Scope of fiduciary duties extended to cover credit brokers

In what circumstances will the court request for the disclosure of commission? Adam Finch, litigation partner in Harrison Clark Rickerbys, comments on the effect of the recent Court of Appeal judgment in McWilliams v Norton Finance.

Original news

McWilliams v Norton Finance (UK) Limited (in liquidation) [2015] EWCA Civ 186

This appeal was heard by the Court of Appeal on 2nd December 2014. It is an appeal from the decision of Mrs Recorder Mullen in Middlesbrough County Court dated 7 June 2011. It concerned a secured loan of £25,000 unregulated by the Consumer Credit Act 1974 (CCA 1974), with single premium payment protection insurance (PPI) of £3,745. The loan was to consolidate existing debts and to finance a conservatory. Norton was paid a broker fee of £750 and a completion fee of £500. Norton was a member of FISA and was authorised by the Financial Services Authority for general insurance intermediation.

Norton had made an admission in the proceedings that it had received commission for selling the loan and PPI. This admission was made to try and keep the claim simple and get the case on to the fast-track. This failed and the case was allocated to the multi-track. At trial, Norton’s counsel sought to withdraw that admission. The counsel for the borrowers did not object in the proper manner. The trial judge appeared to allow Norton to resile from its admission. After assessing the evidence which included oral evidence from Norton’s compliance manager Mrs Gregory the claim was dismissed with costs.

Lord Justice Buxton granted permission to appeal in October 2011. Norton then went into liquidation. The borrowers’ solicitors then sought to abandon the case and a consent order was drawn up and sealed compromising the case. Subsequently Mr Hodge Malek QC successfully made an application to the Court of Appeal on 15 May 2014 for this consent order to be set aside and for the appeal to be re-opened under the Civil Procedure Rules 1998, SI 1998/3132, Pt 3 (CPR).

Norton was not present or represented at the appeal but it had served a skeleton argument and issued a respondent’s notice.

What is the significance of this case?

This was the first time an appellate court had looked at the issue of disclosure of commission since the landmark Supreme Court decision in Plevin v Paragon Finance Ltd [2014] UKSC 61, [2015] All ER 625. The commission in this case was 45% while in Plevin it was 72%. The Court of Appeal considered these borrowers ‘vulnerable’. Mrs McWilliams has multiple sclerosis. The court decided that the amount of commission earned by Norton should have been disclosed to them. The FISA booklet sent to the borrowers had a statement in general terms that commission would be paid. The court said this was not enough and held there was a fiduciary duty on Norton which had been breached. As a result, the Court of Appeal ordered all commissions to be refunded with 5% interest.

What were the key issues the Court of Appeal was asked to address?

The Court of Appeal had to consider three issues:

  • Was the admission validly withdrawn?
  • Was there a breach of fiduciary duty?
  • Should the amount of the commission earned by the broker have to be disclosed?

The court decided CPR 14 had not been followed—permission to withdraw the admission had not been sought and held the admission was not validly withdrawn.

The Court of Appeal extended the scope of fiduciary duties to cover insurance and credit brokers. It applied the Privy Council ruling in Arklow Investments v MacLean [2000] WLR 594 where it was held that there was an obligation not to exploit of take advantage of the position of the fiduciary at the expense of the principal. It held a principal is entitled to the single-minded loyalty of his fiduciary. Finally it applied an earlier Court of Appeal ruling in Hurstanger Limited v Wilson [2007] EWCA Civ 299, [2007] 4 All ER 1118 where Tuckey LJ had ruled that the relationship between a borrower and an independent credit broker was obviously a fiduciary one.

As a consequence it ruled that the broker did not have informed consent from the borrowers to receive and keep the commission because the borrowers were vulnerable and unsophisticated. As the amount of commission earned by the brokers was not disclosed, the court ordered the commission to be repaid to the borrowers.

How will the decision in this case affect future cases?

The banking industry had proceeded on the basis that credit brokers remunerated by means of commission payment were not under a fiduciary duty. This ruling overturns that assumption. It will mean that, in general terms, where a commission has been paid there should be a fiduciary duty to obtain informed consent beforehand from customers to retain commission. Where consent is not obtained, commission payments may have to be repaid. It should mean there is greater scope for claims management companies to commoditise financial mis-selling cases.

For business written after 1 April 2014, FCA CONC 4.5.3R mandates that a credit broker must disclose to a customer the existence of any commission or fee payable by a lender where knowledge of the existence or amount of the commission could actually or potentially affect the broker’s impartiality or have a material impact on the customer’s decision. However, this decision not only gives retrospective affect to this part of CONC, it also widens its scope too.

Does this decision leave any grey areas or unresolved issues?

While this concerns an independent credit broker, it is not clear how this decision will apply to other brokers (ie state agents arranging mortgages or travel agents arranging travel insurance on which they too receive undisclosed commission). In Hurstanger, the issue of whether there was a fiduciary duty was not argued before the Court of Appeal—it was agreed. The commission here was 45% but it is not clear what will be the position where commissions of less that this amount was received. Many banks and lenders as well as being a creditor are also a broker for arranging insurance—often with another company in their group. Does this mean that lenders themselves will also be under a fiduciary duty? It is not clear how vulnerable or unsophisticated a customer needs to be for the fiduciary obligations to arise. Finally, it is not clear how far back claims for breach of fiduciary duty can go back. Will the concealment provisions the Limitation Act 1980, s 32 prevent a limitation defence being run?

What should lawyers do next?

Brokers in particular are likely to see an increasing number of claims for breach of fiduciary duty on any cases where an undisclosed commission has been paid. Here an ‘unfair relationship’ claim could not be made against the lender because, as the loan was for more than £25,000, it was not regulated by CCA 1974. Brokers are vulnerable to claims on other such cases where a claim cannot be made against a lender itself. It would seem these will have to be settled if the criteria identified in McWilliams are met. The earlier such cases are settled then the lower any adverse costs award should be.

As the commission on this case is low at 45% this may prompt the Financial Conduct Authority to issue a direction to firms requiring a further past business review and remediation to all customers where commission of more that this amount was received.

As Norton is in liquidation, it is unlikely there will be a final appeal to the Supreme Court. As this judgment is from the Court of Appeal it is binding on all county courts in England and Wales.

There may be scope in a future case with different facts to try and challenge this ruling but only the Supreme Court can over turn this ruling. Lawyers should look out for a suitable case to take as a leap frog appeal if this is the case.

Interviewed by David Bowden.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

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