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The recent ruling by the Court of Appeal in Wilson v Hurstanger Limited finally shines some bright, and irresistible, light into the murky area of undisclosed commission to intermediaries. If 15 years ago this was the norm, sums even changing hands in cash in brown envelopes passed on in motorway service area car parks, the regulatory mood of the day now calls for complete transparency.

The Court of Appeal has now insisted that this be the case and about time too. The court used strong language when describing such undisclosed commissions, terms like: “defrauding the borrower” and “breach of fiduciary duty” were heard, and whilst overtones of Consumer Credit Regulations attended this particular case, I have little doubt that the ruling impacts upon all commercial deals too.

The case concerned a married couple in serious financial difficulty who instructed a broker to find a £7,000 second mortgage. This was done and a fee of £1,000 added to the loan. The signed agreement between the broker and the client also mentioned that further commission may be paid to the broker by the lender. In that the amount of this commission, £243, was not stipulated, it represented a fraud against the borrower.

There is now a possibility, arising from this ruling, that a lender paying an undisclosed commission to a broker may find their facility set aside by the courts for joining in the defrauding of the borrower.
This is good news for the whole commercial finance sector. A good broker could always stand tall and defend his, or her, fees as just reward for finding the best possible deal for their client. It is little trouble demonstrating that a 1% fee on a 10-year loan is quickly covered by obtaining a 0.5% reduction in the interest rate – just two years.

Commissions paid to intermediaries are added to the cost of the facility and are so deeply embedded in the reward structure of the invoice finance industry that this ruling must come as a relief in that commission levels must now standardise and be declared on all agreements.

There are some areas of the commercial property sector where commissions are excessive and often paid by naive, often desperate, borrowers who have responded to advertisements in the press, ironically guaranteeing best rates. Yes, but for whom?
Some of the clearing banks have set an example in that they insist upon full disclosure of broker remuneration and at a time when the voluntary, but highly effective, Banking Code is under fire from some overly idealistic Conservative Social Justice Group, a good thing too.
The NACFB may heave a sigh of relief as well. It has balanced precariously on the fence over this one but now has no choice.
If commercial finance wishes to remain unregulated, the Court of Appeal has just done it a great big favour.

I am sorry if it means the pain of change for some, but ours is a great, and largely honest, industry: we must keep it that way. Undisclosed commissions, no matter how hard the intermediary has worked, no longer have a place in it.

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Editor

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