The high street banks could be facing another bill for mis-selling. The issue at the heart of the problem – the inherent dangers in the lender/ broker relationship – sounds a clear warning for business borrowers.
The Financial Conduct Authority could decide to introduce new rules following a recent landmark court ruling concerning the non-disclosure to customers of high commission payments made to lenders and brokers when selling financial products.
Disclosing Commission Payments
The ruling in the Plevin v Paragon legal case was that failure to disclose commission payments to a borrower was unfair, and breached the 1974 Consumer Credit Act. Susan Plevin borrowed £39,870 on a loan and was charged £5,780 as an upfront PPI premium. However, £4,150 (nearly 72%) of the PPI premium was commission, of which £2,280 went to the lender and £1,870 to the broker who arranged the loan.
The ruling may have wider implications since it could apply to personal loans, store cards and car finance, opening the door to a flood of new mis-selling claims. Borrowers whose previous claims of mis-selling PPI insurance were rejected may also be able to claim, citing this new ruling.
Are brokers truly independent?
Although the case involved a consumer finance product, in our experience the issue at the heart of the problem – the inherent dangers in the lender/ broker relationship – extends into the commercial finance arena. Most readers will know that we regularly warn about conflicts of interest in our market. We believe that any borrower that enlists the help of a finance broker to help them raise finance has a right to expect that the broker will be truly independent. So how does this play out in practice?
Well, we can cite many situations that, in our view, potentially compromise the interests of borrowers.
Take for example the payment of introducer fees by lenders to brokers. The accepted norm is still that a lender will pay fees to a broker for introducing a borrower to them, even though this creates an obvious conflict of interest. Whilst borrowers tend not to object (presumably in the mistaken belief that they are not ultimately bearing the cost of the fee, whereas in reality the lender will add it to the fee they charge the borrower), it does lead to some unsavoury practices. For example, many brokers will ‘follow the fee’; that is, they will favour lenders who pay them the largest fees rather than the lenders who might offer better terms to the borrower.
Space prevents us from covering every example here, but you get the point; the potential for conflicts of interests exists and is very real. As in the case of Mrs Plevin, the borrower takes the risk and is often disadvantaged.
Our transparent way of working at IBC
In contrast, here at IBC we work hard to eliminate the risk for our clients. We do not believe in accepting arrangement fees from lenders; neither do we have a panel of preferred lenders. Therefore, there is no conflict of interests, no divided loyalties. Although harder work for us, this is much more transparent way of working and tends to result in better outcomes for the borrower. Why? Because we have to work hard to earn our fees: we cannot take the easy option of obtaining an ‘approval at any price’, safe in the knowledge that the happy lender will pay us when the borrower signs up.