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Asset Finance: The Scope of Commission Disclosure
Disclosure of Brokers’ Commissions remains very much a live issue within the asset finance industry, and in our last Briefing we suggested some practical steps in Dealing with Broker Commission Refund Claims – Click Here
Since then we have been involved in a number of instructions which has caused us to undertake a thorough review of the case law both in terms of the Wood and Pengully decisions and various other cases, which has given us some encouragement in the approach to be adopted to at least some of these claims.
Suffice it to say that the law in this area is complex and the decisions are very fact specific depending upon both the contractual documentation and the status of the parties involved; in particular it is worth noting that in Wood and Pengully the clients as well as the lenders paid the broker substantial fees, and in breach of an express contractual term that the amount of commission would be revealed this did not happen.
Claims management firms have relied on Wood and Pengully to launch claims for repayment against brokers and in some cases claims to set aside finance agreements against lenders, but it is clear that at least some of those advising those firms have little real understanding of the complexity of the issues involved, and we feel it is inevitable that some of these cases will find their way to court therefore providing further guidance in reasoned decisions of the appeal courts.
As matters stand at the moment our considered view is that a broker dealing with business clients has no specific obligation to go beyond limited disclosure. The main reason we believe this is the case is the decision of the Court of Appeal in Medsted Associates Ltd v Canaccord Genuity Wealth (International) Ltd [2019] EWCA Civ 83, [2019] 1 WLR 4481. This concerned a broker who introduced sophisticated and wealthy clients to an investment firm. The clients knew that the broker was paid commission by the firm, but the amounts were not disclosed to them.
The court analysed previous case law including the leading case of Hurstanger v Wilson with which the industry is well familiar, and explained that the reasoning of that decision was in effect the fact that the borrowers were consumers in the non-status lending market:
“[the judge in Hurstanger] cited .. the then current edition of 21st Bowstead and Reynolds [the leading textbook on the Law of Agency]… in the following terms:-
“where [the principal] leaves the agent to look to the other party for his remuneration or knows that he will receive something from the other party, he cannot object on the ground that he did not know the precise particulars of the amount paid. Such situations often occur in connection with usage and custom of trades and markets. Where no usage is involved, however, the principal’s knowledge may require to be more specific.”
He then said:-
“Here I think the requirement is more special. Borrowers like the defendants coming to the non-status lending market are likely to be vulnerable and unsophisticated. A statement of the amount which their broker is to receive from the lender is, I think, necessary to bring home to such borrowers the potential conflict of interest.
There is nothing about any of this which should come as a surprise to any lender or broker working in the non-status lending market…”
It follows from all this, in my judgment, that even if the relationship of Medsted and its clients was a fiduciary one, the scope of the fiduciary duty is limited where the principal knows that his agent is being remunerated by the opposite party.
As Bowstead and Reynolds say, if the principal knows this, he cannot object on the ground that he did not know the precise particulars of the amount paid. He can, of course, always ask and if he does not like the answer, he can take his business elsewhere. Bowstead does add that where no trade usage is involved (and no usage was alleged in the present case), the principal’s knowledge may require to be “more specific”. In Hurstanger the court held that it did need to be more special “because borrowers (such as the Wilsons) coming to the non-status market were likely to be vulnerable and unsophisticated”. The contrary is the case here since, as the judge found (para 90) the clients were wealthy Greek citizens and it is likely that they were experienced investors”.
The points we would rely on in asset finance for business customers include that the clients are engaged in business, they do not pay the broker a fee, there are in general no Terms and Conditions in which the broker promises to find them the best deal (as is present in many of the reported cases), they must appreciate that the broker is being paid by the financier are even if they do not bother to read the disclosure material, and the disclosure is in general clear insofar as it goes.
It would appear that financiers are beginning to impose additional Terms and Conditions on brokers but so far the trend does not appear to be towards requiring disclosure of amounts paid unless asked to do so.
Despite the recent advice of the NACFB encouraging brokers to always disclose the amount of commission as a matter of course, its Code of Conduct has not been amended in relation to commission disclosure, and it may be of interest that in the invoice finance market the relevant Code of Practice of UK Finance requires members to:
“ensure that any arrangement for the making of commission or other payments to anyone who is not an employee of the Member or of the Member’s group in connection with the referral or introduction to the Member of a client is disclosed in writing to the client prior to the completion of the legal documentation; such disclosure shall include relevant details of the party receiving the payment; upon request the Member shall provide details in writing to the client of the amount of any known commission and the method of calculation of future commission”.
It may therefore be possible to mitigate to some extent the risk of claims from ambulance chasers by applying a halfway house short of revealing the amount of commission paid by including a reference in disclosure documents to a willingness to reveal the amount of any commission if requested, as normally already appears in documents dealing with commission disclosure in the CCA regulated arena; however our experience suggests that in practice business customers do not seek to investigate the amounts paid.
Contact Bermans Asset Finance team