Peter Hamilton: Financial consequences of evading the duty of trust

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A recent decision of the Court of Appeal illustrates only too clearly that agents owe their principals a fiduciary duty of trust, confidence and single-minded loyalty. This means not acting in any way that does, or could, involve a conflict of interest between the interests of the client and those of the agent, unless the agent has the client’s full and informed consent.

One of the serious conflicts of interest that exists in the financial services industry relates to commissions and other inducements. If there is a breach of that fiduciary duty, the agent is liable to account to the principal for the profit they made as a result.

The Court of Appeal’s decision was on 11 March in the case of McWilliam and McWilliam v Norton Finance (UK) Ltd. The brief facts were Mr and Mrs McWilliam (the clients) were looking for a loan of about £25,000 to refinance credit card loans and to fund the building of a conservatory for their house. They approached Norton Finance, a firm of credit brokers, which arranged a loan of £25,500 together with PPI cover costing £3,745.

The clients knew they would pay £750 to Norton as a “broker fee” and a completion fee of £500. They did not know (because they were not told) Norton would receive both a commission of £2,675 from the providers of the finance for the introduction and £1,685.25 from the PPI insurers: £4,360.25 in total. Thus more than 18 per cent of the amount borrowed was made up of fees or commission.

Once the clients discovered the full extent of the commission received by Norton, they sought to recover from it the amounts to which they had not agreed. The trial judge found for Norton and so the clients appealed.

The Court of Appeal had no difficulty in deciding Norton was the agent of the clients for the purpose of arranging the required finance and that Norton owed the clients a fiduciary duty not to “have placed itself in a position where its duty and its interest conflict, nor profit out of the trust reposed in it to get the best possible deal, nor act for its own benefit without the [clients’] informed consent”.

Although the clients may have guessed Norton was to receive commission for arranging the loan and the PPI cover, the totals were so high that, unless the clients knew the full facts and amounts, they could not be taken to have consented. It followed that the clients obtained judgment in the Court of Appeal for the undisclosed commissions of £4,360.25 and interest. This sum was the secret profit in law made from the conflict and the failure to disclose it.

In the course of his judgment, Lord Justice Tomlinson adopted the much-quoted words of Lord Justice Millett in the earlier case of Bristol & West Building Society v Mother (decided in 1997), which are worth repeating:

“A fiduciary is someone who has undertaken to act for or on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence. The distinguishing obligation of a fiduciary is the obligation of loyalty. The principal is entitled to the single-minded loyalty of his fiduciary. This core liability has several facets. A fiduciary must act in good faith; he must not make a profit out of his trust; he must not place himself in a position where his duty and his interest may conflict; he may not act for his own benefit or the benefit of a third person without the informed consent of his principal. This is not intended to be an exhaustive list, but it is sufficient to indicate the nature of fiduciary obligations. They are the defining characteristics of a fiduciary. …[He] is not subject to fiduciary obligations because he is a fiduciary; it is because he is subject to them that he is a fiduciary.”

Generally speaking, when a financial adviser or anyone in a similar position (such as a credit broker) acts for a client by arranging a deal for them or acts in respect of a transaction on behalf of them, the financial adviser will be the client’s agent. That relationship of the agent to his principal is an example of a fiduciary relationship. It follows that all such advisers need to take particular care they make full and clear disclosure to their clients of all amounts they will accrue as a result of the transaction undertaken by them on behalf of the client. To get the client’s informed consent, the adviser needs to explain exactly what he proposes to do, what the financial consequences will be and how that will conflict with the interests of the client. Then, of course, the client must agree.

Peter Hamilton is a barrister specialising in financial services at 4 Pump Court and co-founder of moneymatterslegal.co.uk