Commissions are commonplace within the financial services industry, but customers, agents and third parties should all be aware of the common law duties that have developed around secret commissions.

Background

Brokers within the financial services industry will usually be regarded legally as agents for principals. As such, they will qualify as a fiduciary, namely 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 and an obligation of loyalty to the principal. One of the fiduciary duties imposed upon them in such circumstances is that they must not put themselves in a position where their duty and the principal’s interest may conflict. Mortgage brokers for example cannot therefore act for two principals (namely the person looking to borrow and the lender) without the informed consent of both.

It follows that an agent who receives payment from a third party without the informed consent of its principal would be in breach of its duty to avoid conflicts of interest. Until recently, this has been the basic premise of the common law regarding secret commissions.

What is a secret commission?

The 3 requirements for a secret commission are:

1.The payer must have made the payment to the agent of the principal.
2.The payer must have made that payment knowing the recipient had been acting as the agent of the principal.
3.The payment must not have been disclosed the payment to the principal.

Secret commissions can either be fully secret or half secret, depending on the level of disclosure by the agent to the principal. For example:

• A mortgage broker who discloses to the borrower the fact of and the amount of the commission it is due to receive from the lender is not in breach of its fiduciary duty to avoid conflicts of interest, nor is the commission secret.
• Where a mortgage broker discloses to the borrower the fact there may be a commission, but either doesn’t confirm if one was paid or doesn’t confirm the value, the payment may be considered a half-secret commission.
• Where a mortgage broker receives a commission from the lender, without disclosing the existence of the commission at all to the borrower, the payment is likely to be considered a fully secret commission.

A secret commission is treated by the law as civil bribery, which entitles the court to award alternative remedies against both the payer and agent, including a restitutionary claim for the money had and received (i.e. the commission) and/or damages for fraud (i.e. the amount of actual loss suffered by the principal). The usual remedies in instances of breach of fiduciary duty are also available where that is established, including rescission and compensation. In respect of a half-secret commission, this has been held by the Court of Appeal in Hurstanger v Wilson [2007] EWCA 299 not to amount to bribery but was a breach of the fiduciary duty of obtaining informed consent owed to the principal by the agent. As a result, the remedies available for secret commissions above are only available at the discretion of the court.

Clarifying the case law

There were inconsistencies between judgments in this area, but many of those have now been resolved by the Court of Appeal in Wood v Commercial First Business Ltd [2021] EWCA Civ 471 (31 March 2021).

The claimant was an individual who took out three mortgages and a further advance from the defendant mortgage lender. All three mortgages were arranged through a mortgage broking company that received a commission from the defendant each time. The claimant later fell into arrears and commenced proceedings challenging the validity and enforceability of the mortgages, on various grounds including that of secret commissions. The claimant submitted that the mortgage broking company was her agent and therefore the payment of a commission by the mortgage lender to her agent, without her knowledge, had amounted to a secret commission.

The Judge at first instance found that the payments in question were fully secret commissions, as the claimant had received no written notice of the commission and was therefore entitled to assume that no commission had been paid. The 3 requirements for secret commissions were also made out, as the mortgage lender knew the mortgage broker was acting as the claimant’s agent and paid a commission to the mortgage broker without disclosing this to the claimant. The claimant was therefore successful on this ground. Interestingly however, the Judge held that it was not necessary for a fiduciary relationship to exist between the claimant and the broker. The Judge ordered the lender to pay the claimant £92,927 (being the total commission paid) and (more importantly for the claimant’s ability to refinance), rescinded the mortgage agreements.

The decision was appealed, with three issues to be determined:

• Is a fiduciary relationship between the client and the broker a necessary pre-condition to the grant of relief against the payer of the undisclosed commission?

The Court of Appeal concluded that in cases such as this where an agent who provided advice, information or recommendations has received or been offered a secret commission, the courts do not need to conduct complex analysis of the nature of fiduciary relationships. Instead, the question the court should ask is did that agent owe a duty to be impartial and to give disinterested advice, information or recommendations? If the answer is yes, the remedies mentioned above are available.

• Did a fiduciary relationship exist between the client and the broker in these cases?

The Court of Appeal went on to conclude that on the facts, based upon the broker’s terms and conditions, it was under a duty to make a disinterested selection of mortgage products to put to the claimant. To the extent that it is necessary, the Court of Appeal confirmed it was also correct to hold that the broker owed a fiduciary duty of loyalty to the claimant.

• Are the commissions that were paid properly categorised as half-secret commissions?

Finally, the Court of Appeal concluded the commission was a fully secret commission. The broker’s terms and conditions stated: “We may receive fees from lenders with whom we place mortgages. Before we take out a mortgage, we will tell you the amount of the fee in writing. If the fee is less than £250, we will confirm that we will receive up to this amount. If the fee is £250 or more, we will tell you the exact amount.” The analysis of the court at first instance was upheld, namely that the terms and conditions imposed an unqualified obligation on the broker to inform the borrower, before the mortgage was taken out, of the amount of the fee (commission). Without such disclosure, the only conclusion was that no commission was to be paid. The appeal was therefore dismissed.

The position regarding half-secret commissions therefore did not need to be considered further and it remains the case that it is necessary to prove that the agent was a fiduciary of the principal to obtain redress.

Comment

Given the widespread payment of brokers, both in the financial and other sectors, by means of commission, we expect to see many more cases involving claims of secret and half-secret commissions. Furthermore, the strong line taken by the courts in this area and the variety of remedies available both against the payers and recipients of commissions means that claimants may consider making a claim even where the amount of commission itself is relatively small.

If you need advice relating to the matter of secret commissions, please reach out to our dispute resolution and financial services team.