Commissions ' The Drive Towards Transparency

• Published date: 25 June 2021
• Subject Matter: Finance and Banking, Litigation, Mediation & Arbitration, Debt Capital Markets, Financial Services, Trials & Appeals & Compensation
• Law Firm: PDT Solicitors
• Author: Mr Noel Ruddy, William Angas, Laura Sutton and Dawn Shadwell

The Court of Appeal recently considered two appeals concerning the payment of commissions by lenders, and the ruling of the Court has caused some serious fluttering in the dovecots. Hailed as providing much needed clarity to the lending industry, it has not been received warmly in some quarters.

Firstly, it's important to stress that there is nothing objectionable to the payment of commissions by lenders to brokers. Commissions to agents and brokers are an everyday fact of life; it's how they make a living. The problem, however, is that in many instances brokers are seen as having divided loyalties particularly where he obtains a broker fee from the client and commissions from the lender.

This is not a new issue and it's likely that further caselaw will be necessary to deal with other problems arising out of this particularly difficult area of common law.

In the appeals before the Court were two decisions of the High Court involving the same broker. In each case the broker had received a fee from the borrower and commissions from the lenders. The broker's terms of business disclosed the fact commissions may be received from the lenders and that the broker would disclose the amount of the commission. The broker failed to disclose the amount of commission received.

Sometime later, the borrowers defaulted on their loans and the lenders started enforcement proceedings. The borrowers, having discovered that commissions had been paid to the broker, brought counter-claims for recission of the loan agreements and for recovery of the commissions as secret profits. They argued that the commissions had been paid without their consent or knowledge - a secret profit.

This is where things get murky. It may seem unfair on the lenders that because the broker failed to disclose the fact he received commissions from them, the borrowers could rescind the loan agreements and effectively cancel their obligations under those agreements. However, the law in this area has been unclear for a while. The High Court had previously given conflicting decisions as to whether civil remedies in secret profit cases only existed where there was a "fiduciary relationship" between the borrower and the broker.

Although the High Court in both cases found that a fiduciary relationship did exist, and this decision formed part of the appeal by the lenders, the Court of Appeal decided...