Simon Engelsman, legal counsel for Tiuta plc, highlights some of the thorny legal issues facing introducers in the increasing morass of regulation and compliance and provides some practical pointers to limit the exposure of the intermediary.
The legal concept of agency is hardly more challenging than in the context of the relationship of lender (principal) and broker (agent). In some instances, it is created by statute , i.e. in the sphere of the Consumer Credit Act and in other cases it is inferred, or at least there is a tendency to imply it!
Invariably, the lender is primarily accountable for the acts or omissions of the introducer but the following are examples of where the broker may be responsible in law for his actions.
Unlawful/Hidden Commissions
The decision of the Court of Appeal in Hurstanger v Wilson & Burton [2006] highlighted the difficulties of non-disclosure to the customer of commissions paid to the broker by the lender and has spawned a culture and entire industry of claims management (not limited only to the business of secured lending).
Apart from establishing the liability of the lender to refund the commission and interest on it to the customer in cases of concealment, the judgment suggests that it is the introducer who is primarily obliged to disclose – not just the fact of the payment but also the amount to the customer (as they are effectively his or her client) and the connotation of a ‘bribe’ or ‘inducement’ will be greater where that broker has ‘tied’ arrangements with the lender – restricting the former’s ability to shop around.
Therefore in all cases of transactions outside the ambit of the FSMA 2000 (where such disclosure is mandatory as part of the pre-contractual formalities) brokers would be well advised, independently of the lender, to confirm to the customer in writing prior to completion the precise commission expected – including any override arrangements or benefits receivable from the sale of allied credit activities (e.g. insurance products). Failure to do so might render the broker liable to reimburse his principal those moneys in certain scenarios.
Treating Customers Fairly
Again, there is a tendency in some quarters to associate the obligations of the recent directives with lending institutions only and to imagine that introducers are immune from complying therewith. This would be an unsafe assumption.
The TCF initiative is relevant to all firms who are involved in the retail supply chain and regardless of whether they are ‘end distributors’. Brokers will generally be responsible for the sale including information provided, product design and the suitability of advice. The principles extend also to remuneration strategy so that commission rates do not result in sales bias.
Introducers must therefore ensure above all else that the customer has all the appropriate information and endeavour to keep abreast of the implementation programme, if necessary with assistance from dedicated,web-based support companies such as TCF Info.
The FSA and the sub-prime mortgage market
It is almost two years ago since the FSA published its review of the behaviour of intermediaries (and lenders) within the sub-prime mortgage market and reported on weaknesses in lending practices and inadequate assessment of customer affordability.
The spate of increased enforcement activity in recent months suggests no moderation on the part of the regulators in eradicating poor practices in relation to what it perceives as a ‘vulnerable’ sector of the marketplace.
At a time of higher arrears levels, introducers would therefore be well advised to focus or re-visit:
- robust assessments of affordability
- proper assessment of customer’s suitability (needs and circumstances)
- inappropriate self-certification of income
- inappropriate re-mortgaging and incurrence of early redemption charges
Unfair Credit Transactions and the Consumer Credit Act 2006
As a result of refinements to the CCA and the replacement of extortionate credit bargains with the concept of ‘unfair relationships’, a Court can take into consideration various new factors to determine the issue of ‘fairness’ – including the conduct or misconduct of the lender’s ‘associate’ – arguably the credit broker (see S140A).
Regardless of whether in law the introducer is treated as the agent of the lender for all purposes, it is clear that the broker’s behaviour is a standalone ground for the debtor successfully challenging the underlying transaction.
Not that the introducer should need yet another incentive to ensure best practice is adopted but failure to do so could well result in him being enjoined in any subsequent litigation regarding the loan, if not by the lender, then by the borrower!
It’s no longer a question of Caveat Emptor – let the buyer beware – but let the broker beware!