30th January 2020
30th January 2020
People are increasingly turning to brokers for advice on obtaining a mortgage. But how much do you know about your broker and are they acting in your best interests?
Property developers and estate agents regularly refer their clients to brokers. Mortgage lenders and intermediaries (i.e. brokers) are regulated by the Financial Conduct Authority (FCA) while lenders are regulated by the Prudential Regulation Authority. Always check that your broker or mortgage adviser is regulated and sufficiently qualified to advise you properly by ensuring that they have the CeMAP or CertMA qualification. They should also have sufficient indemnity insurance in place should you receive poor advice from them.
An initial market study into mortgages conducted by the FCA in 2018 concluded that in numerous cases consumers are paying more for their mortgage than they need to. The FCA determined that there are limitations on the effectiveness of tools available to consumers and that reliance on brokers may mean that they are not getting a fair deal.
In some cases, brokers were restricted to introducing clients to a limited number of lenders, with preference given to a ‘panel’, leading to issues surrounding impartiality and their ability to provide the best advice. For this reason it is sensible to check that your broker is a ‘whole of market’ broker. This is the case with both commercial and residential property lending.
In other cases, it was found that brokers had access to a wider range of lenders, but would charge both the borrower and the lender for the privilege of an introduction, meaning that the borrower does not necessarily benefit from an overall cost-saving by using a broker. It is important that when looking at the cost of your mortgage you take into account:
The report highlights, among other things, how important it is that brokers remain transparent with regard to the fees they receive, and from whom, right from the outset. This point was recently made in the High Court decision of Wood v Commercial First Bank Ltd (in liquidation) and Others in which the court considered the law surrounding payments made to a broker on introducing clients to lenders in a property purchase. Although a commercial rather than residential case, the principles established apply in all cases where a broker is used.
The claimant in the case, Mrs Wood, borrowed significant sums from the lender, as follows:
A broker facilitated the loan arrangement and received commission in excess of £90,000 made up of fees from the lender and Mrs Wood herself. This type of arrangement is sometimes referred to as ‘double-dipping’ where the income is derived from two sources, without one necessarily being aware of the other. Mrs Wood contended that the broker failed to disclose the commission to her.
Mrs Wood failed to meet repayments under the terms of the loan and the lenders applied for and were granted possession orders for both farms. Mrs Wood issued court proceedings in 2013 asking the court to set aside the mortgage contracts. She also brought numerous claims against the lenders, including allegations of various frauds, forgery and undue influence, but one of the claims concerned the secret commissions paid by the lender to the broker, referred to as an ‘unfair relationship’ claim.
The application to the court set out that the commissions were unfair and as a result the mortgage contracts should not be upheld. During the course of litigation the lender itself went into liquidation and their insolvency agent was joined to the proceedings.
His Honour Pickering J in handing down judgment, concluded that payments made to the broker by the lender were ‘fully secret’ commissions and, as a result, the relationship between Mrs Wood and the lender was unfair for the purposes of the Consumer Credit Act 1974 s.140A. This is because Mrs Wood was not able to provide her consent without knowledge of the payments and was therefore deprived of ‘disinterested’ i.e. impartial advice, by the broker.
Claims for financial relief on a simple contract are time barred, subject to the Limitation Act 1990. However, her claim for rescission i.e. termination of the First Disputed Mortgage, the Second Disputed Mortgage and the Disputed Further Advance contract based on the unfair relationship between her and the lender were not time-barred, and the Judge held that the mortgages were therefore, invalid.
Damages are available for unfair relationships; the point at which these are assessed for compensation is from the time the relationship ends, i.e. when the contract is rescinded. Financial compensation was not therefore statute barred and commission from all mortgages was recoverable from the lender (but not from the insolvency agents). Mrs Wood was entitled to recover the fully secret commission paid (subject to counter restitution, that is deducting sums for any benefit she received from the contracts) and Mrs Wood was no longer held to mortgage contracts over which the commissions were paid.
In conclusion, commissions should be discussed openly at the outset of the introduction and the overall effect this will have on the amount you pay should be calculated to ensure you are getting the best deal. It is worthwhile noting that this applies even if the broker does not provide advice but simply acts as an introducer.
If you would like any advice around buying a property please get in touch. We have five offices across the North East and a specialist team of conveyancers with a wealth of expertise and knowledge of buying and selling commercial and residential property.