The Lord of the Secret Commissions – the grey area between clients, brokers and product providers

If you use a broker to negotiate or advise on a financial product or the provision of energy, by completing the deal the broker may in return for their services receive a fee from the end provider.  This is usually deducted from the product on completion.  It is also fairly common practice for the Lender/Suppliers to provide the broker with commission on each deal completed.  There is nothing illegal about this practice.

If a commission is of itself not illegal, then where do you start?

As fans of JRR Tolkien will know, the Rings of Power were given as gifts to Kings of Men by Sauron, before eventually corrupting them.

The issues arise when commission is concealed from the customer.  The issue of secret commission has been discussed in the courts of England and Wales for almost 150 years.  It was the ruling in Panama and South Pacific Telegraph Co v India Rubber, Gutta Percha and Telegraph Works Co (1875) LR 10 Ch App 515 that first confirmed that secret commissions should be treated as fraud and the agreement where there was a secret commission could be rescinded.

There have been a number of more recent rulings in the UK Courts that having become increasingly more claimant friendly, reducing the grey areas and expanding the capacity in which claims can be brought.  An example is Wilson & Anor v Hurstanger Ltd [2007] EWCA Civ 299 which created the principle of a half-secret commission, which will be discussed in more detail later.  There is also the leading case of Wood v Commercial first [2019] EWHC 2205 (Ch) which further entrenches the rights of the borrower/consumer.

There are two main areas in which Secret Commission claims have been brought.  These are

• Sale of financial products and relate to the relationship between, borrowers, lenders and brokers; and
• Sale of Energy and relate to the relationship between consumers, suppliers and brokers.

That is not to say that the claims are limited to these categories.  This firm has recently acted on a claim in relation to the sale of livestock.  This goes to show that the rules and principles could hypothetically apply to any market in which there is an intermediary liaising between the provider and end purchaser of a product.

The crux of the matter is the extent of the commission and how this will impact the impartiality of the broker and whether this was disclosed to the customer.  Broadly speaking if the commission is not disclosed i.e. it is secret commission then it is likely that the broker will have breached their fiduciary duty (duty of care) to the borrower / consumer.

Have they in effect been bribed to encourage a customer to use a specific product or terms which may not be in their best interest even more favourable to the supplier / lender?

The lender / supplier that does not disclose the payment to the borrower / consumer will be equally liable for having procured the breach of duty.  The case is also the same if the presence of commission is disclosed but not the amount – this is known as a half secret commission.  As with fully secret commissions, half secret commissions can amount to a bribe and are illegal.  As mentioned earlier the Panama v India Rubber case in 1875 stated that secret commissions could also be considered fraudulent.

For want of a better example, has the offer of commission corrupted the broker as the Rings of Power did the Kings of Men.

How can you defeat something that cannot be seen, or in our case prove that a secret commission has been paid to your broker?  In both the Hobbit and Lord of the Rings the Eagles appear at the nick of time to save the day.

Unfortunately, we can’t rely on winged friends to do the same, the surest way to uncover a suspected commission  is to request disclosure of the suspected commission.  In the event that this is refused one could also submit a Subject Access Request under GDPR forcing the broker or lender/supplier to comply or accept penalties from the Information Commissioners Office.

Once commission has been identified the next step is to assess the value of a claim.  The aim underpinning commercial claims is to put the wronged party in the same position had they not been wronged.  This could include payment of the commission to the borrower/consumer, recission (reversal) of contracts or damages for fraud.  The exact amount of damages can only be assessed on a case by case basis and it is not possible to provide estimates without knowing the value of the underlying contracts.

In the recent ruling in Wood the broker had arranged 3 loans totalling £2.5m and had fees circa £20,000.  The contract stated that any commission over £250 would be disclosed.  In fact, they received three payments totalling in excess of £92,000 and these was not disclosed.  The borrower defaulted on the loans and properties were repossessed by the lender.

Mr James Pickering sitting as a Deputy High Court Judge, (a real life Aragorn?), confirmed the loan agreements should be rescinded setting off capital, interest and penalty charges.  She was also awarded the amounts received in commission circa £92,000.  The judgment was appealed and subsequently rejected in the 2021, strengthening the position in law.

However, no war can be won without some losses the downside for the claimant in this case was that she had to return the capital loaned in the first place circa £2.5m.  and she was unable to prove substantial claims for losses suggested to have resulted from the secret commission.

One issue to bear in mind is limitation.  This is the time after which you are unable to proceed with a claim as the point of deceit is too historic. The usual principle is 6 years.

The Lord of the Rings covers a period of some twenty years and is not too dissimilar to the length of some mortgages or the lifespan of certain products.  It would seem that one would not be able to claim. Fortunately for claimants, the limitation rules are amended in case of fraud, which as discussed above, secret commissions potentially are.  In this scenario, the six years run from the date of knowledge of the commissions.  If you discovered the commission 10 years into the mortgage you would still have 6 years within which to bring proceedings.

Returning to the Frodo, when he, Merry, Pippin and Sam set out to destroy the Ring they were not return to Hobbiton for an estimated 16-17 months.  Depending on their complexity, claims for secret commission in the English courts can take as long if not longer from issuing proceedings to trial.

The Hobbits with some assistance, were successful in destroying the Ring and defeating Sauron.  The judgments referred to in this article have increased the viability of claims relating to secret commission.

Whilst each case may often be lower in value than traditional funded commercial litigation research by Ofgem (the Office of Gas and Electricity Markets in the UK) suggested that in their industry alone secret commissions were worth £2billion.

We hope this article has shed some light on secret commissions and the possible claims.

If you would like any further information or advice relating to pursuing a claim related to a secret commission (or Lord of the Rings analogies) please contact Dan Dodman (partner and head of the Dispute Resolution Team) and Jonathan Stimmler (Solicitor) who will be happy to assist.