Close Brothers: Court of Appeal Judgement on Commission Disclosure
Melwin Mehta
? Fund Manager ??Financial Education ???????? Family Office Architect ?? Always Cheering Financial Advisers ?? Bees ?? plays to ??????
Introduction: Close Brothers Group Plc is a merchant banking group providing lending, deposit solutions, wealth management services, and securities trading. The company mostly provides services to small businesses and individuals in the United Kingdom. The operating segments of the company are Commercial, Retail, Property, Asset Management, and Securities. The company derives the maximum of its income from the Commercial segment. Total group income has exceeded ￡ 1 billion
Last Friday, the Court of Appeal ruled that it was unlawful for car dealers to receive a commission from a lender providing motor finance to a customer – unless it was disclosed to the customer and they gave informed consent to the payment.
The Court of Appeal ruled that brokers owe a fiduciary duty of loyalty in the performance of their duties AND must make a disinterested selection from the customers perspective rather than be influenced by the lender that pays the highest commission.
Back story:? Hopcraft vs Close Brothers
In early 2014, Miss Hopcraft, then a student nurse with a part-time job, was looking for a replacement car.
Miss Hopcraft found one she wanted at Jordans, a large motor dealership in the Hull area.
Jordans agreed to help her secure the necessary financing from lenders.
The sales representative then uploaded her information onto an electronic platform that connected Jordans with a panel of lenders with whom they worked. Close’s proposal was the only one that the Jordans representative took back to Miss Hopcraft for consideration.
Several documents including “Terms of Business” were signed between all parties.
None of these documents made any mention of the fact that Close Brothers would pay a commission to Jordans for introduction of the Hopcraft transaction.
Close’s witness, Miss Shaw, accepted in cross-examination that in 2014 the disclosure of any commission was not required by Close and was not part of their practice.
By not disclosing commission arrangements, the Judgement says, there was a “conflict of interest” as the consumer (borrower) was ignorant about commission arrangements.
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The Court of Appeal ruling was rooted in common law principles of fiduciary duty rather than the FCA Rules. Significantly, all three of the credit agreements were made prior to the FCA’s ban on difference in charge commission models in 2021 and the implementation of the Consumer Duty in 2023.
Close Brothers disagrees with the Court's extension of the existing case law in this area and intends to appeal this decision to the UK Supreme Court.
The stock market has not taken the Judgement lightly… stock price is down 90%.
The share price now stands at ￡2 from the ￡17 in January 2021.
The judgement will have implications far beyond the motor finance industry -- in other lending businesses. ?
What do you think ? Feel free to share your views below.
Full discolsure: neither Sterling Investment nor the Sterling Select Select Fund is an investor in Close Brothers.
Judgment pdf provided below.
Private Investor in listed equities only - NOT an angel investor.
4 个月Consumers deserve transparency in financial matters, as in other contracts. Commissions paid to any type of financial adviser, advising a client on a product need to be disclosed.
? Fund Manager ??Financial Education ???????? Family Office Architect ?? Always Cheering Financial Advisers ?? Bees ?? plays to ??????
4 个月Banking ought to be a beautiful business. It isn’t. ?? Account holders trust Banks and give them free money… look at the paltry rates you earn on your cash. It is insulting. ?? Banks then lend out to businesses and consumers at say 10% and capture the difference… rubbing their hands with glee. Common sense speaking…. ?? BANKS SHOULD BE THE BEST BUSINESS IN THE WORLD and should have generated the best returns to shareholders. Reality is FAR from that. Why ? Because every so often, they trip up and lose money… infact they are wiped out. Generally speaking, ? Bank balance sheets are opaque. It does not matter whether the Bank is American, British, European or Asian. Investors need to be on guard.