It is fair to say that Marcus Smith J’s judgment in Pengelly v Business Mortgage Finance 4 PLC [2020] EWHC 2002 (Ch); [2020] PLSCS 157 covers some tricky legal topics including agency, fiduciary relationships, secret commissions and section 140A of the Consumer Credit Act 1974. Most importantly, however, it may see the beginning of the end of undisclosed commissions being paid to mortgage brokers.
The facts
The claimant, P, is a farmer in Cornwall. In 2006, he took out a new mortgage over his farm for £81,000. This paid off two previous loans and gave him working capital of £30,000. P used a mortgage broker – UK Mortgages and Finance Services Limited (UKMFS) – which arranged the mortgage through Commercial First Business Limited (Commercial) which in turn assigned the benefit of the mortgage to the defendant, Finance 4.
UKMFS’s terms, which P accepted (although he may not have read them in any detail or at all) included this statement: “We may receive fees from lenders with whom we place mortgages. Before we take out a mortgage, we will tell you the amount of the fee in writing. If the fee is less than £250, we will confirm that we will receive up to this amount. If the fee is more, we will tell you the exact amount.”
UKMFS received a commission from Commercial of between £1,620 and £3,240. This was in addition to the fee P paid to UKMFS. Contrary to its terms, UKMFS did not disclose the receipt of this commission to P. When Finance 4 brought possession proceedings against P, P argued that the mortgage should be rescinded (set aside) as a result of the secret commission and that P’s relationship with Commercial was unfair within the meaning of the 1974 Act. P lost on both points at the county court and, on appeal, Marcus Smith J agreed that the 1974 Act argument was doomed – quite simply, there was nothing unfair about the mortgage.
However, Marcus Smith J did hold that there was a fiduciary relationship between P and UKMFS. That relationship was breached on payment of the commission and Commercial and Finance 4 were accessories to that breach. So long as P can repay the outstanding amount of the mortgage (known as counter-restitution), the mortgage should be rescinded.
The judge’s reasoning
First, Marcus Smith J held that UKMFS was the agent (as that term is explained in decisions like Conway and another v Prince Eze [2019] EWCA Civ 188; [2019] PLSCS 27) of P. UKMFS’s terms made it clear that it was acting on P’s behalf and, while it could not bind P to any mortgage (that was a decision of P’s alone), it would negotiate on P’s behalf and P “would no doubt have been responsible for any representations UKMFS made on his behalf to any third party with whom he… ultimately contracted.” Finally, UKMFS researched the market and recommended an appropriate mortgage to meet P’s needs.
Next, he decided the relationship between P and UKMFS was fiduciary, a fact supported by the terms of business UKMFS agreed with P. As such, there was a relationship of trust and confidence and, relying on Millett LJ’s judgment in Bristol & West Building Society v Mothew (t/a Stapely & Co) [1998] Ch 1, P was entitled to the “single-minded loyalty” of UKMFS, including obligations on UKMFS to act in good faith and neither to make a profit at P’s expense nor place itself in a position where this duty and UKMFS’s own interests were in conflict, unless P had given his informed consent. Although UKMFS’s terms weakened the nature of fiduciary duty slightly (by allowing for the payment of a commission from the lender it disclosed to P), they did not eliminate the duty altogether.
The judge was also able to rely on the judgment of Slade J in Industries & General Mortgage Co Ltd v Lewis [1949] 2 All ER 573 to hold that Commercial and Finance 4 were liable as accessories to the breach of fiduciary duty. Where, as here, the party paying commission: (i) pays the money to the agent; (ii) knows that the agent is acting as agent and not principal; and (iii) does not tell the principal about the payment, the courts treat the payment as a secret commission or bribe. The fact that Commercial and Finance 4 were aware that the agency was fiduciary in nature (confirmed by the witness evidence of a director of Commercial), simply made the judge’s decision easier.
The effect of the decision
The case is of significant importance. As was acknowledged at both the county court and on appeal, the payment of commission by mortgage lenders to mortgage brokers is relatively common practice.
Indeed, Commercial’s terms of business require all of its brokers to explain the commission structure to borrowers. The problem for Commercial and Finance 4 was they took the “hazardous course” of not telling P about the payment directly. “They relied on UKMFS to comply with… [Commercial’s terms]… and UKMFS did not do so. Only actual disclosure to the fiduciary will do – and that did not take place in this case.”
Unless the judgment is overturned by a higher court, the mortgage industry should consider itself duly warned. The courts will take a dim view of undisclosed commissions which could well result in the entire mortgage being set aside. The only comfort for lenders is that the borrower will have to repay the outstanding loan in order for this to happen.
Key point
The case provides a warning to the mortgage industry that the courts will take a dim view of undisclosed commissions
Stuart Pemble is a partner at Mills & Reeve
