Obligations on financial professionals receiving secret commissions – to keep or not to keep a secret?

Following the High Court decision in McHale v Dunlop & Anor [2024] EWHC 1174 (KB), professionals in the financial services industry should keep in mind their professional obligations when it comes to “secret” and “half secret” commissions and in particular, their disclosure obligations.

In McHale v Dunlop & Anor, Mr McHale brought claims against Mr Dunlop in respect of losses arising from Mr Dunlop’s introduction to an overseas investment scheme known as the Dolphin Trust. Mr McHale invested his pension savings into the scheme. At the time of investing, it was agreed that the commission payable by the Dolphin Trust to Mr Dunlop as introducer would be split equally three ways between Mr McHale, Mr Dunlop and Mr Lockington (who had arranged the introduction between Mr McHale and Mr Dunlop). Therefore, whilst Mr McHale knew that the commission was payable, he was not aware of the full commission structure or the exact commission amount.

Mr McHale’s claims were for i) professional negligence for damages on the basis that Mr Dunlop “assumed the duties of reasonable care and skill, good faith to be expected of a financial adviser”; and ii) an account of the alleged “half-secret” commission which Mr Dunlop had received in respect of Mr McHale’s investments into the Dolphin Trust on the basis that Mr Dunlop owed fiduciary duties to Mr McHale.

The Court dismissed Mr McHale’s claim for professional negligence in full. The Court found that Mr Dunlop had not assumed a duty of care to provide financial advice to Mr McHale in respect of his investment in the Dolphin Trust. Instead; Mr McHale had decided to invest in the Dolphin Trust prior to the meeting with Mr Dunlop based on prior conversations with Mr Lockington; and Mr Dunlop had not presented himself as a financial advisor rather, his role had been to provide information in relation to the Dolphin Trust and to facilitate the transfer of Mr McHale’s investment in the Dolphin Trust. The key distinction highlighted by the Court was that Mr McHale was not looking for advice from Mr Dunlop on the relative merits of acquiring loan notes in Dolphin Trust as against other investment opportunities; rather, he was looking to Mr Dunlop to execute his own investment decisions.

However, Mr McHale’s claim for breach of fiduciary duty succeeded.

The fiduciary duty claim

The Court held that Mr Dunlop’s failure to provide an honest and truthful account to Mr McHale of the commission paid to him gave rise to a breach of his fiduciary duties.

In its decision, the Court highlighted that when deciding whether a fiduciary duty arises, a key question will be whether someone has undertaken to act for or on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence and in respect of which the distinguishing obligation is the obligation of loyalty.

In circumstances in which such a duty arises, the Court held that where an individual knows that a commission is payable, but not the amount of commission, this may constitute a “half secret” commission. In reaching its decision, the Court looked at the Court of Appeal’s decision in Hurstanger[1] which set a benchmark for claims based on the allegation that a commission payment made to a broker by a lender should be treated as a ‘secret commission’. In Hurstanger, the Court of Appeal held that the facts of that case required the principal’s knowledge to be “more special” than the mere fact that some commission was payable because the defendant borrowers were vulnerable and unsophisticated; as a result, there needs to be transparency as to the amount of the commission payable to bring home the potential conflict of interest. Therefore,  where a fiduciary receives a half-secret commission but fails to obtain informed consent this will amount to a breach of fiduciary duty. Such a breach may be actionable and give rise to equitable remedies, including payment of the undisclosed commission.

In its decision, the Court analysed the nature of Mr Dunlop’s fiduciary duties in respect of the undisclosed commission payable on the Dolphin Trust investment opportunity in two ways.

The first approach was to analyse Mr Dunlop’s duties in accordance with the “half-secret commission” approach in respect of Mr Dunlop’s failure to provide full disclosure of the totality of the commission payable on the Dolphin Trust investment opportunity. The Court held that Mr Dunlop had put himself in a position in which he came under a fiduciary duty to provide Mr McHale with an honest account of the quantum of the commission. Mr Dunlop breached this duty in pursuing a deliberate strategy to provide false information to Mr McHale as to the commission payable by the Dolphin Trust which resulted in false information being provided. Further, given Mr McHale had been promised a third share of the total commission and had repeatedly asked about the commission, the Court held that it was not necessary for Mr McHale to show that he was “vulnerable or unsophisticated”.

The second approach was to consider the duties arising in respect of the investment opportunity which Mr Dunlop actually purported to offer to Mr McHale, namely the Dolphin Trust investment opportunity combined with an “enhanced” offer of an equal share of the introducer commission. The Court held that in taking the additional step of electing to share the commission payable by the Dolphin Trust with Mr McHale, Mr Dunlop changed the nature and content of the investment opportunity presented to Mr McHale and an “enhanced” package is what was actually offered. In electing to offer the “enhanced” investment opportunity to Mr McHale, Mr Dunlop could be said to have taken on a role as an agent for Mr McHale in respect of the commission payable under the enhanced package, and Mr Dunlop was therefore fixed with fiduciary duties. It was a breach of those duties to misrepresent the amount of commission payable and to fail to account fairly to Mr McHale for his share.

What does this mean for financial professionals?

Whether or not a “half-secret” commission case succeeds will depend on the facts of each case. However, the Court’s decision in McHale v Dunlop & Anor demonstrates that professionals may be liable for breach of fiduciary duty not only in situations in which a “half-secret” commission is not disclosed but also when the existence of the commission is disclosed but the amount is not. Further, it may not be necessary to establish the “vulnerable” or “unsophisticated” requirement if in the circumstances the scope of the professional’s fiduciary duty extends to disclosing the level of the commission.

Where commissions or financial incentives are involved, professionals should therefore ensure a sufficient level of transparency as the failure to disclose such details could result in serious repercussions arising out of breaches of fiduciary duties.