The fact that financial transactions, such as mortgages, frequently involve brokers is not surprising.
The sheer scale of products and policies available is often impenetrable to the consumer, who may have neither the time nor the expertise to make an informed choice.
The broker may receive a commission as a result of placing business with a particular lender and this may be an area of contention in the event of a later dispute, because in such circumstances an allegation of breach of fiduciary duty may be made.
The status of the relationship between the broker and the borrower is crucial as to whether such an allegation can be sustained – in particular, whether the relationship is a fiduciary one.
A fiduciary is someone who has undertaken to act on behalf of another in circumstances that give rise to a relationship of trust and confidence: the distinguishing obligation is that of single-minded loyalty.
Amongst other things, this means that a fiduciary must not make a profit out of his position without the informed consent of his principal, the borrower.
Commission is an issue upon which the dispute frequently focuses.
Based on the definition above, if the broker is a fiduciary, then receiving a commission from a third party – especially of an undisclosed amount – may result in a breach of duty.
A much-relied upon decision in pursuing this allegation is that in Hurstanger -v- Wilson (2007).
The borrowers sought the help of a broker in refinancing. The loan documents they signed referred to the fact that commission was to be paid, although no amount was given.
It was also expressly stated that the broker was the agent of the borrowers.
A commission of £240 was paid on completion.
The issues arising were:
- whether the broker owed a fiduciary duty and, if so,
- whether this payment was a secret profit, putting the broker in breach of his duty.
The court found a fiduciary duty existed, because the broker had declared himself to be an agent – the classic example of a fiduciary.
It went on to say that the specific amount of the commission should have been disclosed so that the borrowers – who were found to be vulnerable – could be aware of the potential conflict of interest.
Failing to disclose it was, therefore, a breach of fiduciary duty for which the broker was liable.
In a further twist, the lender that paid the commission was found to be an accessory to the breach.
However, are brokers always fiduciaries?
The answer seems to be no and, although the descriptions of the parties in the agreement will be important, they will not be conclusive.
In Barnes -v- Black Horse Ltd (2011), the lender sold a finance product with associated payment protection insurance and, in the supporting documents, described itself as an adviser.
The court rejected the borrowers’ argument that there had been a breach of fiduciary duty. Being an “adviser” does not necessarily import a fiduciary duty, so the issue will turn on the surrounding facts.
In this case, the lender only had one product to sell and so could not be said to be advising in the ordinary use of the word.
A further recent decision is important for brokers and helps to clarify the situation.
Sealey and Winfield -v- Loans.co.uk Ltd (1) and GE Money Secured Loans Ltd (2) (2011) involved borrowers who obtained a secured loan with the help of a broker.
The documents they signed did not define him as an agent or as an adviser, but did say that there would be a commission (of an unspecified amount) as a result of placing the business.
Later, there was a dispute and the borrowers alleged that the broker owed them a fiduciary duty which he had breached in accepting an undisclosed commission.
The court rejected their argument and said that, whilst brokers owe a contractual duty to act in the best interests of their clients, this does not ordinarily result in them pledging the single-minded loyalty that would make them fiduciaries.
In this case, the descriptions did not raise that presumption and so, on the facts, the broker was simply subject to the usual contractual duties.
The court went further and said that, even if he had been a fiduciary, the borrowers were aware of the commission payment and so had given informed consent.
This was so even though the actual amount was not disclosed.
The case was distinguished from Hurstanger, as the borrowers were not found to be vulnerable and were capable of understanding the position, and enquiring about the specific amount involved if they chose to do so.
Therefore, it seems to be the position that, unless it is specifically stated in the documents that the broker acts as an agent or is otherwise held as being more than a mere intermediary, he will not be a fiduciary, but will instead be subject to the usual contractual duties.
This is the safest position to be in as a broker. Any review of terms and conditions of business would be wise to address this point.
It may also be advisable to specifically draw borrowers’ attention to the issue of commission when the paperwork is signed and as part of any oral explanation given.
In terms of whether the specific amount should be disclosed, this is probably not necessary, provided that the existence of the commission is clear, highlighted and any questions raised are answered.
Such an approach is unlikely to result in onerous conclusions being drawn and will make the position clearer in the event of a dispute.
