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Don’t cut corners when disclosing fees

Sometimes the temptation to break the rules can be too strong and we surrender to temptation. I’m not just talking about breaching the speed limit or bringing more booze than we should through customs – I’m referring to ignoring laws that govern the way firms do business.

Unfortunately, some brokers may be unaware of the laws they should be complying with, which makes them vulnerable to future legal claims.

They know they have to comply with the Financial Services Act but in common with every other business in the UK, they are subject to common law too.

We all know that under Financial Services Authority regulation, brokers must disclose to customers the fees they earn from regulated activities.

It would be easy to assume that the fees gained from unregulated activity do not need to be disclosed but this would be wrong. Under common law, if firms act as agents for principals, any income generated must be disclosed.

For example, take brokers earning commission by referring clients to conveyancing firms. This activity is not regulated by the FSA but under common law brokers are deemed to be acting as principals’ agents. As a result they have to disclose the fees they earn to customers or they are breaking the law. Solicitors are subject to a disclosure code recently introduced by the Law Society, which specifies we have to ensure that firms introducing work to us and receiving financial rewards must inform their customers about it.

It doesn’t matter if the cash is described as fees, commission, marketing contributions or anything else – full disclosure is required.

It would be easy for brokers to turn a blind eye to the rules, a bit like smuggling an extra bottle of wine through customs, but that would be a mistake.

If at some point in the future it was discovered that fees hadn’t been disclosed, brokers might have to repay them in full to clients.

If readers are worried about losing income as a result of this issue, don’t be. Brokers can continue to receive commission from non-regulated activities as long as they declare the income to borrowers.

In my experience, fee disclosure of this sort has never been a problem for customers as they are primarily concerned with how much the service costs them rather than how much brokers get paid. It’s similar to fee disclosure on mortgages.

The temptation to bend the rules is always strong, particularly in a slow market, but I encourage brokers not to lead themselves into temptation. Doing so could cost them dearly.


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