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BFCSA: Colin Neave Commonwealth Ombudsman and his Argument of Agency Broker is Agent of the Bank

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http://www.fos.org.au/custom/files/docs/fos_banking_finance_bulletin_36.pdf

 

BULLETIN NO 36
DECEMBER 2002
In this Bulletin:

Agency of brokers – update of approach


EFT disputes and financial hardship

Issues featured in our Bulletins this year
1.Agency of brokers – ABIO Revised Approach


Introduction
The December 2001 Bulletin (Bulletin 32) set out our approach to the question of when a bank will be liable as principal for misleading and deceptive conduct of a broker who is involved in the marketing, application for or establishment of a loan or other financial service.

 

We have recently reviewed our approach as a result of the following observations in the cases that have been considered by us:

An increase in the use of brokers by banks for activities which go beyond merely providing information about available products and assisting in the completion of the loan application and extend to activities which would traditionally be the responsibility of the bank lending officer or back office of the bank;

An apparent increase in the delegation to brokers by banks of the responsibility of explaining the loan offer or security documents or both, including an apparent refusal by banks in some cases to have direct contact with the borrower, instead referring all questions to the broker;

 

An increase in the sophistication of the contractual arrangements between banks and brokers, reflecting the broader range of activities undertaken by the brokers, and indicating, in our view, the giving of actual authority to the broker to carry out what would otherwise be regarded as aspects of the bank’s role in the lending process.

Summary of revised approach

It is more likely that we will conclude that a broker is an agent of the bank if the bank has no direct contact with the borrower and/or the borrower is referred by the bank to the broker for explanations about the loan offer, the product features or the security documents.

We will place less weight on statements made to borrowers that the broker is not the agent of the bank and will place more weight on the actual arrangements in place between the bank and the broker.

 

Similarly, we will place less weight on clauses in the agreement between the bank and the broker which seek to deem the broker not to be an agent of the bank and more weight on the agreement as a whole.

Discussion
It is becoming more common for banks to outsource to brokers the tasks traditionally carried out by an internal lending officer – explanation of product, taking of the loan application and notification of approval.


In such cases the bank will pay commission to the broker and will usually have in place a referral or broker agreement. The agreement will usually contain express statements such as
‘The broker is not the agent of the bank’, although it will also, usually, require the broker to indemnify the bank against any liability it may have as a result of misstatements by the broker – in the absence of agency the bank is unlikely to have any liability so the indemnity in that sense contradicts the express statement.

 

The customer may also be asked to sign an acknowledgement that ‘the broker is your agent not the bank’s agent’.  The aim of such statements is undoubtedly to distance the bank so far as possible from any errors, omissions or misstatements that may be made by the broker. Nevertheless there will be cases where a bank will be liable for misleading or deceptive conduct by the broker.

 

Liability of a bank for misleading or deceptive conduct by a broker
A bank will be liable for misrepresentations or other misleading and deceptive conduct by a broker if at the relevant time the broker was acting as the agent of the bank. The agency may be a limited one and it is possible for a broker to be the agent of the customer for some purposes such as sourcing the finance but the agent of the bank for the purposes of taking the loan application and providing product information. Agency may be either actual or apparent.

Actual authority
Features that will, in our view, establish agency based on actual authority:

 

Express authority to act as agent for the bank in one or more respects - such as in identifying the customer, completing the application form, taking the loan application to a certain stage or providing information with the express authority of the bank and under the control of the bank. For example:
- the broker may be provided with information produced by the bank and be subject to the direction of the bank as to how that information is passed on to the customer;
- the broker may be given express permission to use the bank’s logo in documents produced by the broker;
- the broker may be given express permission to access the bank’s internal system to gain and communicate information about the progress of a loan application;

 

Referring the borrower back to the broker when the borrower had specific queries about the loan product or offer, saying that the broker could answer all the borrower’s questions to the bank or refusing to provide information except through the broker;

A requirement to comply with internal bank policies such as a code of conduct when dealing with loan applications and to be trained in those policies and practices, particularly where there is any component of performance review.

 

The code may, for example, specifically authorise the broker to give applicants information about bank products, how they work and what are their terms and conditions. This is consistent with an intention that the broker will be carrying out some of the bank’s own functions on behalf of the bank; or

Payment of a commission - although our view is that this needs to be in combination with other factors.  Apparent or ostensible authority – examples of a sufficient holding out

Referring the borrower back to the broker when the borrower had specific queries about the loan product, saying that the broker could answer all the borrower’s questions to the bank or refusing to provide information except through the broker;

Not correcting the understanding of the borrower that the broker was acting for the bank when the bank knows that the broker has been holding themselves as having authority to do so;

Allowing the broker to use a title that would normally only be given to an agent;

Allowing the broker to use or display the bank’s logo in association with the broker’s own promotional or contractual material;

Allowing the broker, in the presence of the borrower, to access internal bank systems to establish the progress of an application; and/or

Holding out the broker as having some authority without making it clear that the authority is limited;

Payment of commission – in combination with other factors.

 

Apparent or ostensible authority – examples of a sufficient holding out

Referring the borrower back to the broker when the borrower had specific queries about the loan product, saying that the broker could answer all the borrower’s questions to the bank or refusing to provide information except through the broker;

Not correcting the understanding of the borrower that the broker was acting for the bank when the bank knows that the broker has been holding themselves as having authority to do so;

Allowing the broker to use a title that would normally only be given to an agent;

Allowing the broker to use or display the bank’s logo in association with the broker’s own promotional or contractual material;

 

Allowing the broker, in the presence of the borrower, to access internal bank systems to establish the progress of an application; and/or

Holding out the broker as having some authority without making it clear that the authority is limited;

Payment of commission – in combination with other factors.


The relevance of express statements in documents
An acknowledgment signed by the borrower, that the broker is the borrower’s agent and not the bank’s will be taken into account in determining whether the broker was held out as having authority to act for the bank. But it may not protect the bank where clear representations to the contrary have been made and it will not assist the bank if it is contrary to the actual arrangements between the bank and the broker.

 

In other words, it may mean that there will be no holding out, but the bank will nevertheless be liable because the broker is actually the agent of the bank at the relevant time.

 

 

 

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