The Supreme Court has delivered its long awaited judgment in Plevin v Paragon Personal Finance Ltd & Another, which has potentially far reaching implications for lenders.
After three years of being followed, the Court of Appeal decision in Harrison v Black Horse Ltd has been overruled. Non-disclosure of commission by a lender can result in an unfair relationship after all.
The Supreme Court has, however, applied a more narrow interpretation of the words "for and on behalf of" in the unfair relationship test.
The facts
The facts of Plevin are generally well know and can be seen from our earlier coverage of this case both at first instance (And another Payment Protection Insurance (PPI) case) in October 2013 and before the Court of Appeal (Harrison, PPI and unfair relationship revisited) in January 2014.
Before the Supreme Court, Plevin alleged an unfair relationship within the meaning of s140A(1)(c) of the Consumer Credit Act 1974 (s140(A)) based on non-disclosure of the amount of the commission paid (being 71.8% of the £5,780 premium) and failure by the broker 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 Paragon was caught by s140(A).
Non-disclosure of commission
The Supreme Court overturned the Court of Appeal decision in Harrison v Black Horse Ltd. It held that while the Insurance: Conduct of Business (ICOB) rules do not require disclosure of commission, those 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) is concerned with whether the debtor-creditor relationship is unfair. It does not impose any obligation and is not concerned with the question of whether the creditor or anyone else is in breach of a duty. The relationship may be unfair for a variety of reasons which do not have to include a breach of duty.
The assessment under s140(A) is far broader and wide-ranging than whether there has been a breach of ICOB and is applied to the particular debtor-creditor relationship. The question of whether the debtor-creditor relationship is fair cannot be the same as the question of whether the creditor had complied with the ICOB rules.
A wide range of considerations may be relevant to the fairness of the relationship, most of which would not be relevant 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
- 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. It is a question of degree. From the documentation, Plevin knew some commission was payable out of the premium, 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. Plevin's evidence had been that had she known the level of the commission, she would have questioned it, shopped around and could have ultimately decided against entering into 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. Plevin could then have made a properly informed decision about the value of the PPI policy. The fact that she was left in ignorance made the relationship unfair.
On behalf of
On a more positive note for lenders, it was held the words "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. The only relationship the broker had with Paragon consisted of the facility arranged between them so the broker could introduce its principals to them. They assessed Plevin's needs and advised her (however badly) as to the suitability of the policy. They performed this function solely for Plevin's benefit. They did not receive any commission from Paragon for the introduction. They were paid commission by the insurance company. Paragon simply accounted to the broker for the commission before remitting the balance to the insurance company.
The broker was the relevant intermediary for the purposes of recommending the insurance under 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. Lenders will only be liable under s140(A) for things done "on their behalf" by their agents - actual or deemed.
Paragon's appeal was therefore dismissed and the case referred back to the county court to determine what relief Plevin should be granted.
The Supreme Court concluded that once Harrison is discarded, s140(A) can be seen to give extensive protection to the debtor extending beyond the right to enforce the creditor's legal duties, in any situation where the creditor or his associates (or agents) have made the relationship unfair.
So what does this decision mean for lenders?
The judgment is a mixed bag:
- The narrow interpretation of the words "on behalf of" is welcomed and means that the law of agency, as presently understood and applied in such cases, remains intact.
- What is unclear is how the finding of the Supreme Court sits with the obligations on lenders under the Consumer Credit sourcebook (CONC) 1.2.2R which provides that a firm must (1) ensure that its employees and agents comply with CONC; and (2) take reasonable steps to ensure that 'other persons' acting on its behalf comply with CONC. (2) is deliberately wider than (1), so does it include other persons, not being common law or deemed agents, such as the broker in Plevin?
- The finding that Harrison was wrongly decided will obviously disappoint and potentially opens up the proverbial can of worms. The key question is whether the floodgates will re-open in relation to PPI mis-selling claims where commission was not disclosed? While most cases have either been remediated under DISP or otherwise decided or settled on the basis of Harrison, might these cases now be re-opened? It seems likely that the claims management industry will be in a bullish mood. On the other hand, previous cases were decided on the law as it stood at the time and is the court really likely to be minded to allow a situation to develop where everybody goes back to square one again? If old cases are re-opened limitation arguments are unlikely to assist lenders following Patel v Patel as endorsed by the Court of Appeal in Reast - see our earlier coverage of this case (Deemed agency and unfair relationship) from June 2014.
- What is the tipping point at which the level of commission on a PPI sale requires disclosure? To be safe rather than sorry, lenders may need to work on the basis that full disclosure should be given on every transaction. Arguably this is consistent with the high level regulatory obligations under Principles for Businesses (PRIN) and CONC to be transparent in dealings and treat customers fairly. However, in another twist, CONC is silent on the lender's obligations as regards commission disclosure. Early versions of CONC which required the lender to take responsibility for disclosure were amended and the final version, at 4.5.4R, merely requires a credit broker to disclose the commission payable for credit brokering upon request.
- It stands to reason that if lenders are treating customers fairly pursuant to regulatory obligations then an unfair relationship finding under s140(A) is less likely. But, Plevin makes it clear that compliance with such rules is the minimum requirement to be expected and a court may still find there to be an unfair relationship even where there has been compliance.
- And if there is an unfair relationship for non-disclosure, what is the relief to be? We shall have to wait for the county court to tell us, unless the parties can agree.
- Lenders can be forgiven for feeling confused. There seems to be disharmony between the obligations imposed on lenders in ICOB and CONC and following the Supreme Court's judgment in Plevin. And following extensive debate over the course of a number of years within the EU as to the appropriateness of commission disclosure, the draftsmen of the proposed revised Insurance Mediation Directive (IMD II) have chosen to delete express requirements for mandatory disclosure of the amount of commission received by insurance intermediaries (only the fact of commission will need to be disclosed, as it was in Plevin). However, following Plevin, it will not suffice for lenders who are insurance intermediaries to simply comply with IMD II to escape the risk of an unfair relationship and as suggested above the only totally safe course of action seems to be to disclose it in full.
- By 2019 the government has already pledged to review which parts of the Consumer Credit Act (CCA) will remain in force and hopefully it will take the opportunity to bring some harmony - will the CCA be needed at all by then given the protections of the FCA handbook and FSMA?
While the dust settles, one thing seems to be clear at least following Plevin - we haven't heard the end of PPI claims and further litigation will ensue. Indeed some matters we are dealing with have already come back to life. We are here to help.