The Consumer Credit Act 1974
Under section 56 of the Consumer Credit Act 1974 (CCA), antecedent negotiations between the debtor and creditor which are conducted by a credit broker are “deemed to be conducted by the negotiator in the capacity of agent of the creditor as well as in his actual capacity.” However, for the purposes of the unfair relationship provisions in section 140A of the CCA, the credit broker is not generally deemed as the creditor’s agent.
This was made clear in Plevin v Paragon Personal Finance Ltd where the borrower refinanced existing liabilities through a credit broker. The credit broker informed Mrs Plevin that commission was paid by the lender but did not disclose the amount of commission or identity of recipients. Mrs Plevin argued that the credit broker’s failure to assess and advise her on whether PPI was suitable to her could be attributed to the lender, as its agent. The Supreme Court rejected her argument and confirmed that the credit broker did not act as the lender’s agent. It observed that the practice by which a credit broker was remunerated is “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”.
At common law, an agency gives rise to a fiduciary obligation towards the principal due to the principal’s trust and confidence in the agent and the agent’s ability to affect the principal’s legal relations. Consumer credit brokers are not “agents” in this sense. In practice, the credit broker will have existing relationships with a panel of lenders and have access to finance criteria. The credit broker’s role is to identify the lender willing to offer the most favourable terms to the borrower, assist in preparing the credit application and forward the completed application to the lender.
Accordingly, whether a credit broker owes fiduciary duties to a borrower should depend on the particular circumstances of each case. If the credit broker is found to owe fiduciary duties to a borrower, the question of whether the disclosure of any commission received by the credit broker was sufficient to avoid breaching the credit broker’s fiduciary duty can be answered.
In Nelmes v NRAM plc, the borrower paid a credit broker’s fee and a lender’s arrangement fee. The fact that half of the lender’s arrangement fee was transferred to the credit broker as commission was kept secret. The Court of Appeal found that the credit broker breached its fiduciary duty to the borrower by accepting the commission. However, in McWilliam v Norton Finance (UK) Ltd (t/a Norton Finance in liquidation), the credit broker was deemed to have breached his fiduciary duty to the borrowers because, although it did not inform the borrowers how much commission it might receive, it implicitly told them that the terms offered by the lender were the best possible deal. In this case, the Court of Appeal noted that the borrowers were “not financial sophisticates” and were financially vulnerable.
More recently, in Commercial First Business Limited v Pickup & Vernon, the High Court distinguished Nelmes and William and another v Hurstanger Ltd, which was followed in McWilliam. The case involved experienced property investors who were not told of the amount of commission to be paid to the credit broker. Preferring first instance decisions which detailed the particular facts of each case*, the High Court found that the credit broker was neither the borrowers’ agent nor their fiduciary agent. The credit broker’s involvement was minimal, comprised only of receiving a quotation and submitting the loan application forms to the lender. Further, it decided that the borrowers could not have “reasonably expected undivided loyalty” from the credit broker where the fact of commission was disclosed in writing to the borrower.
McWilliams is a judgment of the Court of Appeal and remains an authoritative, if unwelcome decision. On the other hand, Pickup is a judgment of the High Court and can be overturned by the Court of Appeal. It remains to be seen how the Court of Appeal will consider McWilliams in future cases, in light of Pickup.Although the High Court decision is welcomed by most, it does not bridge the gap representing the lack of clear guidance on the relevant principles and law in relation to fiduciary duties owed by credit brokers. In light of the decision in Plevin and the recent FCA Policy Statement PS17/3 on lack of commission disclosure with regard to PPI, it is clear that failure to disclose commission remains a legal hot potato.
*Yates and Lorenzelli v Nemo Personal Finance & Another, Flanagan v Nemo Personal Finance, and Sealey and Windfield v Loans.co.uk and GE Money Ltd