This article was originally published in the November issue of Motor Finance.
In a judgment with potentially far reaching implications for motor finance companies, the Supreme Court has given its long awaited decision in Plevin v Paragon Personal Finance Ltd & Another.
The Court of Appeal in Harrison v Black Horse Ltd decided that a lender was not required to give disclosure of commission received in a PPI sale. That decision stood for three years, but has now been overruled. The Supreme Court decided that non-disclosure of commission by a lender can result in an unfair relationship.
More favourably, the Supreme Court has applied a more narrow interpretation of the words "for and on behalf of" in the unfair relationship test.
Plevin took out a personal loan and PPI with Paragon through a broker. The PPI premium was £5,780. Following submission of the forms by the broker, a Paragon employee only spoke to Plevin to confirm her details and those of the loan and insurance required in order to comply with Paragon's anti-money laundering obligations. The agreement was completed and sent to Plevin.
This was the only contact Paragon had with her. 71.8% of the PPI premium was taken as commission. The broker received £1,870, Paragon retained £2,280 and the balance was remitted to the insurance company. Neither the amount of commission nor the identity of the recipients was disclosed to Plevin.
Before the Supreme Court Plevin alleged unfair relationship within the meaning of s140A(1)(c) based on non-disclosure of the amount of the commission and failure to assess the suitability of the PPI for her needs. Plevin argued that the defaults by the broker were "on behalf of" Paragon and so caught by s140(A).
Non-disclosure of commission
The Supreme Court held that the Court of Appeal decision in Harrison v Black Horse Ltd was wrong. While the Insurance: Conduct of Business (ICOB) rules did not require disclosure of the commission, it was held that such rules are only evidence of the minimum standard of commercial conduct reasonably to be expected of a creditor. They are not solely determinative of whether there is an unfair relationship under s140(A).
S140(A) does not impose any obligation and is not concerned with any breach of duty. It is concerned with whether the debtor-creditor relationship is unfair. This assessment is far broader and wide-ranging than whether there has been a breach of ICOB and is applied to the particular relationship.
A wide range of considerations may be relevant to the fairness of the relationship, most of which would be irrelevant to the application of ICOB. They include the sophistication or vulnerability of the borrower, the choices available to the borrower, what the borrower could reasonably be expected to know or assume and the degree to which the creditor is aware of these matters.
The Supreme Court held that, on the facts of this case, the non-disclosure of the commission payable was unfair. A sufficiently extreme inequality of knowledge and understanding is a classic source of unfairness in a debtor-creditor relationship. From the documentation, Plevin would have known some commission was payable but she did not know how much. At some point commission may become so large that the relationship cannot be regarded as fair if the customer is kept in ignorance. Although the court did not conclude what that tipping-point was, it did conclude that 71.8%commission in this case was a long way beyond it.
Although Paragon owed no duty to disclose the commission under ICOB, nor under the general law, not being Plevin's agent or adviser, it was the only party which knew the size of both commissions. In the interest of fairness, it would have been reasonable to expect Paragon to disclose it. The fact Plevin was left in ignorance made the relationship unfair.
On behalf of
On a more positive note, it was held "on behalf of" in s140(A) should be confined to common law and deemed agency. The broker was not acting as Paragon's agent: it was Plevin's agent. They assessed Plevin's needs and advised (or not) as to suitability, for the sole benefit of Plevin. The commission they received was from the insurance company, not Paragon, which simply accounted to the broker for it before remitting the balance.
The broker was the relevant intermediary to recommend the insurance for the purposes of ICOB 4.3.1 and 4.3.2, not Paragon. Paragon did not owe Plevin any other legal duty to assess her needs or determine suitability of the insurance. It would be unreasonable to expect Paragon to do so in the interest of fairness where the ICOB rules expressly assigned that duty to the broker.
The broker's acts or omissions did not therefore make Paragon's relationship with Plevin unfair. Motor finance companies will only be liable under s140(A) for things done "on their behalf" by their agents - actual or deemed.
Paragon's appeal was dismissed and the case referred back to the county court to determine what relief Plevin should be granted .
Things to consider
Although the "on behalf of" decision is favourable to lenders, the remainder of the decision gives rise to a great deal of uncertainty. Questions which immediately arise include:
- If the determination of fairness depends on the circumstances of each case and is to be applied by the court "after the event", how will lenders know whether they are doing enough to ensure they are acting fairly?Where is the tipping point in relation to the level of commission that requires disclosure? What one court may find tips the balance may be different to another.
- Will the floodgates re-open in relation to PPI mis-selling claims, including claims decided or settled on the basis that Harrison was good law?
- How does the 'on behalf of decision' sit with the responsibility of lender under the Consumer Credit sourcebook (CONC) which refers to employees, agents and other persons acting on a firm's behalf?
At the time of writing, the answers to these questions are unclear but the claims management industry is likely to be in bullish mood. One thing seems to be clear at least - further litigation will ensue.