The facts of the case
In March 2005, the claimants bought double-glazing from Bowater Windows Ltd trading as Zenith Staybrite (Zenith) following a visit to their home by its salesmen (S). The claimants required a loan (which Zenith was to arrange) to enable them to make the purchase. S told the claimants they had to purchase PPI in order to secure the loan. Zenith, through a broker, subsequently submitted the application for the loan to the lender electronically. At no time was the lender involved in any negotiations with the claimants.
The lender did not, in fact, require PPI to be taken out as a condition of the loan and would have agreed the advance without it. The loan to purchase the double-glazing was for £7,430 and the PPI premium, £1,133.08. The PPI policy was duly issued by the insurers. The lender earned commission on the premium and interest on the loan which related to it.
Proceedings were issued by the claimants in November 2011 alleging a number of issues. The only one which was live by the time the matter came to trial was the allegation of an unfair relationship under s140A of the Consumer Credit Act 1974 (the Act) (s140A).
Findings at first instance
The judge found that S had misrepresented the need for PPI in order to secure the loan and that the policy had been sold in breach of the Insurance: Conduct of Business rules (ICOB) as:
- The misrepresentation meant that Zenith had failed to communicate with the claimants in a way that was clear, fair and not misleading, so breaching rule 2.2.3.
- The discrepancy between the term of the loan (10 years) and the term of the PPI (five years) and S's failure to ascertain that the claimants were both entitled to sick pay from their employer meant that Zenith had failed to take reasonable steps to ensure that the policy was suitable, contrary to rules 4.3.1, 4.3.2 and 4.3.6.
The judge also found that S's misrepresentations were deemed to have been made on behalf of Zenith and as agent for the lender pursuant to the terms of the Act and were relevant as "things done (or not done) by, or on behalf of, the creditor" in determining whether there was an unfair relationship between the claimant and the lender within the meaning of s140A. As the claimants would not have taken out the PPI policy but for the misrepresentation and breaches of ICOB, there was an unfair relationship.
The lender was ordered to repay the loan repayments referable to the PPI policy and the loan was varied so there were no further repayments in relation to the policy. The lender appealed.
The Court of Appeal decision
In dismissing the appeal, the Court of Appeal determined five specific issues with Lord Justice Kitchin delivering the court's judgment:
- The scope of s56(1)(c) of the Act and the effect of the agency to which s56(2) gives rise.
The lender argued that the deemed statutory agency created by s56(2) had no relevance to s140A. It contended that there was no debtor-creditor-supplier (DCS) agreement in relation to the PPI, the supplier of which was the ultimate insurance company, not Zenith, as there were no pre-existing arrangements with the insurer under s12(b) of the Act. The insurer had made no misrepresentations. There could therefore be no deemed agency between Zenith and the lender in relation to the PPI.
Kitchin LJ rejected these arguments holding that even if the sole DCS agreement did relate to the double-glazing, the misrepresentation about the PPI and the loan was made in relation to that transaction and formed part of the negotiations in relation to the double-glazing. The purchase of the PPI formed part of the same package as the purchase of the double-glazing and it was only taken as a means to secure the loan to purchase the double-glazing.
All the negotiations by Zenith in relation to the PPI were antecedent negotiations within the meaning of s56(1)(c). S56(2) applies to negotiations falling within s56(1)(c) and the deeming provisions meant that Zenith's negotiations constituted "any other thing done (or not done) by, or on behalf of, the creditor" within the meaning of s140A.
- The effect (if any) of the Court of Appeal's decision in Plevin v Paragon Personal Finance Ltd.
In Plevin, a broad approach to what acting "on behalf of" meant within the meaning of s140A was accepted as correct.
Kitchin LJ held that there was no doubt Zenith's representations were made "on behalf of" the lender, as that phrase was construed in Plevin. All the representations made by S played a material part in bringing about the credit agreement. The loan enabled the claimants to purchase the double-glazing. The lender received commission on the PPI and interest on the part of the loan that related to it.
- Whether the agreement for the provision of PPI was a "related agreement" for the purpose of s140A and, if so, what were the implications?
Kitchin LJ accepted that s56 made no reference to the concept of a linked transaction and so the deemed agency provisions it contains don't apply and don't make the creditor responsible for negotiations conducted by a broker in relation to such transactions.
- Was it appropriate to take into account the misrepresentations by Zenith in determining whether the relationship between the claimant and lender was unfair?
Kitchin LJ rejected the lender's argument that, as the claimants could have sought a remedy under s75 of the Act (had it not been time barred), there was no need to provide an alternative remedy for the same type of wrong by means of s140A. He held there was no reason to conclude that the misrepresentations should be excluded for an assessment under s140A.
Under s140A, the court must consider whether the relationship is unfair because of the matters identified in that section and having regard to all matters the court thinks relevant. The court's consideration is not limited to those matters for which no alternative claim can be pursued.
S56(2) renders the creditor responsible for misrepresentations made by the negotiator and Kitchin LJ considered it wholly consistent with the scheme of the Act that, where appropriate, they should be taken into account in assessing whether there was an unfair relationship.
The fact that the misrepresentation claims were time barred did not mean they could not be taken into account. This was despite the fact that the lender would no longer have a right of recourse to Zenith. The court may have regard to all matters it considers relevant impliedly without limitation of time.
- The correct overall approach to be taken to an unfair relationship claim and specifically, whether any misrepresentation or breach of the ICOB rules should be regarded as determinative.
The ICOB rules did not apply to the lender because it is neither an insurance product provider nor an insurance intermediary. However, Kitchin LJ held they provided a benchmark against which to measure the conduct of Zenith.
Zenith's conduct fell short of that benchmark in a number of key respects:
- it misrepresented the need to take out PPI to secure the loan;
- the terms of the PPI policy were unsuitable for the claimants;
- and it failed to take proper and reasonable steps to ensure the PPI met the claimants' demands and needs.
S140A is framed in broad and general terms, so the court has considerable flexibility in considering unfairness and whether such conduct could be taken into account.
The fact that alternative remedies may have been available to the claimants from the Financial Services Compensation Scheme for breach of the ICOB rules by a broker or supplier was also irrelevant. Zenith were the lender's agents pursuant to s56(2) and their negotiations were things done (or not done) on behalf of the lender.
All the relevant circumstances
The lender asked the court to consider what it viewed as all the relevant circumstances, which included:
- the fact it had not acted culpably in its own dealings with the claimant;
- its communications with the claimants made it clear that the purchase of PPI was not a pre-requisite for the grant of the loan;
- that the lender had no knowledge of the misrepresentation made and the claimants' misapprehension as to its requirement;
- there was no criticism of the terms of the loan or of the lender's conduct after the loan was concluded.
Kitchin LJ held that although the circumstances referred to by the lender clearly did not contribute to the unfairness of the relationship, they did not diminish or qualify the impact of the matters relied upon by the claimants which gave rise to that unfairness.
This was a unanimous decision of the court and is not good news for lenders. We await the decision of the Supreme Court on the Plevin appeal which will provide the ultimate ruling on the interpretation of the "unfair relationship" provisions.
If the Supreme Court upholds Plevin and the wider interpretation of "on behalf of", lenders can expect many more claims against them for what might have been done or said on their behalf and will need to review existing intermediary relationships and how they are managed.