Undisclosed Commissions - Why are lawyers talking about it and what does it mean for you?
A Growing Concern for Consumers
In recent years, the issue of undisclosed commissions has come in to sharp focus within the UK’s financial and consumer markets. A commission is a fee paid to an intermediary, such as a broker or agent, for facilitating a transaction. In many sectors such as Independent Financial Advisors (IFAs) specific rules require these, these commissions to be disclosed upfront to ensure transparency and protect consumers. However, in some other sectors such as car finance, mortgage broking and energy broking, it has come to light that commissions are not disclosed to the end customer.
The problem with commissions Is that they lead to potential conflicts of interest. Where a person is paid to recommend products and receives a payment from a product provider, advisors can put their own interests above their clients' by recommending the product that produces more income for the advisor, not the product that best fits the needs of their client.
Why are Lawyers so interested?
In recent months, the Court of Appeal has been asked to look at detailed arrangements relating to both car finance and business energy contracts. The High Court was also asked to review the way that the Financial Ombudsman Service (FOS) dealt with complaints about car finance deals. On top of that, the Court of Appeal's decision on car finance has been referred to the Supreme Court, the UK's highest Court and both the Financial Services Authority (FCA) and the UK Government applied to Intervene so that the Court could take their views Into account In reaching a final decision.
The reason for this interest is the conflict between the best interests of the consumer and the best interests of big business. Large companies have been paying commissions for years. billions of pounds of commissions have been paid and, now that the issue has come to light, the cost of compensating the consumers would be so large that the battle has escalated accordingly.
What does the Law say?
The law considers that any kind of commission is a "civil bribe" as it influences the way people make decisions. Whether that is lawful or not depends on two things:
- The amount of information that it provided to the consumer by the adviser / intermediary / broker. Full disclosure will mean that the consumer is clearly told about the existence, the nature and the amount of any commissions before they decide which product or service to choose; and
- The relationship between the consumer and the adviser / intermediary / broker is also important. Broadly speaking, the more trust and reliance that the consumer places on the intermediary, the more the law will expect them to say about commissions.
As at today's date, the law distinguishes between secret commissions - where the consumer is told nothing at all about it, and partial disclosure where some information such as the existence of the commission is mentioned. We don't expect the law to change dramatically as a result of the forthcoming Supreme Court decision. The debate is really in the detail and understanding whether, in partial disclosure cases, the consumer has been given enough information to make a proper decision.
Are you affected? What should you look out for?
If you relied on an industry expert to help you to select the most appropriate product or service, then the law will expect them to be very transparent about commissions or other incentives that they receive from those product or service providers. Common areas where we see this are:
- Financial services, especially loans and mortgages. It Is worth paying particular attention to loans which are offered alongside product purchases like:
- Car loans
- Home Improvements (double glazing / solar panels etc)
- Bridging loans
- Holiday products
- Insurance products where you use a broker or other Intermediary
- Business energy contracts
If you have used any of these products and would like us to carry out a free, no obligation review, please contact us
Summary
While commissions themselves are not inherently problematic, the lack of transparency around their disclosure creates a significant problem in the UK market.
The issue of undisclosed commissions undermines consumer trust, creates conflicts of interest, and can lead to financial harm. Regulatory bodies, financial institutions, and consumers alike must continue to work towards solutions that promote transparency and fairness in all areas of the market, ensuring that the needs of the consumer always come first.
If you used a broker or intermediary who recommended a product or service to you please contact us for a no obligation free assessment to see if you may be eligible to claim.