If your firm receives referral fees or commissions, you must comply with rigorous client consent and notification requirements. These are laid down in ICAEW’s Code of Ethics and the DPB (Investment Business) Handbook . The requirements vary depending on whether the commission or fee received is regulated or unregulated. In essence, you must both obtain client consent and notify clients of the amounts received.
In October 2024, a judgment by the Court of Appeal found that a car dealer could not legally receive a commission from a lender providing car finance without the informed consent of the car buyer. “This judgment relates to car finance, but it is relevant to all of the professions,” says Philippa Hann, who was a partner and managing director at law firm Clarke Willmott for 18 years and is now Head of Solicitor Engagement at technology company RQ . “It means, in a nutshell, that where you have a fiduciary relationship – where somebody is relying on your expertise – and you are not open and transparent about being paid by somebody else, then that is unlawful.”
The Appeal Court judgment
The appeal involved three lead cases, each taken against a provider of car finance. All three claimants, who were described as being “financially unsophisticated”, wanted to finance the car purchase through a dealership. However, the car dealers did not properly disclose to each buyer that they were receiving commission from the finance companies for the loans they agreed. “The sums involved were relatively small,” says Philippa, “but where there is a payment of commission, it needs to be disclosed to the person it relates to.”
The car dealers in these cases had two roles. First, they were acting as an agent on behalf of the person who was buying the car in that they were offering to find them the best finance. In those circumstances, they owed a duty of honesty and transparency to the car buyer. Second, the car dealers also had contractual relationships with the lenders. Translating this to the accountancy profession, this equates to the accountant having a relationship with their client, as well as a relationship with, for example, an independent financial adviser (IFA) or a lawyer.
As an accountant, you are very likely to be in a fiduciary relationship with your client. Where you have agreed with the client that you will act in their interests and where that relationship involves trust and confidence, then it is likely that a fiduciary relationship will be created. “You hold that position of trust and confidence in society,” explains Philippa.
There may be certain instances where accountants won’t be advising their client in a fiduciary capacity; it depends on the nature of the service. For example, there is unlikely to be a fiduciary relationship where the accountant is only doing the payroll. “This is a grey area, however,” says Philippa. “And I would always advise a professional to assume that they do have a fiduciary duty to their client.
“Where there is a fiduciary relationship,” she emphasises, “that imposes a duty of the utmost loyalty. And where there is a fiduciary duty, you can't make a profit unless there's been fully informed consent by the client – or the buyer in these cases.”
“If you have a fiduciary relationship, you are not allowed to make a profit or to prefer your own interests over those of your clients,” she explains. “So, the only way that you can do that legally is if you have obtained fully informed consent from the client, which is to say you are, of course, allowed to make a profit when advising clients, but you cannot keep that a secret.”
In this case, the court also talked about a different duty, the “disinterested duty”, which may arise even where there isn't obviously a fiduciary duty. This “disinterested duty” is to provide advice, information and recommendations on an impartial basis where the agent can influence or affect the decision taken by the customer. So, even where the court decided that there was no fiduciary duty, the disinterested duty was held to apply because the agent had agreed to find the best deal or the one most suitable for the client.
The court found there were different sets of circumstances in each case, but in all cases the buyer was not fully informed about the payment of the commission.
- Case 1: the buyer was not informed about the commission paid to the car dealer at all. The court found this to be a fully secret commission, similar to a bribe.
- Case 2: the commission was mentioned to the buyer in the terms and conditions, but it was hidden in a sub-clause and no one drew their attention to it. The court decided this was a fully secret commission due to the lack of proper disclosure.
- Case 3: the buyer was informed about the commission. They signed the terms and conditions and a suitability letter saying commission would be payable, but they were not told the amount or how it was calculated. The court ruled this as partial disclosure, which did not meet the standard of fully informed consent.
The Court of Appeal ruled in favour of all three of the claimants, and the lender had to pay back the full commission payment with interest.
In December 2024, the UK Supreme Court announced that it had given the lenders leave to appeal the judgment. The appeals are expected to be heard before 16 April 2025.
Firms are responsible
Transparency in relationships and maintaining trust with clients is crucial. ICAEW’s Code of Ethics and the DPB (Investment Business) Handbook set out clear requirements for obtaining client consent and making the appropriate notifications. “If you follow these, everyone is clear all the way through the process about what's happening,” says Dean Neaves, Senior Manager, ICAEW’s Quality Assurance Department. “And that's the really important point.”
If you fail to follow the requirements, you will be putting client relationships at risk and potentially opening yourself up to regulatory action. The Court of Appeal case also highlights the wider legal environment, and the associated implications of failing to meet your obligations to clients.
“The legal principles here are that if you have agreed to act in a client’s interests and there is a relationship of trust and confidence – if you are a fiduciary (and you probably are as an accountant) – you have certain obligations which include the steps you must take where there is a fee payable to you by a third party,” says Philippa.
The fact that the third party is a lender in these cases doesn't detract from the relevance of the ruling for the accounting profession. For example, as an accountant, the third party might be an IFA or a lawyer, from whom you receive a fee or commission when you refer a client. “In those circumstances,” says Philippa, “if you have a fiduciary duty, and in lots of cases you will, and you are not disclosing payments made to you early enough, you will be breaching that duty.”
A robust process
Although most firms are meeting their consent and notification obligations, ICAEW’s 2024 Practice Assurance Monitoring Report shows that during 2023’s visits, reviewers identified gaps in accounting for unregulated commission and/or referral fees at 69 firms. Typically, this was where firms had not told their clients in writing how much they received and/or obtained their consent to retain it.
“Whatever the type of commission, the responsibility for making sure the consents and notifications are properly documented always lies with the firm,” stresses Dean. “So, it’s important that firms have robust processes showing that clients have provided fully informed consent and have been notified of the amounts at the right time.”
Firms can choose how they develop and implement compliance processes, for example, designing in-house systems or using outsourced services and software. If you decide to use a third-party provider, ICAEW has worked with technology company RQ to develop a collaboration platform, which is free to ICAEW members. The platform aims to help accountants stay “within regulatory tramlines”.
One of its key features is to ensure clients provide fully informed consent in referral arrangements. It does this by generating an automatic e-signature letter detailing the referral and any fees or commissions before the referral is made. Until the client signs and returns that letter, which sets out the specific details, the referral will not be made.
“The platform works to ensure that you stay on the right side of the line, and your clients remain happy,” says Philippa. “If you do your referral through RQ, you will be meeting the ICAEW regulatory requirements around monitoring referrals, and you will be able to pull off a report whenever the regulator requests this information.”
As a trusted adviser, no professional wants to be in a position where their client is not fully aware of what is happening in terms of referral relationships and commissions. To ensure you keep within the law and meet regulatory requirements, you need to understand your obligations, be fully transparent throughout the process, and retain up-to-date, specific and detailed records.
