Lawyers consider the impact of the case on the principles relating to law of agency may also affect buy-to-let deals as well where a broker is involved.
They also suggest that in past instances where commission has not been disclosed on protection sales or on mortgage sales in the pre-regulated market where a procuration fee has been paid and a fee charged, then the deals may be open to challenge.
The case, Wilson v Hurstanger, saw a client Delroy Wilson appeal against a county court judgment in favour of lender Hurstanger over the terms of a consumer credit loan agreement and over commission not being fully disclosed.
The case was originally heard at Coventry county court where the recorder ruled against the borrowers on both counts and made an order for possession as the loan was secured by a second legal charge on the borrowers’ house.
The county court gave the borrowers permission to appeal the decision on the consumer credit part of the case but refused permission to appeal the “secret commission” part of the judgment but the appeal court granted permission at the beginning of the hearing.
In early 2003, the borrowers were in arrears on their mortgage with Alliance & Leicester Building Society and sought a loan to pay off arrears of around £5,500.
Coventry loan broker Mr Dunk, operating as One Way Finance charged them a £1,000 broker’s fee for organising a £7,000 loan and also received £240 commission from Hurstanger.
In March 2005, the borrowers were nearly £700 in arrears on this loan.
The adviser had disclosed the fact there was commission but failed to disclose the amount paid.
It is not an FSA requirement for protection advisers to disclose commission but those advising on investment and pensions do while mortgage brokers advising on residential mortgages have had to since mortgage regulation came into effect.
By charging a fee, the adviser is acting as an agent for the client and unless the client gives informed consent to the commission a conflict of interest arises.
The court ruled in favour of Wilson on the basis that Hurstanger was aware of the legal relationship between himself and the adviser and was therefore party to a conflict of interest. If the adviser had not mentioned the commission at all, the transaction would have been nullified and the lender would have had to pay back all premiums Wilson paid.
In the ruling, Lord Justice Tucker said: “This is a halfway house case. The claimant did not pay the broker a secret commission but procured the broker’s breach of fiduciary duty by failing to obtain the defendants’ informed consent to the broker acting in the way he did.”
He concluded: “I would allow the ‘secret’ commission appeal and award the defendant £240 plus simple interest at 1.29 per cent per month from August 5, 2003.”
The court dismissed the consumer credit appeal.
Financial services law firm Fishburns solicitor Harriet Quiney says: “The case establishes that, as a matter of common law, where an adviser receives commission for arranging a loan on behalf of a lender, the lender must not only ensure that the borrower is aware of the commission payment, but must also obtain the borrower’s informed consent to the payment. If that consent is not obtained, the lender will be an accessory to the adviser’s breach of fiduciary duty in failing to disclose the commission payment.
“In this particular case, which related to a non-status loan, the court considered it was necessary for the lender to ensure that the borrower was aware of the amount of commission payable as well as the fact that there would be a commission payment.
“This decision will apply to both regulated and unregulated sales involving third-party brokers. As there are clear regulatory requirements to disclose commission, it is to be hoped that similar situations will not arise where the sale is covered by Cob, Icob or Mcob as commission will have been disclosed.”
“As not all sales of financial products are regulated by the FSA, in particular, buy-to-let mortgages.”
Quiney says advisers who fail to disclose commission fully will find providers knocking on their doors for compensation.
She says: “If a lender is liable to pay compensation to a borrower because an adviser has not disclosed a commission payment, it is likely that the lender will seek to recover that compensation from the adviser.”
But advisers are also vulnerable to being sued by the client so those advising on unregulated buy-to let mortgages and other areas where regulation does not obligate them to fully disclose commission, such as protection and general insurance, will need to take note.
Kirwan believes, however, that many fee-based advisers are unaware of their law of agency obligation to disclose commission and feel that because it may not be a regulatory requirement, they are operating above board.
But Quiney says even advisers who are regulated to disclose commission now, but were not in the past, could be in the firing line because of the precedent set in this case.
Kirwan says providers will have to disclose all commission fully to cover themselves against litigation.
He says: “Insurers may have to make the decision to disclose commission and because they do not know which advisers charge fees and which do not, they will have to disclose across the board to prevent the whole transaction being nullified and having to pay back premiums. If they don’t they will potentially be putting themselves in the firing line.”
Many protection providers already send out a commission disclosure document to the adviser when they send the quote and feel this is all they can do, as contacting the client directly would undermine the adviser’s relationship with the client.
Standard Life protection marketing manager Mick James says most product providers believe disclosing commission is the appropriate thing to do because the client has a right to know how the adviser is being paid and if they are unhappy with the arrangement, move their business elsewhere.
James says Standard provides advisers with a commission disclosure document under the belief that it is being passed on to the client.
He says: “We have to trust that the adviser is disclosing this information to the client. From a company point of view, we feel that we have done all we can. If we were to sent out copies of every single document to the client, it would undermine the adviser’s relationship with the client.”
Bright Grey product director Roger Edwards says: “If there has been a precedent set, the chances are that things are going to have to change. Companies will have to adjust to the circumstances.”