High Court finds agent breached fiduciary duty in "half secret" commission case

The High Court has found that an introducer did not assume a duty of care to an investor to advise, as an independent financial adviser, on an investment scheme. However, the court found that the introducer had breached his fiduciary duties to the investor by failing to provide a honest account of the commission payable from the scheme: McHale v Dunlop & Anor [2024] EWHC 1174 (KB).

This case is the latest in a line of decisions concerning "secret" and "half secret" commissions payable to third party intermediaries (see our previous blog posts here and here). The judgment is a reminder that, as per Hurstanger Ltd v Wilson [2007] EWCA Civ 299, where a commission payment is disclosed to a principal, but the amount is not (ie it is a "half secret" commission), this can amount to a breach of fiduciary duty by the agent.

In the present case, the introducer had disclosed to the investor that a commission was payable by the scheme, but not the amount. The investor argued that this situation amounted to a "half-secret" commission and was a breach of fiduciary duty. The court was tasked with determining two key issues: (i) whether the relationship between the introducer and investor gave rise to a fiduciary duty; and (ii) whether the introducer had breached his fiduciary duty. Applying Hurstanger, the court concluded that the introducer owed fiduciary duties to provide an honest account to the investor regarding the commission payable, and that the introducer breached these duties by deliberately providing false information to the investor about the commission payable by the scheme. As a result, the investor was not in a position to provide fully informed consent regarding the substantial undisclosed element of the total commission payable.

The court reached the conclusions outlined above, notwithstanding the fact that the principal in this case was not vulnerable or unsophisticated, which was an important factor in Hurstanger as to why the information disclosed to the principals in that case needed to be "more specific". On the unusual facts of the present case, the court found that the introducer took on a special obligation to disclose the quantum of the commission, because of: (i) a promise made by the introducer to share its commission with the investor; and (ii) false information given by the introducer as to the true quantum of commission received. The decision is also noteworthy for financial institutions as it illustrates that individuals and institutions can be held liable for a breach of fiduciary duty, even where they do not owe a duty of care in negligence.

We consider the decision in more detail below.

Background

In January 2016, the claimant investor met with an "introducer" of investors to an overseas investment scheme. The meeting was arranged by the investor's friend who was a former independent financial adviser. This introduction led to a series of meetings and communications amongst the three parties.

As a result, the investor decided to invest £320,000 in the scheme. However, the investment scheme filed for bankruptcy in October 2020.

The investor initiated legal proceedings against the introducer seeking to recover losses from his investment in the scheme, pursuing the case on two limbs:

1. A professional negligence claim, asserting that the introducer had assumed duties of "reasonable care and skill and good faith to be expected of a financial adviser" under FSMA and that he had acted in breach of duty by prioritising his own interests above those of his client by recommending the scheme because of the high commission it paid.
2. A claim for breach of fiduciary duty and account of the "half-secret" commissions paid to the introducer by the scheme.

The introducer denied these claims on the basis that: (i) he was merely an introducer, not a financial adviser, and therefore did not owe the investor a duty of care or a fiduciary duty; and (ii) the introducer agreed to share his commission with the investor thus the commission was not undisclosed.

Decision

The High Court dismissed the negligence claim, but found that the introducer owed and breached a fiduciary duty to declare the true quantum of the commission he received. The key issues which will be of interest to financial institutions are examined below.

Negligence claim

The court found that the introducer did not assume a duty of care to advise, as an independent financial adviser, on the merits or suitability of the scheme opportunity.

Duty of care to prevent economic loss

The court highlighted that in the present case, no contract or retainer was alleged to exist. As such, the court found Spire Property Development LLP and another v Withers LLP [2022] EWCA Civ 970  to be helpful for its guidance on the principles to be applied when determining whether there had been an assumption of responsibility by a party where there was no retainer.

According to Spire, the central question is whether the defendant objectively assumed responsibility towards the claimant for a specific task or service. This does not depend on the defendant's state of mind, but is a question that requires a careful examination of the facts.

The court also noted that, in the context of information/advice relating to financial investments, it may be relevant to consider whether the "information" provided was the result of a selection process involving a value judgment. This could include whether the information constituted an express or implied comparison or evaluation, or contained an element of persuasion (as per Adams v Options UK Personal Pensions LLP [2021] EWCA Civ 474).

Furthermore, the court highlighted the importance of considering whether it was reasonable for the claimant to have relied on the representation or advice given by the defendant, and also whether the defendant should reasonably have foreseen that the claimant was likely to do so (as per NRAM Ltd v Steel [2018] UKSC 13).

The present case

On the facts, the court concluded that the introducer did not assume a duty of care to advise, as an independent financial adviser, on the merits or suitability of the scheme opportunity. Instead, the scope of the duty of care owed by the introducer was more limited. It encompassed providing information on the scheme in accordance with the details provided in the scheme brochure, advising on the logistics of transferring the investor's pension funds, and taking the necessary steps to enable those funds to be used for the purpose of acquiring the scheme loan notes.

The court's conclusion was influenced by several key factors: (i) the investor's sophistication given his long career in the FX markets; (ii) the third-party advice received by the investor from his friend prior to his decision to invest in the scheme; (iii) the investor's knowledge from the outset that the introducer was a representative of the scheme and not an independent financial adviser; (iv) there was no evidence that the investor had sought advice from the introducer, or understood the introducer to be providing independent advice expected of a financial adviser - rather he had wanted the introducer to execute his own investment decisions; and (iv) there was no evidence that the introducer had gone beyond the information given in the brochure when presenting the investment opportunity to the investor.

Accordingly, the court dismissed the negligence claim.

Fiduciary duty claim

The court found that the introducer had breached his fiduciary duty in failing to provide an honest account to the investor of the commission paid to him.

Fiduciary duty

The court highlighted that a fiduciary is someone who has undertaken to act for or on behalf of another in circumstances which give rise to a relationship of trust and confidence. The distinguishing feature of a fiduciary is the obligation of loyalty. Further, even if a fiduciary is properly acting for two principals with potentially conflicting interests he must act in good faith in the interests of each and must not act with the intention of furthering the interests of one principal to the prejudice of those of the other (as per Mothew (t/a Stapley & Co) v Bristol & West Building Society Respondant [1996] EWCA Civ 533).

The court underlined that where such a duty arises, and the principal knows that a commission is payable, but not the amount of the commission, this can amount to a "half secret" commission. A fiduciary receiving a half secret commission will be in breach of fiduciary duty if it fails to obtain informed consent (as per Hurstanger, Medsted Associates Ltd v Canaccord Genuity Wealth (International) Ltd [2019] EWCA Civ 83 and Wood v Commercial First Business Ltd [2021] EWCA Civ 471). Such a breach may be actionable and give rise to equitable remedies, including payment of the undisclosed commission.

The present case

In the context of the present case, the material facts relevant to the payment of commission were as follows:

• The investor was provided with a brochure for the scheme, which clearly stated that a commission was payable to the introducer, but did not specify the amount.
• The introducer chose to provide additional information about the commission payable. He informed the investor that a substantial commission was payable on any investment and agreed to share the commission equally three ways with the investor and his friend.
• The investor repeatedly asked about the commission payable, but the introducer adopted and implemented a strategy deliberately to misinform the investor as to the true commission payable to him and failed to account properly for that commission.

The court highlighted that there were at least two ways of analysing the nature of the duties assumed by and attaching to the introducer on the facts of the case:

1. To consider the duties arising in respect of the investment opportunity which the introducer actually purported to offer to the investor, i.e. an investment in the scheme combined with an "enhanced" offer of an equal share of the introducer commission.
2. To analyse the duties in accordance with the "half-secret commission" approach adopted in Hurstanger in respect of the introducer's failure to provide full disclosure of the totality of the commission payable on the scheme investment opportunity.

Considering the first approach, the court said that by choosing to share the commission payable by the scheme, the introducer changed the nature and content of the investment opportunity presented to the investor. This was not the standard opportunity to buy the scheme loan notes available to any qualifying investor. Instead, the opportunity proposed was "enhanced" and (apparently) bespoke/exclusive, which the introducer correctly calculated would be deeply attractive to the investor, impacting his analysis of the benefits vs risks of the investment opportunity. In the court's view, one of the consequences of offering the "enhanced" investment opportunity, was that the introducer assumed a role as an agent for the investor and was fixed with fiduciary duties in this regard. This gave rise to a relationship of trust and confidence, where the investor assumed a duty of good faith (as per Bristol and West BS). It was a breach of that duty to misrepresent the amount of commission payable and to fail to account fairly to the investor for his share.

Turning to the Hurstanger approach to half-secret commissions, on the facts of this case the court held that the introducer assumed fiduciary duties to the investor, including to: (i) act in good faith in respect of the provision of information about the commission payable by the scheme; and (ii) provide the investor with an honest account of the quantum of the commission payable. The introducer breached these duties by pursuing a deliberate strategy to provide false information to the investor as to the commission payable by the scheme and by failing to account properly to the investor.

The court noted that an important factor in Hurstanger was the unsophisticated nature of the principals, so that the information disclosed to them by the agent needed to be "more special" (i.e. that their knowledge of the fact of commission was not sufficient because they needed transparency as to the amount of commission payable, to bring home the potential conflict of interest). Here, the introducer argued that there were no "special" obligations on the introducer to disclose the quantum of commission, because the investor was not vulnerable. However, the court said the investor did not need to demonstrate that he was vulnerable/unsophisticated. The "special" obligations were placed on the introducer by virtue of the share of commission promised to the investor and the false answers given by the introducer as to the true quantum of commission payable to him.

Further, the effect of the deliberate strategy to mislead the investor, was that the investor was not in a position to provide fully informed consent in respect of the substantial undisclosed element of the total commission payable.

Accordingly, the court ordered that an account be taken of the total commission paid to the introducer and be paid to the investor with interest.