Facts
The Claimant, Mr McHale, brought a claim in negligence and breach of fiduciary duty against the Defendant, Mr Dunlop, for damages in respect of losses from investing his pension savings in an overseas investment scheme known as Dolphin Trust ("the Trust").
Mr McHale met Mr Dunlop in January 2016, following an introduction from a friend, Mr Lockington. Mr Dunlop formally introduced Mr McHale to the Trust and between 2016 and 2018, Mr McHale invested his pension savings worth £320,000 in the Trust, through a small, self-administered scheme ("SSAS") which Mr McHale had set up with the assistance of Mr Dunlop.
A message in 2016 from Mr Lockington to Mr McHale stated that Mr McHale would be paid a one-third share of the commission paid by the Trust to Mr Dunlop as an introducer. When Mr McHale followed up, Mr Lockington replied, on Mr Dunlop's advice, that they did not yet know the amount due.
In 2020, the Trust entered preliminary bankruptcy proceedings in Germany.
Mr McHale subsequently brought a claim for damages on the basis that Mr Dunlop had assumed the duties of reasonable care and skill and good faith to be expected of a financial adviser and had acted in breach of those duties by putting his own interests above his client by recommending the Trust because of the high commission it paid.
Mr McHale also brought a claim for breach of fiduciary duty and an account of the undisclosed commission received by Mr Dunlop in respect of the investments into the trust. The claim was for a breach of duty in respect of "half-secret" commissions, as Mr McHale was aware that commission was payable but not the precise amount.
Judgment
Professional Negligence Claim
The Court found in favour of the Defendant and held that Mr McHale had failed to establish that Mr Dunlop owed him the duties of good faith and reasonable skill and care to be expected of a financial adviser. This was because Mr Dunlop did not present himself as an independent financial adviser and that Mr McHale knew from the outset that he worked as an introducer for the Trust.
Breach of Fiduciary Duty
The Judge held that Mr Dunlop owed a fiduciary duty to Mr McHale to provide an honest account of the total commission payable by the Trust and was in breach of his duties by adopting a strategy to misinform Mr McHale of the true commission payable.
In electing to share the commission payable by the Trust with Mr McHale, Mr Dunlop changed the nature and content of the investment opportunity, such that the opportunity proposed was "enhanced". Mr Dunlop had adopted the role of an agent for Mr McHale in respect of the commission payable under the enhanced package, such that Mr Dunlop had a fiduciary duty to account honestly to Mr McHale in respect of the commission.
The Judge considered the Court of Appeal decision in Hurstanger Ltd v Wilson [2007], which held that the obligation on the agent must be “more special” than disclosing the mere fact that commission was payable. It was met in the Hurstanger case because the defendant borrowers were vulnerable and unsophisticated.
In this case, while Mr McHale needed to demonstrate a "more special" obligation, he did not need to demonstrate that he was vulnerable or unsophisticated. The Judge referred to Medsted Associates Ltd v Canaccord Genuity Wealth (International) Ltd [2019] in which Longmore LJ noted that if the principal knows that commission is payable, but not the particulars of the amount payable, then he can "ask and, if he does not like the answer, he can take his business elsewhere”. In McHale, the Judge determined that as Mr McHale was promised a third of the total commission and repeatedly asked about the commission payable. This gave rise to a "more special" obligation on Mr Dunlop to disclose the true amount of commission payable.
Comment
McHale reaffirms the principles set out in Hurstanger and Medsted, and highlights that for a finding of a breach of fiduciary duty in a case of a half-secret commission, there must be a "more special" obligation on the fiduciary to disclose details of the commission received.
McHale also speaks to a wider focus on fiduciary duties, for example in the recent Pension Ombudsman's Decision Mr N (PO-25984) which concerned a complaint by Mr N, a Member Trustee of a Rowanmoor SSAS, against Rowanmoor for failure to undertake sufficient due diligence on an investment scheme which resulted in Mr N suffering losses. In this case it was held that a professional SSAS trustee owes a duty to member trustees to explain "the ins-and-outs of trusteeship".
These decisions emphasise that fiduciaries must take care to provide appropriate information to clients, particularly if they are vulnerable. They must actively consider where those duties extend beyond the norm by virtue of the circumstances. Providing adequate disclosure of commission arrangements is key, particularly where customers may be taking a share in the commission or otherwise make enquiries about it.
Authors: Harriet Quiney and Aisha Hirani
