Tread carefully with fees and commission

Do you sell unregulated financial products for which borrowers pay you fees?

If so, do you get written permission from your clients for you to also take commission payments from lenders? If not, you could be guil-ty of fraud and the len-ders involved could be seen as accessories.

The Court of Appeal recently ruled that if a broker receives a payment from a borrower, they owe that borrower a fiduciary duty.

This means that as a broker, you have a duty to act loyally towards your client and not put yourself into a position whereby there may be a conflict of interest. Commission from a lender could be seen as such a conflict.

Commission payments from lenders have been a contentious issue for some time, with debates on whether they affect brokers’ judgement. The ruling states that if you have already had a payment from a borrower, any commission you subsequently get could constitute a sec-ret payment if your client has not agreed to you receiving it.

So for cases in which you have received both a broker fee and commission without the client’s written consent, not only could you be guilty of fraud but the lender involved may be an accessory.

It also brings into question the fees paid by master brokers. These might also need to be declared. This would have several consequences. You would have to repay the commission and having accepted it in the first place could mean being prosecuted for fraud.

On top of that, the loan agreement could be void which would mean that if the borrower decided not to make any further payments, there is nothing you or the lender could do about it.

This is a worst case scenario and only likely to occur if a borrower and lender enter into dispute. It does not apply to brokers who only arrange mortgages, as commission payments are declared on Initial Disclosure Documents.

Neither does it apply to brokers who only receive either fees or commissions, as there is no conflict of interest.

But if you are one of the many brokers who advise on unregulated loans and are paid both fees and co-mmission payments, to safeguard yourself you would be wise to:

• Tell your clients verbally that you will be receiving commission payments.

• Tell them how much you will be receiving.

• Prepare a short form for your clients to sign at the same time as they sign the main agreement sta-ting other commission payments you will receive.

• Most importantly, ensure that all consent agreements are kept safely on file.