A case report on High Court’s decision on fiduciary duties in the context of broker introducer credit in Commercial First Business Limited v Pickup & Vernon (2016), Unreported, Manchester District Registry, 6th December 2016.
The lender was non-standard provider of secured commercial loans. Between May 2007 until February 2008, the lender made five secured loans jointly to the borrowers (who were experienced property investors). The total amount lent to both borrowers was £1,032,714. Another secured loan of £63,750 was made just to Mr Vernon. None of the loans were regulated agreements for the purposes of the Consumer Credit Act 1974 (the CCA).
The borrowers were introduced to the lender by brokers, Select Finance Limited and Active Mortgage Management. The lender paid commissions on each of the loans of between 2 and 4% of the amount of the loan.
Following the Court of Appeal’s decision in Hurstanger Limited v Wilson & Another  EWCA Civ 299, the lender decided to disclose the amount of the commissions in its loan documentation. But for the earlier four loans, the documentation simply stated that a commission would be paid (but did not say the amount).
The borrowers acknowledged that they knew the commissions paid for the last two loans, but not the previous four. They also said that if they had known the amount of the commission it would have caused them no concern.
The borrowers' mortgage accounts fell into arrears and receivers were appointed under the Law of Property Act 1925 over all the jointly owned properties. The properties were sold but a shortfall was left.
The lender brought a claim against the Mr Pickup of £1,267,944 and against Mr Vernon of £1,342,577.79. The borrowers accepted the monies were owed but argued they did not have to pay because:(a) the loan agreements should be rescinded (without the need to repay the loan) because secret commissions were paid by the lender to the brokers without the borrowers’ informed consent (relying on the Court of Appeal’s decision in Hurstanger Limited v Wilson & Another  1 WLR 2351 at para 38);
(b) there was an unfair relationship within the meaning of Sections 140A to 140C of the CCA (the unfair relationship provisions) because of one or more of the factors listed in Section 140A(1) of the CCA;
(c) there was a failure to obtain a proper price for the properties because the lender directly interfered with the sale of the properties.
For the purposes of this note, we will focus on the borrowers’ claims that:-
(a) they were entitled to rescind the loan agreements because of the payment of commission to Select Finance Limited (who allegedly owed the borrowers a fiduciary duty); and
(b) the relationship between the parties was unfair under the unfair relationship provisions because of the payment of an undisclosed commission.
There were three issues for HHJ Raynor QC to decide:-
(1) to what extent, and if at all, there was disclosure of the commissions;
(2) whether the relationship between the borrowers and Select Finance Limited was a fiduciary relationship; and
(3) whether the payment of a commission to Select Finance Limited was a secret commission.
HHJ Raynor QC also had to consider whether to follow the Court of Appeal’s decisions on these points, or whether he could distinguish those decisions and follow a line of carefully considered county court decisions by respected circuit judges.
The Court of Appeal's decision in Hurstanger Limited v Wilson & Another  EWCA Civ 299, where the Court noted that the relationship between the borrower and broker was "obviously a fiduciary one", has undoubtedly caused significant difficulties for the development of the law on secret commission.
However, there have been a number of carefully considered decisions by respected circuit judges in the county court where the court has distinguished Hurtstanger by expressly noting that it had been decided on the basis of a concession (see Yates and Lorenzelli v Nemo Personal Finance & another, (unreported), 14 May 2010, (Manchester Count Court), Flanagan v Nemo Personal Finance, (unreported), 5 August 2011 (Manchester Count Court) Sealey and Winfield v Loans.co.uk and GE Money Ltd, (unreported), 15 August 2011, (Mold Count Court)). In those county court cases, it was decided that only in unusual cases would the broker owe a fiduciary duty to the borrower. The factors considered in those cases included:
The position established in those county court decisions took a backward step when the Court of Appeal, in McWilliam v Norton Finance (UK) Ltd t/a Norton Finance (in liquidation)  EWCA Civ 186, followed Hurstanger (considering it was bound by the earlier decision) without recognising that this issue had been conceded. Unfortunately, once again, no argument was heard on the point on the basis that the broker was in liquidation and unrepresented. The Court of Appeal however did state this case was a "very unsuitable vehicle" to determine issues of principle.
The principle that the broker acts as fiduciary agent for the borrower was given further weight by the Court of Appeal's decision in Nelmes v NRAM plc  EWCA Civ 491. The Court of Appeal referred to the "classis principles" in Hurstanger, as well as the broker's duty of "undivided loyalty". There was, once again, no recognition that the decision in Hurstanger was founded on a concession and no argument had been heard on the point in any of the Court of Appeal's decisions.
Whilst the Supreme Court in Plevin v Paragon Personal Finance (1) Limited  UKSC 62 did not consider Hurstanger, it observed that the way that the broker was remunerated was "…an almost universal feature of the business, and it is of the utmost legal and commercial importance to maintain the principle that the source of the commission has no bearing on the identity of the person for whom the intermediary is acting or the nature of his functions."
HHJ Raynor QC dismissed the claim for rescission and damages on the basis of the undisclosed commission payment to the broker on the basis that:-
The court correctly noted that in Hurstanger the issue of a fiduciary relationship had been conceded and referred to the county court decisions in Yates, Sealey and Buckingham.
The court referred to the absence of any written contract and broker's fee (excluding the first loan) and concluded that the broker's involvement had simply involved receiving a quotation and submitting the loan application forms to the lender.
The court also decided that because the fact of commission was disclosed, it could not see how the borrowers could have "reasonably have expected undivided loyalty”.
The court found that the broker was not the borrowers’ agent and did not owe a fiduciary duty. The borrowers therefore had no entitlement to relief.
The court decided that the commission payments did not make the relationship unfair on basis that:
This is a very positive decision for lenders following a number of frustrating Court of Appeal decisions where it has been conceded, or assumed, a fiduciary exists between a broker and a borrower. It is another carefully considered decision in the lower Courts by a respected Circuit Judge, and indicates once again that where submissions are considered on the issue, the Court will often distinguish the Court of Appeal’s decision in Hurstanger. This decision marks the highest level of Court to distinguish the decision in Hurstanger to date and will hopefully lend encouragement to the lower Courts to do so.
This is plainly the right approach. It cannot surely be sensibly argued that any broker always owe a prospective borrower a fiduciary duty. If this were right, then every time a borrower approached a broker to source a loan there would be an obligation of undivided loyalty. This would cover situations like motor dealers, online brokers, face-to-face brokers and other intermediaries. Unlike an independent financial adviser, those brokers will often provide no evidence, will not charge for their services and often provide no advice. If those brokers owed borrowers a fiduciary duty, this would go beyond their obligations in the FCA’s Handbook. For example, Rule 4.5.4 of the Consumer Credit Sourcebook (CONC) only requires a credit broker to disclose the amount of a commission where the prospective borrower asks it to do so before entering into a regulated credit or consumer hire agreement. If credit brokers always owed a fiduciary duty, CONC 4.5.4R would misleadingly mis-state the law.
It is also interesting that the Court decided that the existence of a “half secret” commission prevents a fiduciary duty from arising. This is contrary to all the reported ‘secret commission’ cases in which relief has been granted involving half secret commissions. This issue has historically been approached by the Court's as being relevant to the nature of relief that may be granted, rather that the issue of whether a fiduciary duty is owed.
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