Wilson & Another v Hurstanger Ltd
The borrowers had fallen behind with their mortgage payments and with the help of a broker sought a second loan of £8000 to pay off the arrears.
The lender, Hurstanger Ltd, sent the borrowers various documents to sign, including one that authorised payment of the broker's arrangement fee of £1000 out of the loan. Another stated that the broker was acting as the borrowers' agent and that "in certain circumstances [the lender] does pay commission to brokers/agents…We will pay monies to your broker strictly in accordance with your signed authority by the deduction from this advance". The borrowers signed and the lender paid the broker commission of £240.
The court heard evidence that the non-status lending market had become so competitive that it had become necessary for small companies like Hurstanger to pay this sort of commission to brokers to attract business. This was in addition to the arrangement fee the broker would negotiate with the borrower.
A dispute arose over the terms of the loan. One of the issues was whether the payment of £240 was a secret profit, in breach of the broker's fiduciary duty to his clients.
Under common law principles of agency, a broker owes fiduciary duties to act in the client's best interests and not to put himself in a position of conflict or make a secret profit. In this case, the broker had an incentive to look for a lender who paid the best commission, rather than getting the best deal for his clients. The only way he could act without breaching his fiduciary duty would be if the borrowers had consented.
The borrowers knew that the commission would be paid, but, without knowing the amount, could they give their informed consent?
The Court of Appeal noted that there is no clear authority to say that an agent's duty requires him to disclose the actual amount of this sort of commission. Taking into account that borrowers in this market were likely to be vulnerable and unsophisticated, however, it concluded that disclosure of the amount was necessary "to bring home to such borrowers the potential conflict of interest".
The broker had not made a secret profit because the borrowers knew about the commission. But, in failing to disclose the amount, he had, nevertheless, acted in breach of his fiduciary duty because he had not obtained his clients' informed consent to the potential conflict of interest.
Significantly, the lender, who had paid the commission knowing that the broker was acting as the agent of the borrowers, was found liable as an accessory to that breach. This meant that the borrowers were entitled to claim equitable compensation directly against Hurstanger.
Where there has been a breach of fiduciary duty, the court has a discretion whether or not to grant rescission. In this case, it could have ordered rescission of the whole loan agreement. The court, however, decided it would be sufficient to require the lender to pay the borrowers the amount of the commission, plus interest from the date it was paid.
This is not an insurance case, but the situation is similar to that of an insurance broker who receives an additional (or contingent) commission from the insurer on top of his "normal" commission. In both cases, a potential conflict of interest arises because the broker might be tempted to find a lender or insurer who pays the best additional commission rather than get the best deal for his client.
If so, then an insurance broker receiving this sort of additional commission might be held to be breach of duty if he does not disclose it to his client. Where, as here, the clients are vulnerable and unsophisticated (consumer insureds, or perhaps even small business insureds), this case suggests that only disclosure of the actual amount will do.
The other significant point is that, once a breach of fiduciary duty has been found, another party can be held liable for knowingly assisting that breach. Insurers who agree to pay brokers additional remuneration could find themselves liable if they fail to ensure that those brokers have made sufficient disclosure to their clients.