The Court of Appeal recently considered two appeals concerning the payment of commissions by lenders, and the ruling of the Court has caused some serious fluttering in the dovecots. Hailed as providing much needed clarity to the lending industry, it has not been received warmly in some quarters.
Firstly, it's important to stress that there is nothing objectionable to the payment of commissions by lenders to brokers. Commissions to agents and brokers are an everyday fact of life; it's how they make a living. The problem, however, is that in many instances brokers are seen as having divided loyalties particularly where he obtains a broker fee from the client and commissions from the lender.
This is not a new issue and it's likely that further caselaw will be necessary to deal with other problems arising out of this particularly difficult area of common law.
In the appeals before the Court were two decisions of the High Court involving the same broker. In each case the broker had received a fee from the borrower and commissions from the lenders. The broker's terms of business disclosed the fact commissions may be received from the lenders and that the broker would disclose the amount of the commission. The broker failed to disclose the amount of commission received.
Sometime later, the borrowers defaulted on their loans and the lenders started enforcement proceedings. The borrowers, having discovered that commissions had been paid to the broker, brought counter-claims for recission of the loan agreements and for recovery of the commissions as secret profits. They argued that the commissions had been paid without their consent or knowledge - a secret profit.
This is where things get murky. It may seem unfair on the lenders that because the broker failed to disclose the fact he received commissions from them, the borrowers could rescind the loan agreements and effectively cancel their obligations under those agreements. However, the law in this area has been unclear for a while. The High Court had previously given conflicting decisions as to whether civil remedies in secret profit cases only existed where there was a "fiduciary relationship" between the borrower and the broker.
Although the High Court in both cases found that a fiduciary relationship did exist, and this decision formed part of the appeal by the lenders, the Court of Appeal decided that such a relationship was not necessary to find civil liability for the payments of bribes or secret commissions. The Court decided that it was more relevant to consider whether the broker owed a duty of loyalty to the borrower (ie a duty to be impartial and give disinterested advice, information or recommendations), and, if he did, the common and equitable remedies come into play. Those remedies include the broker and lender being liable to pay an amount equal to the amount of the bribe or commission as money had and received or, in the alternative, being liable in fraud to pay damages for any losses suffered by the borrower. The lender may also be liable for recission of his loan agreement (subject to the lender making counter-restitution, if that's possible).
The question then is whether the broker owed a duty to the borrower to provide disinterested advice or recommendations or information. This may depend on the type of broker. In the two appeals before the Court it was found that the broker did owe such a duty - a duty to make a disinterested selection of mortgage products to the borrower - and, as the commissions from the lenders had not been disclosed, the appeals failed. However, whether the duty exists in other cases will very much depend on the facts of those cases. In some cases it may well be the case the borrower is not relying on the broker for advice, so arguably no duty exists.
For most brokers and lenders, the best advice is to be as transparent as possible about commissions and fully disclose the amount of any commissions received. To date many brokers in their terms of business disclose that they may receive commissions and will provide details of amounts received from a lender if requested in writing by the borrower. As a consequence of this new ruling by the Court of Appeal, brokers may want to take a more cautious approach as the only sure way to mitigate the risks is to be as transparent as possible about the commissions they receive from lenders.
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