This article originally appeared in Motor Finance April 2015.
In the first appellate decision on disclosure of commission since the Supreme Court decision in Plevin v Paragon Finance Ltd, the Court of Appeal has held that brokers owe fiduciary duties to customers. The decision confirmed that, to ensure informed consent was obtained, the amount of commission, not just the fact that commission was payable, had to be disclosed.
In McWilliam and McWilliam v Norton Finance (UK) Ltd (t/a Norton Finance (in liquidation) (Norton) Norton, as credit brokers, arranged a £25,000 loan for the claimants. In doing so, Norton earned various fees including commission on PPI insurance entered into by the McWilliams of £1,685 (being 45% of the premium payable for the product). The claimants subsequently claimed that Norton was in breach of its fiduciary duty and should account for the commission it had received without their informed consent.
On the facts, the court found that there was an agency contract between the claimants and Norton. Critically, as the claimants were unsophisticated borrowers of relatively modest means with a history of credit problems, the court also found that a relationship of trust and confidence arose creating a fiduciary relationship with Norton.
Although Norton's documentation provided that it gave its services on an information only basis and did not give advice or recommendations, the court held that did not preclude a fiduciary duty arising. Norton should not have placed itself in a position where its duty and its interests might conflict, nor profit out of the trust the claimants placed in it to get the best deal for them, nor act in its own best interests without the claimants' informed consent.
Although the paperwork sent to the claimants by Norton prior to them entering into the loan contained a statement in general terms that commission would be paid and that the claimants consented to such payment, that was not enough. The claimants were not told how much would be paid and so had not given their informed consent for Norton to receive and keep the commission. The amount of commission should have been disclosed.
Norton was in breach of its fiduciary duty and should account to the claimants for the commission received together with interest at the rate of 5% since the date of completion of the loan.
Comment
Where commission is to be paid, informed consent should be obtained from borrowers beforehand for brokers to retain it. For that consent to be informed, the borrowers must know the amount of the commission involved.
This judgment provides a greater level of protection than the FCA's Consumer Credit Sourcebook (CONC). CONC 4.5.3R merely provides that credit brokers must disclose the existence of commission or fees payable (on business written after 1 April 2014) where it could affect a broker's impartiality of have a material impact on the borrower's decision to take out the loan. This decision confirms that not only the existence, but also the amount, of the commission has to be disclosed – and also affects business written before April 2014.
Lenders, as well as credit brokers, need to take heed of this decision.