Mortgage Brokers, Secret Commissions and Unfair Credit Relationships
Pengelly v Business Mortgage Finance 4 plc  EWHC 2002 (Ch)
This case represents the next chapter of High Court decisions since the decision in Wood v Commercial First Business Limited (In Liquidation)  EWHC 2205 (Ch), to examine the law on secret commissions. The practical implications of this decision is important not just for mortgage brokers but for mortgage providers and practitioners alike. The decision by Mr Justice Marcus Smith confirms that the High Court will have no hesitation in recognising fiduciary duties between borrowers and mortgage brokers. It is also a firm reminder that, where the circumstances warrant, undisclosed commissions from lenders to brokers will likely result in the mortgage being invalidated.
The Background Facts
Mr Pengelly was a farmer with a working farm at his property. In 2005, he had two outstanding loans that he wanted to re-finance with more competitive interest rates and also raise some additional capital. This borrowing was to be secured by a mortgage over his property. Mr Pengelly approached a broker, UK Mortgages and Finance Services Ltd (“UKMFS”) whose standard terms and conditions stated:
“We may receive fees from lenders with whom we place mortgages. Before we take out a mortgages, 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 £250 or more, we will tell you the exact amount (emphasis added)”.
A mortgage was subsequently arranged with Commercial First Business Limited (“CFBL”), which was later assigned to Business Mortgage Finance 4 plc (“Finance 4”), and an advance of some £81,000 was agreed. This had the effect of paying off the two loans and providing Mr Pengelly with some £30,000 in capital. With regard to commission, the evidence was that the broker, UKMFS, had received a standard commission of 2-4% from both Mr Pengelly and CFBL. Neither UKMFS or CFBL disclosed the commission that was to be paid by CFBL. Indeed, the evidence of CFBL was that it expected UKMFS to deal with this disclosure.
The mortgage subsequently fell into arrears and Finance 4 sought possession of the property. By his defence and counterclaim, Mr Pengelly sought to have the mortgage rescinded either because CFBL had paid, and UKMFS had received, a secret commission or because the contract had been unfair under s.140A of the Consumer Credit Act 1974 (“CCA 1974”).
First Instance Decision
At first instance, HHJ Carr held:
- that there was no fiduciary relationship between Mr Pengelly and UKMFS because there was no agency relationship as UKMFS had no power to contract with CFBL on Mr Pengelly’s behalf;
- that if he was wrong, relying on Hurstanger Ltd v Wilson  EWCA Civ 299, he considered the case to be a “half-secret” commission case because Mr Pengelly had undoubtedly received the standard terms and conditions which confirm the “possibility” that the broker would receive a commission;
- that the relationship was not unfair pursuant to s.140A given Mr Pengelly was aware or deemed to be aware of the possibility of the commission and made no enquiries about it;
On the basis of these findings, HHJ Carr refused to rescind the mortgage and dismissed Mr Pengelly’s defence and counterclaim.
Appeal Decision - Mr Justice Marcus Smith
On appeal, Mr Justice Marcus Smith held the following:
- The relationship between Mr Pengelly and UKMFS had clearly been one of agency [68(2)]. Whether this agency gave rise to a fiduciary relationship as between Mr Pengelly and UKMFS was a different question and not one that the judge asked himself [68(3)]. Having regard to the terms brought to Mr Pengelly’s attention and the acceptance signed by him, the relationship between him and UKMFS was a fiduciary one . The Judge had erred in his characterisation of the relationship between Mr Pengelly and UKMFS as not fiduciary. This fiduciary duty had also been breached because of a failure by UKMFS to obtain Mr Pengelly’s informed consent to the commission paid by CFBL .
- The breach of fiduciary duty committed by UKMFS had been both extremely serious and had resulted in a non-disclosure, not a partial disclosure, of the secret commission received by UKMFS from CFBL. This was not, in short, a “half-secret” commission, but a secret commission or bribe .
- No point of law regarding section 140A had arisen before HHJ Carr given he had been concerned with a factual question of whether the mortgage had been unfair within the meaning of the CCA 1974. The reasons set out by the judge that no unfairness had arisen was unimpeachable and there was no reason to interfer with that finding . This element of the appeal was dismissed.
There are a number of key discussion points to take from this decision.
Firstly, this is an important decision in reminding us that agency relationships do not automatically lead to fiduciary relationships and that each must be looked at separately. On the facts of this case, Mr Justice Marcus Smith clearly thought that the agency relationship existed not only because the terms had made clear that UKMFS would be acting on Mr Pengelly’s behalf but also because they had full authority to negotiate on his behalf. He then separately went on to find that the relationship was also fiduciary because of the undivided loyalty UKMFS had to Mr Pengelly in bringing him the best deal (for him) on the market [68(5)].
Secondly, Mr Justice Marcus Smith was clear that the failure to disclose the commission was a serious breach which was not remedied just because Mr Pengelly was put on notice that there “might” be a commission. This is consistent with the reasoning in Wood v Commercial First Business Limited (In Liquidation) in making clear to mortgage brokers and lenders that informing borrowers that there might be commission does not go far enough in moving the nature of the commission from fully secret to half-secret.
Thirdly, although not argued on appeal, Mr Justice Marcus Smith opined obiter that it was unlikely the assignment from CFBL to Finance 4 would have allowed Finance 4 further defences over-and-above those that would have been available to CFBL . Lenders should therefore bear in mind that, in the context of secret commissions, an assignee will not be protected from enforcement claims even if they were distanced from the original events.
Lastly, Mr Justice Marcus Spencer’s finding that there was no unfair relationship under s.140A was somewhat surprising despite also finding that there was a fully secret commission entitling Mr Pengelly to recission. Given unfair relationship claims are generally quite fact specific, it is unlikely this decision will preclude a subsequent court from coming to a different decision on broadly similar facts.
The discussion above makes clear the importance of this decision for both litigants who seek to challenge the enforceability of their mortgage contract on the basis of secret commissions, brokers whose terms and conditions attempt to disclose such commissions and mortgage providers who rely on brokers to disclose commissions on their behalf. Given the far-reaching impact of this decision, it may be helpful if the Court of Appeal stepped in to provide a clear binding decision on these issues.
25 Canada Square Chambers
11 December 2020