The High Court has recently held that an introducing broker owed a fiduciary duty to its clients (those introduced to a CFD provider) to inform them about the commissions it would receive as a result of the introduction, as well as the other costs and charges incurred in the provision of the service.
As a result, the Court found that the firm to whom the introductions were made only had to pay de minimis damages to the introducing broker for breach of the non-solicitation clause in the IB agreement.
While the facts of the case may not be that noteworthy, the Court's decision is a timely reminder, with MiFID II inducements and cost and charges changes on the horizon, that firms can require introducing brokers to disclose costs and charges and other inducements to the end investor. If the introducing broker fails to do so, it could amount to a breach of the introducing broker's fiduciary duty to the end investor if they placed trust and confidence in the introducing broker.
Background
On 20 July 2017, the High Court gave judgment in the case of Medsted Associates Limited v Canaccord Genuity Wealth (International) Limited [2017] EWHC 1815 (Comm).
Medsted introduced wealthy clients to Collins Stewart (now Cannacord Genuity Wealth (International) Limited) and received a share of the commission and funding from Collins Stewart. The clients had to use Medsted as they could not deal with a "first-tier provider" of CFDs directly. Medsted therefore introduced them to Collins Stewart, who could deal with a "first-tier provider" of CFDs.
In 2009, Medsted formed a business relationship with Collins Stewart and an introducing broker agreement and non-circumvention agreement were discussed. Collins Stewart agreed that it would not approach or solicit any clients introduced by Medsted for 18 months after the agreement had ended. No agreements were actually signed.
Collins Stewart devised a scheme where it traded with the clients directly at reduced rates and without Medsted being informed. Medsted brought a claim for breach of contract and was successful, but the court held that only de minimis damages were payable because of Medsted's breach of its fiduciary duties to its own clients for not disclosing the commissions and charging structure.
Commission rebate structure
The court heard that Mr Valasakis, the majority owner of Medsted, had told Collins Stewart that that "high commission" was being charged because there were other sub-introducing brokers involved who were also being paid. Mr Valasakis had stated that: "The operation is structured. Medsted is in the middle. Medsted has IBs, so Medsted pays the IBs and the IBs bring the customers…there are two or three layers after us."
A commission proposal to Collins Stewart had noted: "Medsted's clients are either Brokers that have a large client base or Securities Firms and other entities that have retail and institutional brokers on their payroll (all called IBs). Medsted gets paid by the overseas firms and then in turn pays its subIBs and the third parties that provided the clients. With this business model the commissions are split between various parties. We propose to keep the same commissions as we were charging in 2008..."
As of result of this charging structure, the parties allegedly agreed that clients should not be informed of the "first-tier provider's" charges.
The court found that Medsted's conduct of introducing clients to Collins Stewart without informing the clients of the charges levied by the first-tier provider and the amount of commission and rebate it was receiving was a breach of its fiduciary duty to its clients.
The court also found that, while an introducing agent who has no authority to contract on behalf of the client and merely makes introductions is not an agent in the traditional sense, it can still owe fiduciary duties. The relationship between Medsted and the clients was a fiduciary one. Medsted had a duty to be honest and to act in good faith towards its clients, a duty not to mislead them, a duty to be fair and transparent with them and a duty to act in their best interests. Such duties are those of a fiduciary.
There was no evidence that Medsted informed its clients that it would be rewarded by a share of the commission and funding rebates paid by the clients to Collins Stewart. Medsted, therefore, breached its fiduciary duty to the clients. This was the case even though the court acknowledged it was unlikely that the clients thought Medsted was providing the introductions for nothing. They probably assumed that Medsted was being rewarded by a share of the commission and funding rebates paid by the clients to Collins Stewart.
