The Court of Appeal has handed down judgment today in the conjoined appeals of Wood v Commercial First Business Ltd & ors and Business Mortgage Finance 4 plc v Pengelly [2021] EWCA Civ 471, in a significant decision on broker secret commission.
David Richards LJ gave the lead judgment (with which the others agreed), dismissing the Assignees’ appeal.
Factual Background
In both cases the original creditor was Commercial First Business Ltd (“CF”) and the broker was UK Mortgages and Financial Services Ltd (the “Broker”).
In both cases the mortgages were subsequently assigned to third parties (the “Assignees”).
Wood
There were two mortgages (May 2006 and July 2007) secured on the borrower (“C”)’s farms and one further advance under the first mortgage (November 2007). The mortgages were unregulated, as they were for business purposes.
C paid a Broker Fee (financed on credit) in respect of the first mortgage and the further advance; in addition the Broker received commission from CF re all three advances (3 or 4%).
Pengelly
There was a single mortgage (January 2006) which was unregulated. C paid a Broker Fee (financed on credit); in addition the Broker received commission from CF of between 2-4%.
Whether Half or Fully Secret
It was CF’s internal policy to require the Broker to disclose commission. In both cases the Broker’s terms and conditions notified Cs that the Broker “may” receive fees from creditors with whom it placed mortgages. The terms also stated that before the mortgage was taken out, the Broker would tell Cs the amount of that fee in writing: if it was less than £250, the Broker would inform C that it would receive “up to £250”; if it was more than £250, the Broker would disclose the exact amount.
In both cases Cs’ evidence was that they did not receive any subsequent written notification of the fact or amount of the Broker’s commission.
The Broker’s failure to make any disclosure in accordance with the term in these cases meant that Cs were entitled to proceed on the basis that no commission was being paid [119]. Therefore this was a case of ‘fully secret’ commission [134].
No Requirement for Fiduciary Relationship
The risk inherent in requiring “a fiduciary relationship” as a pre-condition for remedies in respect of bribes or secret commissions is either that civil remedies which should be available will be denied because there is not a fiduciary relationship, or that the term “fiduciary relationship” will be applied so widely as virtually to deprive it of content [46].
To ask in cases of this kind whether there is a fiduciary relationship as a pre-condition for civil liability in respect of bribery or secret commissions is an unnecessarily elaborate question [48]. It is the content of the duty, not the label attached to it, that matters [50].
Richards LJ did acknowledge that many cases did refer to a requirement for a ‘fiduciary duty’ (at [73] and [87]). However, he considered that such references were only in a “loose sense” ([73], [79]). In Medsted Associates Ltd v Canaccord Genuity Wealth (International) Ltd [2019] EWCA Civ 83 the double use of inverted commas round “fiduciary” was deliberate and illuminating [88].
Requisite Duty Owed by Payee
It suffices that the payee is “someone with a role in the decision-making process in relation to the transaction in question e.g. as agent, or otherwise someone who is in a position to influence or affect the decision taken by the principal” [51].
The emphasis on the duty to provide disinterested advice as the pre-condition to the application of the rules and remedies available in the case of bribes and secret commissions has been repeated in many cases [62].
The payee must owe a duty to provide disinterested advice or recommendations or information. It is the duty to be honest and impartial that matters [92] and [102]. [Comment: the width of this phrase encompasses information-only sales]
Whether Broker Owed Requisite Duty On Facts
The Broker did owe the requisite duties on these facts. It was under a duty to make a disinterested selection of mortgage product to put to its client in each case. To the extent that it was necessary to find, the Judges below were also correct to hold that the broker owed a fiduciary duty [110].
Even in the context of an information-only sale, where the Broker only put forward a single product for C’s consideration, it was the broker, not C, that had access to a panel of lenders and the Broker undertook to work from that panel to provide the appropriate product to meet C’s individual circumstances and needs. This necessarily involved judgment and choice on the part of the Broker. Moreover, the broker had express authority to negotiate with lenders, and could thereby seek to improve the terms available to the client [113].
Commercial First Business Ltd v Pickup and Vernon [2017] CTLC 1 (where the High Court had dismissed the ‘half secret’ commission claim on the basis that no fiduciary duty was owed and the broker was a mere introducer) was wrongly decided [126].
Remedies: Rescission
Rescission of a transaction with the third party is available as of right in cases of secret commission, subject to making counter-restitution [101].
Copy of judgment available here: Pengelly and Wood CA
Summary by Ruth Bala