Judgment in the case of Johnson v GE Money Secured Loans Limited and Elderbridge Limited was handed down earlier this year. The case concerned a loan advanced to Deborah Johnson by GE Money Secured Loans Limited in 2008, that was legally assigned to Elderbridge Limited in 2016.
The loan of £17,000 was arranged by an independent broker, 21st Century Finance Limited, who in turn received a commission payment of £1,700 from GE Money for the introduction.
Unfair Relationship
Ms Johnson brought a claim against both GE Money and Elderbridge under s.140A and s.140B of the Consumer Credit Act 1974 (“CCA”) alleging an unfair relationship. Three arguments for unfairness were raised, but the successful issue was the question of a fiduciary relationship owed by the broker to Ms Johnson and the payment of undisclosed commission.
Ms Johnson did not have prior knowledge of the commission being paid to the broker by GE Money and did not obtain details of the commission until after the claim had started. The judge considered the customer care document provided to Ms Johnson by GE Money before entering into the agreement, where within section 7 it stated:
“Your broker will receive commission from us. This will be a percentage of the amount of your loan, which may vary according to the type of loan which we make. Your broker can tell you how much. You can also ask us.”
Ms Johnson admitted whilst giving evidence, that although she did not recall receiving the document, she would have read it if she had. The judge found she was aware that commission would or may pass between the broker and GE Money, however not the amount, nor the percentage used to calculate it.
As a result of this, the judge concluded that the commission payment in question was not ‘fully secret’, but rather ‘half-secret’. The issue posed was whether the broker owed a fiduciary duty to Ms Johnson. Multiple cases were considered in deciding whether a fiduciary duty was owed, however the cases of Wilson v Hurstanger Ltd [2007]and McWilliam v Norton Finance (UK) Ltd. [2015] were most factually similar.
The judge followed the decision in those cases and found that there was a fiduciary relationship between Ms Johnson and the broker. He said that due to the substantial broker fee she had paid; her financial unsophistication; and her honest oral evidence, that she placed trust and confidence in the broker, which gave rise to such a relationship. It then had to be determined whether Ms Johnson had provided her informed consent for the commission payment to be made. Although it was decided that she was was aware of the commission payment, the fact that she was not informed of the amount of commission that would be paid, meant that she had not provided her informed consent. Consequently, a breach of fiduciary duty was founded.
Assignment: which creditor was liable?
In this instance, the assignment that took place was a legal one. Where legal assignments take place, following the case of Jones v Link Financial Limited [2013], the assignee can become one of the creditors for the purposes of s.140 of the CCA. It follows from this, that claims under s.140 could be made against the assignee, either by itself or as co defendant with the assignor.
Elderbridge argued that it should not be found liable as the creditor, as referred to in s.140(1)(c) CCA, but rather it should, as a matter of construction, be the creditor “who bears responsibility for the act or omission”, that is, in this case, GE Money.
Unlike the case of Jones, the unfair relationship founded in this case did not stem from statute, but rather, a breach of fiduciary duty. Essentially, a personal duty owed by the assignor to disclose the amount of commission that would pass from the assignor to the broker. It was held that the fiduciary duty and the subsequent breach occurred before the loan agreement was entered into. Thus, liability under s.140A could not pass from the assignor to the assignee, and the party responsible for the breach remained with GE Money.
The judge went as far as to say that even if he were wrong in his conclusion, that in exercising the court’s discretion under s.140B, any remedies should be against GE and not Elderbridge, effectively as the party responsible.
Remedy
Although in cases of half-secret commission, rescission is not available as a right, the court still has discretion over whether to grant it as a remedy. In this case the judge considered it disproportionate to order rescission, but rather chose to award damages equivalent to the commission payment (£1,700) plus interest at 4% per annum from the start date of the agreement to the date of judgment, which came to £2,700.11.
Conclusion
Fiduciary duty: Fiduciary relationships can be founded between individuals and brokers, and commission payments that pass from lender to broker can amount to a breach of fiduciary duty. Even where it is considered that the debtors have knowledge of commission passing between broker and lender, where the amount is not disclosed, it can still be found that informed consent was not given.
Assignment: Where fiduciary breaches occur pre-agreement, it may be found that liability does not pass under s.140 and the original creditor/assignor will remain liable.
Guidance: To protect your position as a lender, it is advisable to be more transparent about commission payments in pre contractual information and disclose the amounts paid without requiring the customer to ask. This ambiguity over commission payment and amount gives rise to potential claims as being ‘secret’ or ‘half-secret’ commissions.
As a customer and/or borrower, it is advisable to read thoroughly through contractual documents before signing up to an agreement, and if there is any uncertainty as to any of the content, ask the broker or lender for clarity.
