Half-secret commission leads to liability for introducer
The recent High Court decision in McHale v Dunlop & Anor [2024] EWHC 1174 (KB) serves as a reminder of the legal obligations of financial advisors and introducers when working with clients on investment arrangements. The case is particularly important in relation to disclosure of commissions, where it illustrates the potential consequences of payments which are not fully disclosed, so called “half-secret” commission.
Background
The Claimant in this case, Mr McHale, was a sophisticated investor who had worked in the financial sector for a number of years. A trusted friend of Mr McHale and former Independent Financial Advisor, Mr Lockington, had raised with Mr McHale an oversea investment scheme known as the Dolphin Trust, which Mr Lockington said was “doing very well”. Mr Lockington subsequently arranged for Mr McHale to meet with Mr Dunlop, an “introducer” of investors to the Dolphin Trust.
Mr McHale invested a substantial part of his pension savings in 2-year and 5-year Dolphin Trust loan notes between 2016 and 2018, with the anticipation of high returns on the investment. It was also agreed that the commission payable by the Dolphin Trust to Mr Dunlop as introducer would be split equally three ways between Mr McHale himself, Mr Lockington, and Mr Dunlop.
Mr McHale's investments were facilitated with Mr Dunlop overseeing the transfer of pension funds to a Small Self-Administered Scheme (SSAS) and the purchase of the loan notes. Throughout this process, while Mr McHale was aware that Mr Dunlop was receiving commission, he did not know the exact commission structure (and hence the exact commission sum) offered by the Dolphin Trust. Mr McHale alleged that Mr Dunlop h employed a strategy that deliberately misled him as to the true details of the level of commission payable, taking advantage of Mr McHale’s ignorance.
In 2020, the Dolphin Trust (by then known as the German Property Group) entered preliminary bankruptcy proceedings in Germany. In 2022, Mr McHale issued a claim for damages in respect of losses arising from his investment in the Dolphin Trust. At the trial stage, the claims were for (1) common law professional negligence in respect of Mr Dunlop’s assumed duties of care and skill as a financial advisor, and (2) the undisclosed (“half-secret”) commission paid to Mr Dunlop, on the basis that Mr Dunlop breached his fiduciary duty to Mr McHale.
Decision
Dismissing the negligence claim and upholding the claim in respect of the undisclosed commission, the key points of the judgment are as follows:
- Mr Dunlop had a duty of care, but not as a financial advisor: Mr Dunlop did not assume a duty of care to advise, as financial advisor, on the merits or suitability of the Dolphin Trust as an investment opportunity.
In fact, as a sophisticated investor, Mr McHale had already decided in principle to invest some of his pension funds in Dolphin Trust prior to meeting Mr Dunlop, based on what Mr Lockington had told him. The Court found that Mr Dunlop’s role was to execute the investment decision that had already been made by Mr McHale.
The scope of the duty of care owed by Mr Dunlop was therefore more limited, namely to provide information on the Dolphin Trust, to advise on the logistics of how to make investments into the Dolphin Trust (by transferring funds to an SSAS), and to undertake the work necessary to enable such investments to be made.
2. Mr Dunlop’s fiduciary duties in respect of the undisclosed commission: the nature of the duties was analysed in two ways by the Court. Firstly, in accordance with the “half-secret” commission approach adopted in Hurstanger – Mr Dunlop’s failure to provide full disclosure of the totality of the commissions meant there was a breach of his fiduciary duties to provide an honest and truthful account of the total sum of the commission payable. Secondly, by electing to share the commission with Mr McHale, Mr Dunlop changed the nature and content of the investment opportunity – it was an offer of an opportunity to profit not merely from the interest on the loan notes, but also by a share of the commission – an “enhanced” package was actually offered.
In offering this “enhanced” package, 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 package, and Mr Dunlop was therefore fixed with fiduciary duties in this regard. Such duties included providing accurate information about the commission payable, and properly accounting to Mr McHale for his one third share. Mr Dunlop acted in breach of those fiduciary duties by implementing a strategy deliberately to misinform Mr McHale of the full extent of commission payable and by then failing to account properly to Mr McHale for his share.
Given the above, Mr McHale was not in a position to provide fully informed consent in respect of the undisclosed element of the total commission payable. An account was to be taken of the total commission paid to Mr Dunlop, and Mr McHale was awarded the commission paid, with interest.
Comment
This is an important case for Claimants seeking to pursue claims in relation to concealment or part-concealment of commission payments. The judgment reiterates that the courts are willing to hold to account professionals in the financial services industry who do not adhere to their fiduciary duties to clients. In particular, introducers and financial advisors must ensure adequate transparency regarding any commissions or financial incentives they receive. Failure to disclose such details could result in breaches of fiduciary duties and repercussions, as occurred in this case.