‘Secret’ Commissions

5 April 2019
When does a broker owe fiduciary duties, and when should the amount of commission payments be disclosed? Tom Bolam and Alex Taylor summarise the recent guidance handed down by the Court of Appeal.

A fiduciary is someone who has undertaken to act for another in a particular matter in circumstances which give rise to a relationship of trust and confidence. The core obligations of a fiduciary are multifaceted, including a duty not to receive a secret commission from a third party.

The recent Court of Appeal decision in Medsted Associates Limited v Canaccord Genuity Wealth (International) Limited[1] has provided guidance on the scope of fiduciary duties in cases concerning payment of commissions.

Background

The Claimant (Medsted) had an introducing agreement with the Defendant (CGW) pursuant to which Medstead would introduce investors in return for commission and a funding rebate paid by the investors. Medsted did not disclose to the investors the split in such commissions between itself and CGW.

In 2010, CGW devised a scheme to conduct business directly with certain investors, depriving Medsted of the commissions to which it would otherwise have been entitled. Such trading was hidden from Medsted through the use of separate accounts held in the names of corporate entities, ultimately owned by the investors that Medsted had originally introduced to CGW.

Medsted brought a claim against CGW to recover its share of commission and rebate on the grounds that CGW’s ‘secret business’ constituted a breach of the introducing and non-circumvention agreement entered into between the parties.

First Instance Decision

The High Court held that by dealing with investors directly CGW was in breach of its agreements with Medsted causing Medsted loss. However, the court also found that the investors reposed trust and confidence in Medsted which gave rise to a fiduciary duty. Medsted, acting as agent for the investors, had breached its duty by failing to disclose the level of commission and funding charges paid by investors to CGW that CGW would subsequently pay to Medsted. This led the judge to describe the payments made by CGW to Medsted as ‘secret commissions’.

On this basis, the judge held that Medsted should not profit from its own breach of fiduciary duty and awarded only nominal damages to compensate it for the secret profits earned by CGW.

Court of Appeal Decision

Medsted’s appeal was allowed on the ground that, even if Medsted owed fiduciary duties to the investors introduced to CGW, it did not breach those duties by failing to disclose the level of commission payments it would receive from CGW.

In reaching his decision, Longmore LJ emphasised that the scope of an agent’s fiduciary duty must be determined by reference to the circumstances in which the fiduciary duty arises. He affirmed that the scope of the fiduciary duty between agent and principal is limited where the principal knows that his agent is being remunerated by the opposite party. The commissions were not secretive because the investors knew that Medsted was being paid commission; what they did not know was the amount of that commission.

Citing Bowstead & Reynolds on Agency[2], Longmore LJ held that where the principal (in this case, the investor) leaves the introducing agent to look to a third party for his commission or else knows that the introducing agent will receive some payment from that party, he cannot object on the ground that he did not know the precise particulars of the amount paid. There was no basis for refusing to compensate Medsted on public policy grounds.

Comment

Part of Longmore  LJ’s reasoning was that Medstead was acting for experienced investors. The judgement leaves open the scope of the duty owed by an introducing agent to inform less sophisticated clients about the level of disclosure they are obliged to give in relation to their own remuneration for a particular transaction. If the underlying client is not a sophisticated investor, or if the level of commissions or remuneration is unusually high, it would be wise for introducing agents to be as transparent as possible about their fee arrangements.


[1] [2019] EWCA 83

[2] 21st Edition, paragraph 6-086


 

Tom Bolam Author
Tom Bolam
Senior Associate
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Alex Taylor Author
Alex Taylor
Trainee Solicitor
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