UK: Unfair Relationship Following Non-Disclosure Of Commission Payment

The Court of Appeal has recently had to determine whether the payment of a non-disclosed procuration fee (the Procuration Fee) from a bank to a broker meant that the relationship between the bank and the borrower was unfair under s140A of the Consumer Credit Act 1974 (CCA).

In Nelmes v NRAM PLC, Nelmes, with the assistance of a broker, obtained a loan of in excess of £2 million from the bank secured on 26 properties. Nelmes paid the broker a fee of 0.75% of the sum advanced (£16,112) and the bank a 1% arrangement fee (£21,483). In turn the bank paid half of the arrangement fee to the broker as the Procuration Fee by way of commission. This payment was not disclosed to Nelmes.

Nelmes defaulted and the bank sought to enforce its security. Nelmes brought proceedings alleging that the relationship between himself and the bank was unfair as the broker and bank had colluded to ensure the bank got his business and that they misled him as to the terms of the offer. He alleged he had not been provided with a copy of the offer letter initially so he could not see the terms and how the offer differed from what he actually required. He alleged all the documentation was passed to the broker. The evidence was that the reason for this was that the broker had been concerned Nelmes would use the bank's offer to obtain a loan from elsewhere, jeopardising his fees. Nelmes further alleged that the non-disclosure of the Procuration Fee deprived him of the disinterested advice of his broker.

At first instance the court had held that the payment of a Procuration Fee was not uncommon, and neither was the non-disclosure of it, but that did not mean the bank and broker were misleading the borrower. It found there had been no unfairness.

The Court of Appeal disagreed in relation to the Procuration Fee only and allowed the appeal to that extent. It held that the broker was acting as agent for Nelmes in his dealings with the bank and Nelmes was entitled to the broker's undivided loyalty. Acceptance by the broker of the Procuration Fee was a breach of the duty owed by the broker to Nelmes and was brought about by the bank. The relationship between the bank and Nelmes was unfair due to the bank's non-disclosure of that payment which had deprived Nelmes of the disinterested advice of his broker.

Besides the payment of the Procuration Fee, the Court of Appeal found there was no evidence of any other unfairness in the relationship between Nelmes and the bank or concealment of terms. The non-disclosure of the Procuration Fee did not mean Nelmes was not in a position to assess the value for money offered by the proposed deal.

Nelmes was entitled to damages, being payment of the Procuration Fee paid to the broker plus interest thereon from the date of payment but to no other damages or remedy under s140B CCA.

Things to consider

The borrower in this case was an experienced, commercial borrower borrowing against buy-to-let properties and the court found he was well aware of the terms of the loan. Having considered the various elements of the unfair relationship test as set out in s140A CCA, the court found that there was no other evidence to indicate the relationship was generally unfair.

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