Financiers Beware: UK Court of Appeal Holds Financiers Liable to Repay Commission Payments Paid to Brokers

In a recent UK Court of Appeal judgment in what is known as “the motor finance cases” (see Johnson v FirstRand Bank, Wrench v FirstRand Bank and Hopcraft v Close Brothers Limited, which appeals were all heard together), the Court has shone a spotlight on the issue of commissions paid by financiers to brokers and determined that, in some cases, they may be considered “bribes” under UK law. 

The judgment directly concerns UK consumer regulated motor finance agreements but its implications for international financiers, insurers and other parties who make commission payments to UK based brokers and intermediaries and are much wider.

The judgment serves as a warning that, where a commission is paid to a UK based intermediary or broker and the customer is either not fully informed of the commission or does not give informed consent, the party paying the commission may be liable to the customer for the amount of the commission or to rescission of the contract. The UK courts have viewed this issue as serious, because the payment of a “secret commission” may be tantamount to a bribe, which is actionable by the victim of the bribe (i.e., the customer). 

In short, in all cases where any financier, insurer or similar party paying commission (the “Commission Payer”) has paid a broker in the UK for business that the broker helped to introduce, the Commission Payer may be exposed to the customer for repayment of the commission, or even rescission of the finance contract.  The Commission Payer’s liability stems from its status as an “accessory” to the broker’s breach of its duty to the customer, where there has been no informed consent to the commission by the customer.

In some cases, even disclosure of a commission to a customer may be insufficient (e.g., if it is hidden in terms and conditions). The burden of proving sufficient disclosure about the commission lies on the broker. What is needed to be disclosed is assessed on the basis of whether it might have affected the customer’s decision to borrow funds and not whether it would have done so.

Some critical points for Commission Payers to consider are:

• Where a person arranges finance (or other financial, insurance or investment products) for their customer, they are acting as a broker;
• As a broker, their task is to find the customer a deal from their contacts, which is suitable for the customer’s needs and is competitive;
• The relationship between the broker and the Commission Payer is one of agent and principal, meaning the Commission Payer can be liable for the acts of the broker; and
• The broker has a conflict of interest in these arrangements, because the broker both has: (1) an interest in gaining a commission, and (2) a duty to find the best deal for the customer, which requires the broker to provide information, advice or recommendations to the customer on an impartial or disinterested basis.

Implications

Finally, we note that while an appeal has been lodged in the UK against the decisions: (i) financiers, insurers and other parties paying commission to UK based intermediaries or brokers should review their portfolios (as well as their policies and procedures) to identify cases where a commission has been paid as part of a transaction to assess whether there is any exposure to repayment, and the extent of that exposure, and (ii) clients should exercise caution in entering into new commission arrangements which do not provide for the end customer to provide informed consent. At the same time, the commentary suggests that these rulings are likely to be upheld on any appeal heard in the UK Supreme Court so adopting these enhanced practices early will likely prove to be time and energy well spent.