Going for the broker

4th May 2021

“If a broker has the duty to offer impartial advice, information or recommendations as to the product, they must disclose their commission.  If they do not, then the remedies available to the borrower arising out of the law relating to bribes and bribery will apply.”

The Court of Appeal has recently upheld two High Court decisions in which the High Court found that borrowers could set aside loan agreements obtained through the services of brokers who the lender had paid a secret commission.

Over twenty years ago the Court of Appeal summarised fiduciary duties by saying that:
A fiduciary is someone who has undertaken to act for or on behalf of another in a particular matter in circumstances which would give rise to a circumstance of trust and confidence.  The distinguishing obligation of a fiduciary is the obligation of loyalty.  The principal is entitled to the single-minded loyalty of his fiduciary. … A fiduciary must act in good faith; he must not make a profit out of his trust; he must not place himself in a position where his duty and his interests may conflict; he may not act for his own benefit or the benefit of a third person without the informed consent of his principal.”

An agent who receives a payment from a third party without the informed consent of their principal will be in breach of the fiduciary duty owed to that principal.

In both cases the brokers’ terms and conditions said that they might receive a commission or fee from a lender. In the first case the brokers said that they would notify the borrower if they received more than £250. In the second case they said that if the commission was under £250 the borrower would be told that commission up to that level had been paid and if it was more than £250 then the borrower would be told the exact amount of the commission.

The High Court’s judgement

In the first case the Judge decided that the broker’s terms amounted to an implied representation and if nothing was said to the borrower about commission being received, she was entitled to assume that the lender had paid no commission.  In the second case, the Judge held that the broker was in a fiduciary relationship with the borrower.  In neither case was the borrower informed about the commission received from the lender.

In each case the High Court’s judgment was in favour of the borrower; in the first case the lender was ordered to repay the borrower the amount of the undisclosed commissions paid by it to the broker and also the mortgages which had been entered into were rescinded.  In the second case, the court came to a similar conclusion; the Judge decided that the payment to the broker was a fully secret commission or bribe.  Furthermore, the lender knew of the facts that gave rise to the broker’s status as a fiduciary but did not disclose the commission that it was paying to the broker.  The mortgage was rescinded.

The lenders appealed in both cases but were unsuccessful.  The Court of Appeal concentrated on the law relating to bribes rather than to the fiduciary relationship.  The term ‘bribe’ was considered in a much wider context than the man in the street would think of it i.e. as a corrupt payment.  The Court of Appeal decided it would include any payment or gift made to an agent as an inducement that was not disclosed to his or her principal.  It was said by the Court of Appeal that a judge would not look into a payer’s motives in making the payment or allow evidence as to motive to be given.  The court would presume in favour of the principal that the payment influenced the agent and that presumption was irrebuttable.

The Court of Appeal’s response

The Court of Appeal said that earlier cases made it clear that bribery is an actionable wrong both at common law and in equity and that meant rescission of a contract was available as one of the possible remedies that the court could give.  In giving its judgment the Court of Appeal said that where a broker who has provided advice or recommendations has received or been offered a commission, the issue for the court was whether that broker had a duty to be impartial in giving advice, information or making a recommendation.  If the answer to that was in the affirmative, the borrower would be entitled to the remedies applicable to cases of bribery if the broker failed to inform him or her of the commission which he received.  If that was the case, the court did not need to inquire further into their relationship’s legal nature.

The Court of Appeal said that in each of the cases the terms and conditions of the brokers meant that they owed duties to the borrowers.  They should have made an impartial judgment in deciding which mortgage product to recommend to the borrower.  The Court of Appeal decided this was the principal feature; if the broker is subject to a duty to give impartial advice, information, or recommendations as to the mortgage product, they have to disclose their commission.  If they do not, then the remedies available to the borrower arising out of the law relating to bribes and bribery will apply.

If you have any concerns about bribery or advice given by a broker, we’re here to help – get in touch.

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