Commission Payments Revisited

The recent Supreme Court decision in Plevin v Paragon Personal Finance Limited [2014] UKSC 61 also contains an interesting comment from the judges on the fact that payment of commission to a broker by a funder does not even begin to give rise to an agency relationship as between those parties; Lord Sumption said at paragraph 33: –

“The practice by which the agent of a consumer of financial services is remunerated by the supplier of those services has often been criticised. It is, however, an almost universal feature of the business, and it is of the utmost legal and commercial importance to maintain the principle that the source of the commission has no bearing on the identity of the person for whom the intermediary is acting or the nature of his functions”.

The quite different question of the nature and extent of an agency relationship between broker and customer was the focus of the recent decision of the Court of Appeal in McWilliam v Norton Finance (UK) Limited [2015] EWCA Civ 186. The court reaffirmed its earlier decision in the well-known case of Hurstanger Ltd v Wilson [2007] EWCA Civ 299 and in some respects went further in stressing that there was no need for the customer to be a non-status borrower before an agency relationship arose. In applying well-established principles of agency the court ruled that when engaged by a customer a broker owes a fiduciary duty, which includes obtaining the customer’s reasonably informed consent to the receipt of commission from the funder. This had not been achieved in the present case merely by informing the customer, who the judges described as “vulnerable and unsophisticated”, of the fact that in addition to receiving a fee from the customer, the broker would receive commission from the funder.

Of course this has consequences not only for the broker but also for the funder, because the whole transaction is impaired by the broker’s breach of fiduciary duty, which in effect gives the court a discretion to adjust or even set aside the contract between the funder and the customer. In the present case the funder had gone into liquidation so relief was only granted against the broker, but in the Hurstanger case the court granted relief against the funder by requiring it to pay to the customer the amount of the undeclared commission.

This case is a useful reminder to funders of the need for caution in relation to commission payments to brokers. A series of County Court decisions has sought to distinguish Hurstanger for a variety of reasons which will need to be revisited after this Court of Appeal decision, which clearly sets out that the mere engagement of a broker by a customer involves an agency relationship with fiduciary duties.

However, the key point is the nature and extent of the duty to obtain the customer’s informed consent to the payment of commission by a funder to a broker. In the case of business customers there remains a strong argument that as long as the customer is informed of the fact of the commission payment, the amount of such payment does not have to be volunteered provided that it is made available on request. In relation to CCA regulated agreements (both business and consumer) this reflects the position required by the FCA in CONC 4.5.3-4.5.4.