the Recorder finding that the commissions had not been received by Norton but by a Jersey based company, Fintel Limited. Further, the Judge found that there was no contract between Mr & Mrs McWilliam and Norton.
Norton went into liquidation in January 2013. Mr & Mrs McWilliam decided to continue with their appeal and if this was successful, to seek payment of compensation from the Financial Services Compensation Scheme.
Mrs McWilliam received a flyer from Norton when she and Mr McWilliam were thinking of taking out a loan and so she telephoned Norton. Norton took information from Mrs McWilliam, which included whether she was interested in receiving details of PPI and Mrs McWilliam then received a pre-populated application form which she returned to Norton. This form included a declaration that Norton would receive commission from the lender if the loan completed and that Mr & Mrs McWilliam consented to Norton retaining the commission. Mrs McWiliam was sent a copy of the Borrower Information Guide which included information regarding the payment of commissions. Mrs McWilliam subsequently had a telephone conversation with Norton who advised her that the only loan available was from Money Partners and that only one PPI product was available. Mrs McWilliam was sent additional documentation which included a demands and needs statement which stated that "This is an information only sale".
Lord Justice Tomlinson found that the task of Norton was to identify the lender willing to lend to Mr & Mrs McWilliam on the most advantageous terms to Mr & Mrs McWilliam, which would likely mean the lender offering the most competitive interest rates, although there could be other factors. In addition, Norton also had to identify an insurer willing to offer PPI in respect of the loan. Mr & Mrs McWilliam paid Norton a broker fee of £750 for performing this service, which Tomlinson LJ characterised as a contract of agency.
Tomlinson LJ found that Mr & Mrs McWilliam were not borrowers with impaired or low credit ratings who would find it difficult to obtain finance from traditional sources on normal terms and conditions but neither were they financial sophisticates; they were people of relatively modest means with a history of credit problems and were vulnerable in that they had debt and were trying to ease the burden of servicing this by way of the loan. Furthermore, he stated that Norton should not have placed itself in a position where its duty and its interest might conflict, nor profit out of the trust reposed in it to get the best possible deal, nor act for its own benefit without Mr & Mrs McWilliam's informed consent.
Furthermore, it was held that Norton implicitly told Mr & Mrs McWilliam that the terms offered by Money Partners were the most competitive to which they had access; although this did not amount to a direct recommendation of suitability, it was an indication that what was being offered was the best possible deal. As a result of all these factors, it was found that there was a fiduciary relationship between Norton and Mr & Mrs McWilliam, even though Mr & Mrs McWilliam were not necessarily looking to Norton for any advice or recommendation.
The court found that despite what was said in the various documentation sent to Mr & Mrs McWilliam, these materials did not adequately alert them to the possibility that Norton might receive a commission in respect of the loan in additional to the agreed broker fee and the agreed completion fee. Whilst Mr & Mrs McWilliam were aware of the possibility of a commission based on a proportion of the premium of the PPI, the court decided that they did not give their informed consent to Norton receiving an additional commission comprising 45% of the PPI premium. In particular, the court noted that the critical point was that Mr & Mrs McWilliam were not told how much commission would be paid.
As a result, the appeal was allowed. Norton was ordered to account to Mr & Mrs McWilliam for the additional commissions received in the sum of £4,360.25 plus interest at 5% since the date of the completion of the loan.
As a result of this unopposed appeal, it is likely that brokers and lenders are likely to see an increase in claims against them.
Should you require any further assistance in relation to similar scenarios, please contact me.