The Truth About Undisclosed Loan Commission Fees

Len Burgess[1]

Len Burgess

Money Savings Advice Undisclosed loan commission fees

When you take out a loan, you may be charged a setup fee which is added to the total cost of your loan. This is normal and perfectly legal.

Or, you may just be charged interest as normal. Part of this setup fee or interest may also be used as commission for the broker who set up your loan.

What Are Illegal Loan Commission Fees?

If you have taken out a loan through a broker, were charged a loan setup fee but you don’t know how much of that fee was commission, it may have been mis-sold, and you could claim it back. This references the Plevin case of 2014.

But if you don’t know how much of that loan fee is commission, then you’re not being charged fairly, and following a critical case in 2014, you may be able to claim this money back.

Read our guide on undisclosed loan commission fees to find out more.

How Do Loan Commission Fees Work?

There are two different ways that you can take out a loan in the UK. Many people choose to go directly to the lender – for example, if you visit the bank to request a loan, then you are borrowing directly. However, you may instead use a broker – either an online agent or an in-person financial adviser who sets up your loan. And as part of the latter option, the broker or adviser will need to be paid for their work.

They don’t tend to charge you directly. Instead, they’ll get a commission from the lender, who will pay them a fee out of the money they earn from you. That could be a loan setup fee that’s added to your costs, or they may just take some of the interest payments and hand that to the broker.

The problems arise when you aren’t told how much the broker is being paid. Instead, you may just be told that the fees or interest are all being paid to the lender. That’s mis-selling – you are entitled to know where your money is going when you set up a loan agreement. And following the Plevin legal case in 2014, you may now be able to claim back some of this commission.

The Difference Between Disclosed and Undisclosed Loan Fees

It’s important that we differentiate between disclosed and undisclosed commission fees at this stage. The undisclosed commission is only that which isn’t spelt out to you in your loan agreement.

So, for example, if you were to take out a mortgage through a mortgage broker, you would almost certainly have a mortgage broker fee to pay. This is their commission, but it is disclosed – you are being asked to pay it, or it is clearly explained how that will be taken from your mortgage setup fees.

The problems are when lenders pay the broker in an agreement without your knowledge. This could be that the commission is completely secret from you, or you may be told that the transaction involves commission, but you aren’t given a figure setting out exactly how much.

This doesn’t normally happen with mortgages and is much more likely with personal loans. Even then, it is only when you’re borrowing through a broker. If you take out a personal loan, you can avoid any issues in future by asking for a full breakdown of all costs including commission paid to the broker from the lender’s side – they will be obligated to explain it to you.

Credit Brokers Acting As Direct Lenders

One thing to watch out for is whether your credit broker has made it clear they are not the lender. Some brokers may act as if they are the party lending you the money, despite their brokerage role. This was more common online a few years ago, but you may have a case if you feel you were mis-sold in this way.

If you took out a loan through a broker and then got legal documents through that weren’t from the broker but from a different lender, and they didn’t spell out the difference between the broker and the lender, then there is a high chance that your broker was paid an undisclosed commission fee.

Revisit your loan contract and the initial loan forms that you filled in when requesting the loan. Is it clear and obvious that the broker is not fulfilling your loan but is merely brokering it for you? If not, then you should investigate their commission as you may be able to claim your agreement was mis-sold and reclaim the money.

What Was the Plevin Case?

The Plevin ruling is named for Mrs Susan Plevin. She set up a loan with Paragon Personal Finance with Payment Protection Insurance (PPI). However in 2014, she discovered that a large amount of her PPI payments were being used as commission – in fact, 71% of the money she’d paid towards PPI was commission, with only 29% used to insure her loan repayments. It was a huge sum too – her PPI cost her over £5,000 but without the commission would only have cost her £1,600.

Mrs Plevin took her case to the Supreme Court, claiming she would not have bought the policy had she known this in advance. She won, and so the Plevin ruling was created where any undisclosed high commission fees could be claimed back by the customer. “High commission” was defined as anything over 50%, and considering the average commission paid on many financial products is 67%, it left open a lot of potentials for customers to get their money back, with interest paid too.

It's worth noting that the ruling from the FCA on high commission rates only applied to PPI. For undisclosed loan commission fees that percentage may be different and would depend on the individual circumstances of your case.

It would be extremely unlikely to have been charged over 50% commission on the interest payments made to your bank! Instead, a one-off fee was probably paid, which the Financial Ombudsman Service would rule on to decide whether it was unfair.

You can read the full judgement here.

Can I Make a Claim?

Most people who were able to claim back under Plevin would have paid commission on PPI rather than on a loan. Loan commission fees aren’t as common as PPI commission. If you had PPI, then you have missed the deadline of August 2019 and would need to make a case for extraordinary circumstances.

However, if you’ve taken out a loan through a broker and feel that you may have been charged high commission fees, or even just undisclosed commission fees that render your agreement unfair, then you may have a case.

You would need to prove that the commission fees were undisclosed to you, so make sure you revisit your loan contract to explore whether you might have a case. It should be clear and obvious in your agreement where your fees and payments are going.

Should I Use a Claims Management Company When Seeking Compensation?

On the surface, many mis-sold commission compensation claims can look relatively straightforward, but this is before we look at the UK legal system! As a consequence, many individuals now employ the services of claims management companies to work on their behalf when seeking compensation.

This is a very competitive area of the claims management market that has kept costs “competitive” which is beneficial to both claims management companies and those seeking compensation.

What Evidence Would I Need When Seeking Mis-Sold Commission Compensation?

In order to claim compensation, you would need to prove that the finance provider failed to disclose a relationship with third parties which included payments of commission. In theory, this should be relatively straightforward as the majority of financial transactions will have a detailed paper trail. However, where verbal claims have been made with regards to commission/relationships with other parties, it is sensible to request these in writing.

How Much Would It Cost to Pursue Compensation?

If you pursue compensation yourself, then the costs would be limited although, due to limited experience, you may not be able to prove your case or maximise your compensation. With a claims management company, where they believe you have a good chance of success, they would likely offer a “no win no fee” arrangement.

This effectively means that they will pursue your case at no cost to you, but they will request a “success fee”.

What Is a Success Fee?

A success fee is an arrangement between you and your claims management company which entitles them to a percentage of any compensation you receive. The standard rate is around 25%, although this can vary with regards to complex or long-term claims. In the event that your claim was unsuccessful, the claims management company would receive no payment from you.

Money Savings Advice Tip

If you feel you have been a victim of undisclosed loan commission fees then getting specialist advice from a compensation specialist is certainly a worthwhile route to go down. We would recommend speaking to a compensation specialist who works on a no-win-no-fee basis meaning you are not further out of pocket.

Why Are No Win No Fee Arrangements So Popular?

There are a number of issues to consider with regards to “no win no fee” arrangements. Firstly, the claims management company will have significant experience in this field and therefore be able to maximise your chances of success. Secondly, the “no win no fee” structure means that those pursuing valid compensation claims have literally nothing to lose.

If the claim is unsuccessful, then the claims management company will have to foot the bill for any costs.

Holding Third Parties to Account

When looking at compensation for mis-sold commissions, personal injury claims or any other type of compensation, the “no win no fee” arrangement has proved crucial. It ensures, with minimal risk to the claimant, that potentially negligent third parties are held to account.

Without the threat of financial compensation, there is less pressure to change procedures and ensure that others in the future will not experience similar issues.

Would I Still Receive Compensation if I Was Bankrupt/in a Formal Debt Management Arrangement?

This has been a problem area in recent years. Many perfectly valid PPI claims, for example, have been redirected to cover debt write-offs regarding bankruptcy and other formal debt management arrangements. The law is unclear on the validity of such action, but many banks in the UK would look to offset any compensation awarded against any debt write-offs they had undertaken. Take advice!

How Can Money Savings Advice Help You With Making a Mis-Sold Commission Claim?

Here at Money Savings Advice, we have partnered with some of the UK’s leading Financial Claims management companies. They have already helped thousands of people claim compensation for mis-sold financial products and they can do the same for you.

Choosing an independent claims management company means they won’t proceed with a claim unless they are sure it is in your best interests. They are also regulated by the FCA, which gives you an additional layer of protection.

If you would like to speak to one of these claim management companies who can help you make a compensation claim, then click on the below and answer the very simple questions.

Money Savings Advice Author Len Burgess

Len Burgess

Len Burgess is a professional financial writer who over the last five years has written hundreds of articles for all financial sectors. Len founded Money Savings Advice with the aim of helping consumers navigate their way around the financial world by providing easy to understand financial information and matching consumers with the best financial advisor based on their personal information.

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