In Medsted Associates Ltd v Canaccord Genuity Wealth (International) Ltd  EWHC 1815 (Comm) Teare J held that a broker owed fiduciary duties to investors introduced under an introducing agreement, with the result that the broker was deprived of what the Court held to be a 'secret commission'.
The judgment attracted some criticism for muddying the waters on the issue of whether a broker owed fiduciary duties to investors at all in these circumstances (and, if so, what the scope of any such duty was).
The recent decision of the Court of Appeal , overturning Teare J's decision, provides some comfort, but still fails to address some of the uncertainty created by the first-instance decision.
In 2009 the Claimant, Medsted, entered into an Introducing Agreement with the Defendant, then known as Collins Stewart, pursuant to which Medsted would receive a commission and funding rebate in relation to contracts for difference or any other product placed with Collins Stewart by customers introduced by Medsted to Collins Stewart.
Investors were introduced to Collins Stewart under that agreement and Medsted was paid as agreed. However, in 2010 Collins Stewart entered into transactions with certain investors directly, without Medsted's knowledge, on terms that would have otherwise entitled Medsted to a share of the commission and funding rebate.
Medsted had not disclosed to these investors the split in commission and funding rebate between itself and Collins Stewart; indeed, it had been keen to ensure that this information was withheld from them. Collins Stewart alleged that the investors, when they ultimately became aware of how the charges were being split between the two parties, were unhappy at the level of remuneration being paid to Medsted (described by Collins Stewart as "unusually high" in circumstances where Medsted was not bearing any of the financial risk) and sought to do business with Collins Stewart directly in order to cut out Medsted.
Medsted alleged that the 'secret business' between the investors and Collins Stewart constituted a breach of the Introducing Agreement and sought an account of the sums of the further commission to which it would, on its case, have been entitled.
The first-instance decision
Teare J held that:
- Collins Stewart had been in breach of its agreement with Medsted by dealing with the investors directly;
- this breach had caused Medsted loss;
- the relationship between Medsted and the investors was fiduciary in nature as the investors had "reposed trust and confidence in Medsted";
- Medsted's failure to inform the investors of how the commission and funding rebate were split was a breach of Medsted's fiduciary duty to its clients (and its remuneration under the agreement with Collins Stewart was, in effect, a 'secret commission');
- since the root of the loss caused to Medsted was its own breach of fiduciary duty to the investors, it was entitled only to nominal damages for the breach by Collins Stewart.
Medsted appealed on grounds that, inter alia, it did not owe any fiduciary duties to the investors and, even if it did, it did not breach any such duties by failing to disclose the level of the commission it was receiving.
The lead judgment in the appeal was given by Longmore LJ (with Jackson LJ and Asplin LJ concurring).
Longmore LJ agreed with Teare J's assessment that Medsted had, at least impliedly, represented to the investors that the terms offered by Collins Stewart were competitive. To that extent, at least, he concluded that "the clients/investors reposed trust and confidence in Medsted" which to his mind gave rise to a duty which could be legitimately categorised as 'fiduciary'. However, he held that Medsted had not breached any duty (whether fiduciary in nature or otherwise) by failing to disclose the remuneration split.
As Teare J had already acknowledged, the investors must be taken to have realised that Medsted was being remunerated for its services; the investors themselves were not paying any fees to Medsted and so they must have assumed that Collins Stewart was. Longmore LJ therefore considered that Teare J's classification of the commission as 'secret' was an overstatement of the position; a commission of which the existence but not the amount was known could not be 'secret'.
After considering a number of earlier authorities involving cases of partial disclosure, Longmore LJ concluded that, even if the relationship between Medsted and the investors was fiduciary in nature, the scope of any fiduciary duty was limited where the investors were aware that Medsted was being remunerated by Collins Stewart. On the facts, the judge held that there was no duty on Medsted to disclose to the investors the actual amount of the commission that it was due to (and did) receive from Collins Stewart. In coming to this conclusion the level of sophistication of the investors, described by Teare J as "wealthy Greek citizens" who were likely to have been "experienced investors", appears to have been a relevant factor.
It therefore followed that Medsted was not in breach of any duty and there was no basis on which damages could be denied on public policy grounds. The appeal was allowed and damages were ordered to be assessed.
The Court of Appeal's decision will be welcomed by brokers to the extent that it found that Medsted did not have to provide full disclosure to investors of the commission payments earned by it. However, significant uncertainty remains. Without having to decide the point directly, the Court of Appeal was willing to accept that Medsted owed duties of a fiduciary nature to investors. The open question is the extent of such duties, and in particular, the level of disclosure of commission payments required.
Until the Courts give further guidance on this issue, it may be advisable for brokers to err on the side of caution when considering how open to be about the quantum of commission they are receiving, particularly where the investors concerned may be said to be at the less sophisticated end of the spectrum.