Office of National Statistics - Tax Schemes
Andrew Reid | 14.12.2017
31.07.2017 Sarah Watley
A recent High Court case, Commercial First Business Ltd v Pickup & Vernon, considered whether a broker who introduces potential borrowers to a lender owes a fiduciary duty to the borrower and thus should have told the borrower it was receiving a commission, and the amount of that commission.
We acted for Commercial First Business Ltd in this case and in summary, the High Court found that the broker did not owe the borrower a fiduciary duty to disclose the amount of the commission before the borrower entered into the various loan agreements. Additionally, the High Court did not find an unfair relationship under s.140A of the Consumer Credit Act 1974 (CCA). As a result, the borrowers lost the case, as their argument was based on the premise that the broker and the borrower were in a fiduciary relationship, and the lender had assisted in a breach of the broker’s duty to disclose the receipt of a commission paid by the lender.
Many readers will be familiar with the Hurstanger Ltd v Wilson and Plevin v Paragon Personal Finance cases, which the Commercial First Business Ltd v Pickup & Vernon case, would, on face value, seem to be contrary to. Therefore, it’s worth understanding the details in order to get a better feel for the circumstances and when it could apply.
In order to do this you need a brief understanding of the detail. In short, the borrowers, Mr Vernon and Mr Pickup were introduced to the lender, Commercial First Business Ltd, by two different brokers.
The case relates to six secured loans made in 2008, and were subsequently defaulted on. The total value of the loans was £1,096,464 with none of them being Consumer Credit Act regulated. Following the default, receivers for the properties were instructed. Given the prevailing market conditions at the time, the properties were then sold for less than the sums advanced, leaving a substantial shortfall owed to the lender. Commercial First, in line with its contractual entitlement, brought a shortfall recovery case against the borrowers for the remaining debt.
The key point of the case hinged on the fiduciary responsibility a broker has if they are paid commission. The borrowers argued that they had no financial responsibility for the contractual shortfall because there were secret commissions paid by the lender to the brokers without the borrowers’ informed consent. Therefore there was an unfair relationship between lender and borrower, and a failure to obtain a proper price for the properties.
For the record, there were two brokers involved in the loans, both of whom received commission, albeit the exact amount of the commission was only disclosed in the last two loans. The borrowers acknowledged that they knew the commissions were paid for the last two loans, but not the first four, but they also said that, if they had known the amount of the commission, it would have caused them no concern.
The Court was able to distinguish, the previous Court of Appeal’s decision in the ‘Hurstanger case’, where the court noted that the relationship between the borrower and broker was “obviously a fiduciary one”, it clarified the fact that only in specific cases would the broker owe a fiduciary duty to the borrower.
The factors to be considered include the level of contact with the broker and what services the broker was providing, the borrower’s level of sophistication, awareness of how the broker was being remunerated, whether any written contract existed and whether a fee was paid by the borrower to the mortgage broker.
In brief it was this distinction that existed between the Hurstanger case and the Plevin v Paragon Personal Finance where the court did not consider the nature of the relationship between the parties but merely accepted that the relationship was fiduciary in nature.
Ultimately, in the Pickup & Vernon case, the High Court dismissed the borrower’s claim that they were owed a fiduciary duty by the broker and that the amount of commission should have been disclosed to them before they entered in to the loans.
From a legal perspective this ruling is very important for lenders as it helps clarify when a fiduciary relationship exists or doesn’t between the broker and the borrower. Brokers have a different relationship to other financial and professional advisers as they are, more often than not, paid for their work by commission from the lender.
In short this case is good news for both lenders and brokers as it provides clarity and greater certainty in this complicated area of law. Going forward, my view is that good supporting documentation is key because if there is little evidence of what the broker was being asked to do, and if the amount of commission is not disclosed by either the broker or the lender, there is a substantial risk that a Court could look to rescind the loan.