The borrowers sought a second loan of £8000 to pay off the arrears from a mortgage broker after falling behind with their mortgage payments. .
The lender, Hurstanger Ltd, provided the borrowers with documents that included a document 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 the documents and the lender paid the broker commission of £240.
The borrower’s counsel put to the Court 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. The issue was as to whether the payment of £240 was a secret profit, in breach of the broker’s fiduciary duty to his clients.
Common law principles of agency state that 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 but without knowing the amount they could not 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. However, the Court took into account that the borrowers in this market were likely to be vulnerable and unsophisticated and therefore concluded that disclosure of the amount was necessary. The broker had not made a secret profit because the borrowers knew about the commission, but in failing to disclose the amount, the broker 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.