New ruling highlights risks of paying secret commission
A judgment by the Court of Appeal yesterday made it much more likely that borrowers could be compensated if the commission paid by the lender to their broker was not fully disclosed to them, according to a law firm.
Moore Barlow represented the owner of Commercial First Business created loan books (currently in liquidation) in his unsuccessful appeal against two conflicting earlier decisions.
In both cases, the borrowers were in default and then contested whether their loans were enforceable due to commissions they did not know existed.
One of the earlier cases ruled in favor of the lender on the grounds that there was no contract with the broker and the borrower had not paid a fee and therefore could not ‘s’ reasonably expect undivided loyalty ”.
In this case, it was argued that the borrower would have been aware of the possibility that the broker was receiving a commission, even though the amount had not been disclosed.
In the other contentious case, the court ruled in favor of the borrower, ruling that there was no need for a “fiduciary” relationship between the broker and the borrower for there to be an obligation of disclosure of the commission.
As yesterday’s Court of Appeals judgment (Wood v Commercial First Business Ltd & Ors 2021) went against the owner of the loan book, the law firm says it provides much needed clarification to industry.
It confirms that the broker and the lender are likely to be liable in cases where the commission is not disclosed, which means the mortgage may be unenforceable.
In such cases, the mortgage could be canceled, which would mean attempting to put both the lender and the borrower back into the situation they would have been in if the loan had not been taken out initially.
This does not mean that the mortgage is written off, but it could mean that the lender has to repay the borrower all the completed monthly repayments plus interest and, in turn, the borrower has to repay the lender the amount owed. advance more interest, explains the law firm. .
Susannah Marsh, Financial Services Litigation Partner at Moore Barlow, says: “This ruling will make it more difficult, but not impossible, in future cases to prove that a broker did not owe their client a duty to provide information. and impartial advice, which in turn will expose the broker and lender to applicable civil remedies.
“While the payment of commissions is commonplace in the lending industry, the appeal judgment undeniably highlights a vulnerability for lenders who paid commissions to brokers without notifying the client.
“The positive point we can take is that the ruling brings clarity and greater certainty to this complex area of law.
“We now know that undisclosed commissions leave lenders and brokers vulnerable to borrower claims and in cases where the commission amount is not disclosed by the broker or lender, there is a substantial risk that a court cancels the loan subject to the borrower being able to give a counter-restitution. “
In these types of cases, the counter-restitution likely means that the borrower is able to repay the amount originally borrowed less any fees or gains made by the lender or broker.
Marsh adds, “In the circumstances where the borrower cannot give a return, the loan cannot be canceled.
“Therefore, we now need to focus on fixing these issues and agreeing on the numbers, rather than getting bogged down in costly and time-consuming arguments about defining the broker / borrower relationship.”