secret commisions

[Pinky69]

Hope you enjoy this one. A friend got a call 3 days ago from the man who brokered her mortgage in 2005. He said he had contacts with a firm who reclaimed charges and they could check whether she was due any charges for £495. He said her lenders were one of the worst offenders - ironic since he arranged the mortgage with them! He went on that at worse she could get her charges back and at best she could get the loan written off. I was there when he called and told her I didn't think there would be any charges as she has always paid her mortgage. She asked me to have a look through her mortgage papers and there was no mortgage agreement in the pile - just a copy of the mortage offer. I asked her if she knew the broker had received commission from the lender as well as her paying him a fee. She didn't. She said she didn't even know about his fee until just before completion - she had assumed he would be getting paid by the lender - and the fee had asked her for was extortionate but she felt it was too late to do anything about it as it was almost near completion. I found Wilson V Hurstanger and looked up the FSA Rules. She didn't get an Initial Disclosure Document, she didn't get a Key Facts Illustration and the broker never at any time mentioned he was getting a procurement commission from the lender. His main company advertises as a whole of market broker - he offered her one mortgage from one company in spite of the fact she has a pristine credit rating.There was also a witness present when he was doing the dirty on her. Strangely enough she wouldn't have known anything about it if he hadn't called a few days ago. Furthermore he cold called her by way of introducing himself when she was looking for a mortgage, which is against FSA Rules. She is now seeking legal advice. Scandalous.

[hellhasnofury]

too informative a thread to disappear to page 4 of the ppi forum:eek:

[incipience]

The issues of Secret Commissions or Bribes come from the Common Law Principles of Agency.

 

Under this law, the agent or broker must disclose commissions payable from the lender so as to avoid any conflict of interest.

 

The broker has a Fiduciary Duty to inform the principle(you) as to any commissions recieved, in order for you the principle to make an informed decision.

 

The lender who pays the agent(broker) knowing that the agent is acting on your behalf can be liable also for the brokers breach in its Fiduciary Duty.

 

The same applies with cases of Payment Protection, as the lender is the agent for the insurer and therefore the lender owes fiduciary duty to disclose commissions from the insurer, if these commissions are secret(unknown) then the insurer is also party to the breach.

 

The reasons why none of this really has come out as a big issue, is that it comes under an old law, The law of Agency. Most Financial companies concentrate on regulatory principles, of Consumer Credit.

 

It should also be noted that if you took out a loan via an agent (broker) once a contractual relationship between the principle(you) and the Lender takes place, the agent neither becomes party to the contract nor incurs any liability.

 

Despite this you have companies blaming the sale of the PPI to be that of the broker. Which is false.

 

The contracts are most likely branded lender contracts, the policy will also state that the lender is the intermediary to the insurer, no where in your documents will you find any reference to the broker or its liabilities to the sale.

 

Therefore taken this to the FOS, or Legal action, and on the balance of probabilities the consumer would never be aware of any liability of the agent.

 

Yet Lenders continue to blame the broker.. and this is a classic FOB OFF.

[frettful38]

Sorry to crash in your threads but please could anyone explain CASE COMMISSION TO BROKER means please, I have been trying to find out about this secret commissions for ages now and this thread seems very interesting.

[incipience]

Its the commission paid to the broker for the introduction of the loan and/or insurance

[pt2537]

you have a secret commission payment frettful;) i am 100% certain

 

i would suggest you read para 31-51 of Wilson and Hurstanger Limited as that case is very descriptive on the rules and requirements of commission payments

[pt2537]

Secret Commission?

1. As I have already said this issue only arose by amendment made at trial. The first defendant did not give or call any evidence about it. A letter from the broker was put before the Recorder saying he was not tied to the claimant and that "it was an expectation that we would receive a commission from the lender in addition to the broker fee negotiated with the borrower". The claimant called Mr Fellowes, one of its directors, who explained that the tertiary or non-status lending market was highly competitive and that it had become necessary for small companies like the claimant to pay commission to brokers to attract their business. Such commissions were a matter of separate discussion or negotiation and the rates were largely dictated by market forces. The Recorder notes that he was not invited to make any finding that this was a trade practice because, if there was such a practice, it was not suggested that the defendants were aware of it. However he did find that there was nothing unusual about the circumstances in which the commission was paid in this case or its amount (3%) which he described as conventional.
   
2. The Recorder proceeded on the basis that it was common ground that where a person (in this case the claimant) makes a payment to the agent of another person with whom he is dealing (in this case the defendants) knowing of the agency and fails to disclose that he is making or has made that payment, the other is entitled to rescind the contract. The dispute before the Recorder was purely factual: was the £240 commission paid by the claimant to the broker secret? Relying on the document which said that the claimant did pay commission to brokers in certain circumstances the Recorder held that the payment was not secret. He said that anybody reading that document, as the defendants were enjoined to do, would appreciate that the broker might receive a direct commission from the claimant. Such notice would have enabled the defendants to challenge the broker, insist on a term that no commission be paid or approach a different broker. If the borrower simply proceeded with the transaction without comment or enquiry "the inference must be that he or she would not be troubled if commission is in fact paid to the broker by the lender". He therefore concluded that the commission was not secret.
   
3. During the course of counsels' submissions on this part of the case it seemed to us that we might need to consider the applicable law, its application to the facts of this case and the consequences of doing so in rather greater depth than counsel had anticipated. Therefore at the end of the hearing we asked for written submissions and we are grateful to both counsel for the further submissions which they have provided.
   
4. Certain things are clear. The defendants retained the broker to act as their agent for a substantial fee. The contract of retainer contained the usual implied terms, but the relationship created was obviously a fiduciary one. As a fiduciary the agent was required to act loyally for the defendants and not put himself into a position where he had a conflict of interest. Yet he agreed that he would be paid a commission by the other party to the transaction which his clients had retained him to procure. By doing so he obviously put himself into a position where he had a conflict of interest. The defendants were entitled to expect him to get them the best possible deal, but the broker's interest in obtaining a further commission for himself from the lender gave him an incentive to look for the lender who would give him the biggest commission.
   
5. The broker could only have acted in this way if the defendants had consented to his doing so "with full knowledge of all the material circumstances and of the nature and the extent of [his] interest". (Bowstead Article 44, 18th Edition [6-055] – duty to make full disclosure). An agent who receives commission without the informed consent of his principal will be in breach of fiduciary duty. A third party paying commission knowing of the agency will be an accessory to such a breach. The remedies for breach of fiduciary duty are equitable: they of course include rescission and compensation.
   
6. What amounts to sufficient disclosure for these purposes? Bowstead says:
   
   6-057.
   Consent of the principal is not uncommon. But it must be positively shown. The burden of proving full disclosure lies on the agent and it is not sufficient for him merely to disclose that he has an interest or to make such statements as would put the principal on inquiry: nor is it a defence to prove that had he asked for permission it would have been given.

   I think this is an accurate statement of the law. Whether there has been sufficient disclosure must depend upon on the facts of each case given that the requirement is for the principal's informed consent to his agent acting with a potential conflict of interest.
   

7. There is some doubt as to whether the agent's duty of disclosure requires him to disclose to his principal the amount of the commission he is to receive from the other party. At [6–084] Bowstead says:
   
   … 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.

   The cases cited support these propositions. 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.
   

8. 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. In November 1997 the Office of Fair Trading issued revised guidelines which told such lenders to:
   
   [15]. warn that the broker or other intermediary may not be in a position to give unbiased advice if they are tied to the lender or are paid a fee or commission by the lender. [16] The contract documentation and any customer booklet or leaflet … should … indicate if any commission or other payment is payable by the lender to the broker, and should explain the purpose and nature of any such commission and the basis of calculation.

   and told such brokers to:
   

   [20]. disclose both orally and in writing at an early stage, the existence and nature of any commission or other payment payable by the lender … they should explain clearly the implications of any such commission for the broker's role with regard to the borrower. This is in order that the borrower is clear as to any potential conflict of interest on the part of the broker. The Office would encourage brokers to disclose the amount or likely amount or percentage figure of the commission, since such transparency will help to reassure borrowers that they are receiving appropriate advice from the brokers. Where this is not done, the broker should disclose the factors which will determine its calculation, including whether it will be a percentage of the loan or a fixed sum and whether it is intended to reflect the actual costs incurred by the broker in arranging the loan or is linked to the total volume or value of business brought to the lender over a given period. All such disclosures should be made in writing before the borrower enters into the loan agreement and preferably before the loan application is submitted to the lender.

   
   

9. Obviously if there has been no disclosure the agent will have received a secret commission. This is a blatant breach of his fiduciary duty but additionally the payment or receipt of a secret commission is considered to be a form of bribe and is treated in the authorities as a special category of fraud in which it is unnecessary to prove motive, inducement or loss up to the amount of the bribe. The principal has alternative remedies against both the briber and the agent for money had and received where he can recover the amount of the bribe or for damages for fraud where he can recover the amount of any actual loss sustained by entering into the transaction in respect of which the bribe was given. (Mahesan v Malaya's Housing Society [1979] AC374, 383). Furthermore the transaction is voidable at the election of the principal who can rescind it provided counter-restitution can be made. (Panama & South Pacific Telegraph Co. v India Rubber, Gutta Percha, and Telegraph Co. [1875] 9 Ch App 515, 527, 532-3).
   
10. But "the real evil is not the payment of money, but the secrecy attending it" (Chitty L.J. in the leading case of Shipway v Broadwood [1899] 1 QB 369, 373). Is there a half way house between the situation where there has been sufficient disclosure to negate secrecy, but nevertheless the principal's informed consent has not been obtained? Logically I can see no objection to this. Where there has only been partial or inadequate disclosure but it is sufficient to negate secrecy, it would be unfair to visit the agent and any third party involved with a finding of fraud and the other consequences to which I have referred, or, conversely, to acquit them altogether for their involvement in what would still be breach of fiduciary duty unless informed consent had been obtained. There is no authority which sheds any light on this question. We have been referred to Bartram & Sons v Lloyd [1904] 90 Law Times Reports 357 where a secret commission had been agreed and paid but the question there was whether the principal had elected to affirm the contract with the other party at a later meeting when he was given some information about what had happened. The court held that he had not, but the decision turned upon whether the principal had made his election with full knowledge of the material facts and not upon the consequences of an inadequate initial disclosure.
    
11. So what is the position in this case? Mr Say submits that the disclosure to the defendants was entirely inadequate and did not negate secrecy. It simply said that a commission might be paid to the broker but should have said that a commission was to be paid and stated the amount because these facts were known at the time the defendants were asked to sign the document relied upon by the claimant. The defendants' fully informed consent to the payment of commission had not therefore been obtained. Furthermore he submits that the notice was ambiguous: having said that in certain circumstances the claimants did pay commission it went on to say it would "pay monies to your brokers strictly in accordance with your signed authority by deduction from this advance".
    
12. Mr Seymour submits that it was for the defendants to establish that there had been inadequate disclosure. The allegation that the claimant had paid a secret commission or bribe was serious and yet the defendants had called no evidence to substantiate it. We do not know what, if anything, they were told by the broker or what they understood from the document which they signed. It had not been established that the claimant had procured any breach of duty by the broker. Nevertheless Mr Seymour submits that there was sufficient disclosure. Secrecy had been negated by informing the defendants that commission might be paid and the payment did not become secret simply because they were not given the actual details of the amount paid. Nor, Mr Seymour submits, was the notice ambiguous. Read carefully, as the borrower was told to do, the passage relied upon by Mr Say referred first to a payment by "the company" "in certain circumstances", and then two sentences later to monies payable by the borrower which they had authorised to be dispersed out of the proceeds of the loan. In other words the document is referring to different payments by the lender and the borrower. The payment by the lender to the broker would only be made in certain circumstances; the payment by the defendants out of the proceeds of the loan would be made to the broker in any event.
    
13. Having looked at the pleadings, the written submissions and the Recorder's judgment it seems to me that it was common ground between the parties at trial that the only disclosure made to the defendants was by means of the claimant's document which the defendants signed. The broker's letter said nothing about any disclosure which he had made; nor did Mr Fellowes suggest that anything else had been disclosed by anyone. By signing the document the defendants must be taken to have understood what it said but no more. Quite apart from this, the passage from Bowstead which I have cited in [35] says that it is for the agent to establish that sufficient disclosure has been made. Here the claimant knew that the broker was the defendants' agent and so it had to show that it paid commission to him in circumstances where its borrowers had given their informed consent to such a payment. That was obviously the purpose of the document the defendants were asked to sign. The question is whether it achieved that purpose.
    
14. Did it negate secrecy? I think it did. If you tell someone that something may happen, and it does, I do not think that the person you told can claim that what happened was a secret. The secret was out when he was told that it might happen. This was the Recorder's view and I agree with him.
    
15. Was the defendants informed consent obtained? I do not think it was. The passage which I have quoted was muddled although, read carefully, for the reasons given by Mr Seymour, it may not in fact have been ambiguous. But it could and should have been clearer and informed the defendants that a commission was to be paid and its amount and done so in terms which made it clear that the defendants were being asked to consent to this. I also think this statement should have been accompanied by the warning recommended by the OFT to the effect that its payment to the broker might mean that he had not been in a position to give unbiased advice.
    
16. So for these reasons I do not accept either party's submissions about the disclosure. This is a half way house case. The claimant did not pay the broker a secret commission but procured the broker's breach of fiduciary duty by failing to obtain the defendants' informed consent to the broker acting in the way he did.
    
17. This conclusion means that the defendants are not entitled to deploy the full armoury of remedies which would have been available if this had been a true secret commission case. If it had been, a difficult question would have arisen as to whether they were entitled to rescission as of right. As the loan agreement was voidable and the defendants had elected to avoid it, the argument would be that the agreement had gone and they were entitled to rescission simply on terms as to counter-restitution. In other words the equitable remedy of rescission would simply be deployed in aid of the common law to ensure that its consequences were dealt with fairly between the parties.
    
18. But no such difficulty arises when considering the appropriate remedy for breach of fiduciary duty for which purely equitable relief is available. Here there is no doubt that the court has a discretion as to whether or not to grant rescission. This is illustrated by Johnson v E.B.S. Pensioner Trustees Limited [2002] Lloyds Reps. PN 309 where this court had to consider, among other things, whether a guarantee given by one of the defendants as security for a loan made by solicitors to his company should be rescinded because the solicitor acting for him had a conflict of interest and had been in breach of his fiduciary duty by failing to disclose that his firm received service charges on the loan. The court (Mummery and Dyson LJJ and Douglas Brown J) upheld the Judge's refusal to grant rescission and rejected the submission that rescission was available as of right in such circumstances. The remedy was discretionary. Dyson LJ said:
    
    79. When exercising its equitable jurisdiction the court considers what fairness requires not only when addressing the question of the precise form of relief, but also when considering whether the remedy should be granted at all.

    
    

19. In Johnson the court ordered the solicitor to account for the service charge to his client. In this case the broker could similarly have been required to account to the defendants for the £240 commission he received from the claimant. But no such claim has been made against the broker and so, alternatively, the defendants have a claim for equitable compensation against the claimant as it procured the broker's breach of fiduciary duty. This mirrors the common law right to claim the return of a bribe as money had received.
    
20. I think the defendants are also entitled to interest on the £240 from the date it was received (5 August 2003). Mr Seymour says only "ordinary" interest should be awarded. I would award simple interest at the loan agreement rate of 1.29% per month.
    
21. The only remaining question is whether we should order rescission of the loan agreement and its related legal charge. As I have said we have a discretion as to whether or not to make such an order. I do not think we should do so. The agreement and charge are fair and have been held to be enforceable except for the £295. The defendants will be fully compensated by an award of £240 plus interest. To rescind the transaction altogether would be unfair and disproportionate. This is my view irrespective of whether the defendants would be able to make counter-restitution.
    

Wilson & Anor v Hurstanger Ltd [2007] EWCA Civ 299 (04 April 2007)

[incipience]

The key point is that because the broker made them aware that they would get a commission, but failed to say how much it was not so much a secret commission as the borrower was aware of a commission.

 

However were the borrower not to be aware of the commission and the amount then it would be likely that the loan would have been recinded.

 

The broker would of received around £3k for a secured loan and PPI, plus any overides.

 

You could therefore go after the lender for those commissions plus interest, and look at having the entire loan and PPI written off on the basis that you had not given informed consent.

 

This of course is a matter for the courts and not something that the FSA would deal with. It should also be noted that it would be unlikely that you could get a no win no fee lawyer to argue this in court.

[pinknico]

Can you explain why a no win, no fee lawyer may not argue this is court?

[incipience]

Most no win no fees are after the easy case, say the miselling of PPI, a case like requires more work.

[pt2537]

It should also be noted that it would be unlikely that you could get a no win no fee lawyer to argue this in court.

Im sorry but this statement is plain wrong

 

i work in the legal profession and i can say that we take cases on Conditional Fee Agreements ( No win no fee) quite regular and in fact i know of many otehr practices that do as well,

 

Due to the rules of the site i am not allowed to post the name of the firm i work for but suffice to say even if i were, i would not do so as i keep my work and CAG lives very seperate

[incipience]

Speaking from experience, not fact, as firms we have spoken to have preferenced the easy win.

[frettful38]

Wow pt2537,

 

That was a long story, but what do I do now?

[pt2537]

Wow pt2537,

 

That was a long story, but what do I do now?

that is the case which sets out the requirements on secret commissions

 

you are entitled to reclaim that commission at the least, but if the commission was totally secret then it is likely to be a fraud or a bung and that would give you the right to elect the agreement voided or voidable

 

Its difficult to advise on this kind of matter without the full detail of the case, you would be better served to get legal representation id say

[incipience]

sue the buggers.

[incipience]

You should note that I was told by my lender that the broker was not an agent, they claimed they were an independant third party and as no agency existed they are not liable to disclose commissions as it was an internal matter and that they refuse to disclose details of commercial arrangements.

Edited January 30, 2009 by incipience

[pt2537]

sue the buggers.

i think you have summed it up perfectly with that statement

[frettful38]

Thanks guys,

 

So do I go and see a solicitor about this or how do you suggest I get legal representation. I did not know nothing about this at all, and on page 2 of this letter there is another bit of info about 0.9% commission,

[incipience]

What commission are they referring to. If they have told you that they are paying a commission and how much then you may not have a claim.

[frettful38]

They did not tell me they were paying a commission, the only fee I knew was that Ocean/Finance would receive £1,750.00 broker fee, as we went through them to get loan and they suggested Ocean/Finance,

 

Is there any info that I could upload for you to understand better?

[incipience]

Did they tell you that the lender was also paying Ocean for the referral of the loan? if not then this is a clear cut additional payment, and if that was undisclosed then that was a breach/bribe

[frettful38]

No they did not tell me this bit of information,

 

God could you imagine if I could do them for fraud and win, they would have to write all my debt off, then I could probably take everyone on cag for a drink,

 

Just a thought hey,

So whats my next course of action incipience? I only knew as I said about the broker fee to O/F nothing else.

[pt2537]

you would need to file a letter before action with the lender and set out clearly and concisely your claim.

 

you would need to give them a minimum of 21 days to reply,

 

And if they refuse to reply or reply unfavourably then you would need to sue them

 

the dangers of such an action cannot be overlooked, when we run this type of case we have ATE insurance to protect the customer from major costs liabilities should we lose, we havent lost todate but you never know

 

get a solicitor is my advice unless you are confident in your ability to deal with this

[incipience]

Well if the commission was a secret then you were unable to give your informed consent, which a judge could order a recission of the entire loan.

 

However could you imagine if everyone done this, the banks would collapse overnight. Hey que sera sera.

 

I am not sure your contents insurance will cover this sort of legal action, but you never know as many policies allow for family legal cover.

 

Not advising this, but were you to somehow default on your payment and the lender took you to court then well, your policy should cover this, then get yourself a damn good lawyer and fight your case.

[frettful38]

I would rather not get a solicitor as most of the mess I am in today is because of their negligence, I am sure there are a lot of good ones out there but I am mentally too run down to start searching for any anymore.

 

If its not too much to ask could you start me off with a letter I should write to them please or is there a template.