Wood v Commercial First Business Ltd

Commissions - What's the secret?

Financial products could be tainted by an undisclosed payment by the lender to a 3rd party. However, what about the largely unregulated sphere of commercial lending? That remains a less clear proposition, despite being a year since the rare finding of a secret commission in the Court of Appeal.


An agent is a party that facilitates contracts between their principal and a third party. They often act for the principal in circumstances which give rise to a relationship of trust and confidence – and where they do, this can amount to a fiduciary relationship. Fiduciaries have a duty to not profit from this trust and confidence without the informed consent of their principal. Breaching this duty would entitle the principal to terminate the agency and claim compensation.

In instances where secret commissions have been paid (i.e. payments made to fiduciaries that are not disclosed principal) , the principal would be entitled to alternative remedies (over and above termination of the relationship and compensation), against both the agent and any appropriate third party. This is because the law treats secret commissions as a 'special class' of fraud or bribe. Such remedies include recovery of a sum equal to the amount of the secret commission from either the payer or the payee, damages for fraud relating to any loss suffered, or recission.

Wood v Commercial First Business Ltd concerned two cases relating to the law surrounding secret commissions. The Lender in both cases was Commercial First Business Limited ("CFBL") (but the loans were subsequently assigned). The borrowers (Mrs Wood and Mr Pengelly respectively ("the Borrowers")) had engaged a broker, UK Mortgage Financial Services Limited ("the Broker") for the purpose of finding loan finance.

The Broker's terms of business included a provision as follows:

'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 £250 or more, we will tell you the exact amount'. In both cases, the Broker arranged the loans between the Borrowers and CFBL and received commissions from CFBL. Neither Mrs Wood nor Mr Pengelly were made aware of the fees paid by CFBL to the Broker.

Decisions at first instance

Mrs Wood (a commercial cheese-maker) issued proceedings to set aside the loan agreements after enforcement proceedings had been issued. The Court found in her favour on the issues of the undisclosed commissions and ordered CFBL to pay Mrs Wood the total of the commissions paid to the Broker, on the condition that she gave restitution to the relevant assignee in an amount to be determined.

Separately, proceedings were issued against Mr Pengelly (also a farmer)by CFBL. Contrastingly to Mrs Wood's case, the County Court  dismissed Mr Pengelly's defence in its entirety. On appeal to the High Court, Marcus Smith J allowed Mr Pengelly's appeal as regards the claim for recission based on the payment of an undisclosed commission paid by CFBL to the Broker.

In the Wood case, the Judge held that it was not necessary for a fiduciary relationship to exist between a borrower and the Broker in order for relief to be granted. By contrast, in Mr Pengally's appeal, it was held that a fiduciary duty was in fact a necessary pre-condition to the grant of relief. It was however, held in both cases that a fiduciary relationship existed between the Broker and the Borrowers.

The assignees of CBFL appealed in both cases which were heard together. 

Issues in the Court of Appeal

There were three issues that were considered on appeal:

  1. whether a fiduciary relationship between the client and the broker is a necessary pre-condition to the grant of relief against the payer of the undisclosed commission;
  2. whether a fiduciary relationship existed between the Borrowers and the Broker in these cases; and
  3. whether the commissions that were paid were properly categorised as ‘half-secret’.

First issue: is a fiduciary relationship between the client and the broker a necessary pre-condition to the grant of relief?

The key principle arising from the judgment on this issue was that the existence of a fiduciary relationship is not a necessary pre-condition to find liability for the payment of secret commissions. As a result, liability for such commissions could exist within a variety of relationships which involve a duty to provide information, recommendation, or advice. This is highlighted at paragraph 101 of the judgment:

[101] ‘…the common law remedies of money had and received and damages are available against the third party payer of a bribe or secret commission, and that recission of a transaction with the third party is available as of right, subject to making counter-restitution. None of this depends on establishing that the first party is an accessory to a breach of fiduciary duty by the payee.’

The contemplation of this first issue has also given rise to a far more straightforward question when considering the status of an agent in cases where a bribe is an issue. The court can simply ask ‘is the payee under a duty to provide information, advice or recommendation?’. If the answer is yes, then it will likely be found that a fiduciary relationship was created, and remedies will be subsequently be available to the wronged party (see paragraph 102 of the case judgment).

Second issue: did the Broker owe a fiduciary duty to Mrs Wood and Mr Pengelley?

In the Pengelley case, Marcus Smith J held that by virtue of its terms of engagement, the Broker owed a fiduciary duty to Mr Pengelley. In the Wood case, Mr Pickering used the three-stage test in Industries and General Mortgage Co Ltd v Lewis, determining that all three stages were satisfied.

The Court of Appeal found the conclusions in both cases at first instance, were correctly drawn:

[110] ‘In my judgment, both Marcus Smith J and Mr Pickering were unquestionably correct to hold that, on the basis of the broker’s terms and conditions and on the basis of the finding of fact at first instance, the broker owed duties which engaged the law applicable to bribes and secret commissions. It was under a duty to make a disinterested selection of mortgage product to put to its client in each case. To the extent that it is necessary, they were also correct to hold that the broker owed a fiduciary duty of loyalty to Mrs Wood and Mr Pengelley in the performance of its duties. As I have indicated in relation to the first issue, it matters not whether that duty is characterised as ‘fiduciary’, either in a loose sense or at all’.

[121] ‘in my judgment, Marcus Smith J and Mr Pickering were clearly right in their conclusions as to the duties owed by the broker to Mr P and Mrs W.

Third issue: were the payments made in these cases ‘half-secret commissions’?

A half secret commission is one where a principal is aware, or ought reasonably to have been aware that the broker may be paid fees by the lender. Conversely, a fully secret commission arises where the principal is not told about the existence of a commission at all.

This distinction between secret and half-secret commissions impacts on the remedies available.

Although recission is available as a right in cases involving fully secret commission, if a commission is found to be half-secret, then the remedy of recission is only available as a matter of judicial discretion. Despite this difference regarding the right to recission, there is some difficulty in determining where half-secret cases will arise. For example, half-secret commissions require a similar duty of loyalty to be established as with fully secret commissions.

Due to the nature of the commissions paid to the Broker, the appellants argued that the terms of business put the Borrowers on notice that a commission might be paid to the Broker, and that was all that was needed to prevent the commission from being secret, as opposed to half secret.

The Court of Appeal found that these terms of business imposed an obligation on the broker to inform the borrowers (before the mortgage was taken out) of the amount that they would receive. Further, as the commission paid to the broker in both cases far exceeded £250, the exact amount should have been disclosed to Mrs Wood and Mr Pengelley. The Court also found that in the absence of such disclosure, the only conclusion the Borrowers could have reached was that no fees were being paid. As such, the commissions were held to be fully secret.

Both appeals were dismissed.

What does this mean for lenders?

  • A fiduciary relationship is not a necessary pre-condition for relief against the payer of a secret commission. If an agent owes a 'duty to provide information, advice or recommendation on an impartial or disinterested basis' [48], the payment of secret commissions or bribes will expose the payer and the payee to the applicable remedies and the principal will be entitled to cancel the contract with the third party.
  • Fully undisclosed commissions will leave lenders exposed to liability for damages, but also recission of the underlying loan, even where the lender is not aware that the commission is secret.
  • If an agent has an unqualified obligation to inform a principal of the amount of a fee paid to them, then this will not be considered a half-secret commission.

In practice, whilst lenders will be clear on their regulatory obligations (depending on the nature of their products/customer), it does not mean they can forget their legal risks – especially when the selling of their products rely on third parties (like brokers).

In that case, especially if their customers share similarities to consumers, in minimising the risk of challenges, lenders may wish to be guided by the FCA's rules about the payment of commission which, whilst not prohibited, is tightly governed. For example:

  • The FCA Consumer Credit Sourcebook (CONC) provides that a lender should only offer a firm a commission agreement where such payments are justified based on the extra work of the firm involved (CONC 4.5.2);
  • A credit broker must prominently disclose to a customer, in good time before a credit agreement or consumer hire agreement is entered into, the existence and nature of any commission payable. They must disclose this information where the existence or amount of the commission could actually or potentially affect the impartiality of the credit broker in their recommendation; or have a material impact on the customer's transactional decision to enter into the agreement. (CONC 4.5.3)
  • The FCA Conduct of Business Sourcebook (COBS) also provides rules for the disclosure of commission where a firm sells or arranges the sale of packaged products (i.e. a life policy or personal pension scheme) to retail clients where this service is not in connection with the provision of a personal recommendation. In these circumstances, or if the customer requests it, the firm must disclose to the client any commission received by it or any associates.

Get in touch