The long awaited Supreme Court decision deals with the issue of unfair relationships in payment protection insurance mis-selling claims, concluding that the non-disclosure of commission could make the borrower-lender relationship unfair.

The Facts

The Claimant, Mrs Plevin took out a loan and payment protection insurance (“PPI”) with the Defendant, Paragon Personal Finance Limited (“PPFL”) through an intermediary, LLP Processing (UK) Limited (“LLPPL”),  via a telephone conversation during which a demands and needs assessment was conducted. No further demands and needs assessment was conducted by PPFL. Undisclosed to Mrs Pelvin LLPPL were paid over 70% of the PPI premium as commission.

Mrs Plevin alleged that the non-disclosure of the commission and PPFL’s failure to assess her suitability for PPI, made the agreement unfair.  She submitted that due to the nature of the relationship between PPFL and LLPPL that any omissions made by LLPPL were made on behalf of PPFL, as LLPPL were the lender’s intermediary.  At first instance, Mrs Plevin’s claim was dismissed; however it was later appealed in the Court of Appeal and then the Supreme Court.

The Decision

The Supreme Court’s unanimously overturned the previous leading authority on this matter,Harrison v Black Horse Limited [2012] Lloyd’s Rep IR 521, which stated that a relationship could not be found to be unfair where there had been no breach of the relevant statutory regulations.  It was concluded the non-disclosure of the commission was “unfair enough” to justify the re-opening of the credit relationship.

Commission

The Court referred to the ICOB rules as evidence of a “minimum standard of conduct” required by creditors and stated that a creditor-debtor relationship could be unfair for reasons that don’t involve a breach of the ICOB rules or statutory duty. The question of whether a relationship was unfair is to be decided by reference to certain considerations, including “the characteristics of the borrower, her sophistication or vulnerability, the facts which she could reasonably be expected to know or assume, the range of choices available to her, and the degree to which the creditor was or should have been aware of these matters”.

The Court held that the non-disclosure of commission was unfair because it led to a “sufficiently extreme inequality of knowledge and understanding” and stated that there is a “tipping point” at which commissions become so large that it renders the relationship unfair.  It was recognised that this tipping point was difficult to define but found on the facts of this case that 71.8% was far beyond the tipping point. As PPFL were the only party who knew the size of the commission, responsibility for its disclosure lay with PPFL and this made the relationship unfair.

Emphasis was placed on the specific facts of the case. Particularly the “critical” evidence put forward by Mrs Plevin that had she known about the size of the commission, she would have questioned it.   Accordingly, non-disclosure of commission does have the potential to make the relationship unfair, however each case will be judged on its facts.

Intermediary relationship

The Court then focussed on the submission that the demands and needs assessment failed to assess the suitability of the PPI policy.  The Court stated that this obligation was assigned to LLPPL and therefore PPFL could not have been expected to carry out its own demands and needs assessment.  The Court turned to the question as to whether the acts or omissions of LLPPL were “on behalf of” PPFL. The Court concluded that the term “on behalf of” should be given its ordinary meaning, confining it to agency relationships.  On this basis as LLPPL was not acting as PPFL’s agent it was not “acting on behalf” of PPFL.  The assessment of suitability was performed solely for the benefit of Mrs Plevin.  The Court also commented that the payment of commission does not strictly indicate who may be an agent.

S140A Protection

The Court concluded that s.140A can give extensive protection to debtors “extending beyond the right to enforce the creditor’s legal duties”.

Commentary

This decision provides both financial institutions and consumers with precedential guidance on the impact of sections 140A-D of the Consumer Credit Act 1974.  The decision made clear that the assessment of whether a credit relationship was fair is fact specific. It was noted that creditor-debtor relationships were inherently unequal but emphasised that this did not automatically mean a credit relationship was unfair.

The decision has potentially wide reaching effects. Whilst the matter was heard in the context of a PPI dispute, it is possible that the principles established by the Supreme Court provide wide powers to the Court to review the background and terms of a credit agreement that are alleged to be unfair. It is likely that this decision may encourage the use of sections 140A-D in more banking disputes and lenders should prepare themselves for claims undermining a credit agreement on this basis.