Introduction

His Honour Judge Waksman QC, sitting as a judge of the High Court in the Manchester Mercantile Court, handed down judgment on 1 December 2010 in Harrison & Harrison v Black Horse Limited [2010] EWHC 3152 (QB) on three issues often argued in payment protection insurance litigation: firstly, whether the lender complied with the Insurance: Conduct of Business Rules (“ICOB”); secondly, whether the lender negligently sold a single premium payment protection insurance policy (the “Policy”); and thirdly, whether the sale of the Policy created an unfair relationship. Readers of our earlier review entitled “Claimants Saddled with Further Hurdles” will recall that District Judge Marston dismissed Mr & Mrs Harrison’s claim but they sought permission to appeal to the High Court.

The Facts

Mr & Mrs Harrison were a married couple. In 2003 they applied for, and obtained, a second mortgage with Black Horse Limited (“Black Horse”). In 2006 they applied for, and obtained, further credit from Black Horse and repaid the first agreement. This later agreement (the “Loan”) was for £60,000 meaning the agreement was not regulated by the Consumer Credit Act 1974 (the “CCA 1974”). Mr & Mrs Harrison also opted to take further credit of £10,200 to pay the premium for the Policy. They were provided with a “demands and needs” statement, a key facts document and a copy of the Policy’s terms. Black Horse also completed a questionnaire recording Mr & Mrs Harrison’s answers to Black Horse’s questions. The Loan was repaid in March 2009.

The Issues

The Court had to determine the following issues:

1 Whether Black Horse had breached ICOB by:

1.1 recommending the Policy which was unsuitable; and  

1.2 receiving an inducement which conflicted to a material extent with its duty to Mr & Mrs Harrison.  

2 Whether Black Horse negligently sold the Policy.  

3 Whether there was an unfair relationship between the parties.  

ICOB

Mr & Mrs Harrison argued that Black Horse breached ICOB 4.3 by recommending an unsuitable product, in terms of cost and duration of the Policy (which was five years) compared to the term of the Loan (which was substantially longer), and breached ICOB 2.3 by accepting a commission which conflicted to a material extent with its duty to Mr & Mrs Harrison.

Unsuitability

After reviewing District Judge Marston’s decision, HHJ Waksman QC decided that she “did not properly engage with the points being made about cost and length” of the Policy. These issues therefore needed to be examined again.  

Unsuitability: Cost

After hearing submissions, HHJ Waksman QC decided that:  

  • ICOB 4.3.6(2) required Black Horse to have regard to the cost of the Policy but only where it is “relevant to the customer’s demands and needs”.  
  • ICOB 4.3.2(1) did not require the intermediary to “ask first off whether there were any particular cost constraints on the customer”.  
  • There was no information that cost was a relevant factor to Mr & Mrs Harrison. ICOB 4.3.6(2) was not, therefore, engaged. ICOB 4.3.1 did not, therefore, require a consideration of costs and the words “at least” in ICOB 4.3.6 did not require Black Horse to undertake such a consideration.  
  • Even if ICOB 4.3.6(2) was engaged (which it was not), ICOB 4.3.7(1) was a key provision for Black Horse. The effect of this rule, particularly where an intermediary is only advising on one product (as is often the case), is that Black Horse was only required to advise on the suitability of that product: it was not required to compare it to other products. Indeed, Mr & Mrs Harrison’s barrister accepted that there was no obligation on an intermediary to undertake a comparative exercise.  
  • There was no duty on an intermediary to advise that the Policy was, on any view, expensive (ie a non-comparative basis). Such a duty was not imposed by ICOB 4.3.6 or 4.3.1.  

HHJ Waksman QC therefore upheld District Judge Martson’s conclusion on cost (ie that the Policy was suitable) but on different grounds.  

Unsuitability: Length of the Policy

After hearing submissions, HHJ Waksman QC decided that:  

  • The period of protection offered by the Policy forms part of the customer’s demands and needs but there was no question about the length of cover needed.  
  • There was a breach because:  
    • ICOB 4.3.2(1) required Black Horse to seek information about the desired length of cover and Black Horse failed to do so; and  
    • ICOB 4.3.6(1) required a consideration of the “level of cover”, which included its duration.  
  • But, importantly, there were “real difficulties of causation” for Mr & Mrs Harrison. Indeed, there was “no specific evidence about [causation] at all”.  
  • In their Reply, Mr & Mrs Harrison said that Black Horse should have “appreciated [from the earlier agreement] that the Claimants would refinance during the term of the [Policy] and therefore not receive cover for the whole duration of a single premium PPI policy for 5 years”.  
  • The fact that Mr & Mrs Harrison did re-finance within 5 years also caused real problems with causation and pointed towards a conclusion that a five year term would have been enough for them.  

HHJ Waksman QC therefore upheld District Judge Martson’s conclusion on length (ie that the Policy was suitable) but on different grounds.

Taking of Commission

Mr & Mrs Harrison argued that the large commission received by Black Horse, which was 87% of the premium, meant that it was in breach of ICOB 2.3 because such a sizeable commission was likely to conflict to a material extent with any duty it owed to Mr & Mrs Harrison. After hearing submissions, HHJ Waksman QC decided that:

  • Because he did not find the sales process was flawed as a whole, the taking of a commission did not give rise to the likelihood of a material conflict.  
  • There was “no causal link between this particular inducement and the process actually used, nor any specific likelihood of conflict caused by its taking”.  
  • Because the salesperson was under the control of Black Horse and subject to a scripted process, the situation was a “far cry from the broker in Yates”.  
  • If there is a flawed sale process then, subject to causation and loss, the customer’s remedy is for damages under ICOB 4.3.  
  • There was no evidence or cross-examination that a commission had any particular impact on the sales process.  
  • Mr & Mrs Harrison’s argument would fail on causation in any event.  

HHJ Waksman QC therefore essentially adopted District Judge Martson’s decision and found there was no breach of ICOB 2.3.  

Negligence

The allegation of negligence was not pursued before District Judge Marston. Mr & Mrs Harrison argued that Black Horse had assumed responsibility to take reasonable care in making a recommendation and a breach of ICOB also meant there was a breach of duty in negligence. They also argued that negligence was not limited by ICOB 4.3.7(1) meaning that, whilst there was no breach of ICOB 4.3 in relation to the cost of the Policy given the effect of ICOB 4.3.7(1), Black Horse could not rely upon it as a defence to the negligence claim.

HHJ Waksman QC was not impressed: he noted that “ICOB prescribed a detailed code on how an intermediary in the position of [Black Horse] should conduct itself when purporting to give advice in respect of a single product (ie whether to recommend it or not)” and saw “no reason why any co-terminous duty of care should extend more widely”. He went on to say that where a lender (or, indeed, a broker) has a very limited advisory role, perhaps only advising on one product, he could not “see how [the lender] could be expected to advise more widely on the question of cost under a common-law duty of care. Its inability to make a comparison remains, as does the difficulty of imposing some sort of obligation to pronounce nonetheless upon whether the [Policy] was expensive according to some other standard.” Finally, he noted that in any event, even if there is such a duty which was broken then “the same problems of causation remain”.

Unfair Relationship

Like many other debtors, Mr & Mrs Harrison claimed that there was an unfair relationship between them and Black Horse. HHJ Waksman QC noted that District Judge Marston had adopted the correct approach and that an appellate court should be “most reluctant to interfere” where the discretion has been correctly exercised.

Mr & Mrs Harrison argued that there was an unfair relationship and relied on three factors: a large commission, the limited length of the Policy compared to the term of the loan and the Policy’s cost.

HHJ Waksman QC noted that District Judge Marston had rejected these allegations; saying that Mr & Mrs Harrison were aware of the Policy’s terms and, in particular, its cost. He then went on to decide that there was no unfair relationship because:

  • Black Horse clearly set out that it only could advise on the Policy and, if Mr & Mrs Harrison wanted to look at other policies, they should have either done so or consulted a broker that could advise on a variety of policies.
  • It was not relevant whether Black Horse was responsible for the Policy’s terms: it was the terms (and not who drafted them) that was relevant.  
  • District Judge Marston failed to deal with the issue of a large commission and its nondisclosure to Mr & Mrs Harrison and, since her judgment, His Honour Judge Platts, sitting in the Manchester County Court, handed down judgment in Yates & Lorenzelli v Nemo Personal Finance & Another [2010], Unreported, 14 May 2010.  
  • The commission did not, however, create an unfair relationship because:  
    • there was no misrepresentation in this case about the Policy, unlike the broker’s misrepresentation in Yates that the policy was compulsory;  
    • the facts of this case were very similar to those considered by His Honour Judge Harris QC in Norman Vernalls & Ann Vernalls v Black Horse Limited [2010], Unreported, 4 November 2010 where he found no unfair relationship when an expensive policy was sold;  
    • the cost of the Policy was fully explained. Indeed, the figures were set out side-by-side to the Loan;  
    • the fact that there was no breach of ICOB 4.3 counts against there being any unfairness;  
    • issues of causation were relevant to a claim of unfair relationship;  
    • there was no evidence that Mr & Mrs Harrison would have done anything differently had they known about the size of the commission;  
    • there was no likelihood of the commission causing a conflict, particularly given HHJ Waksman QC’s findings on ICOB 2.3.  

Comment

This is an extremely welcome and binding judgment for any lender or broker defending claims of mis-selling of payment protection insurance. The Court thoroughly analysed the suitability provisions in ICOB 4.3 and made a key finding that a comparison need only be undertaken against other products that the intermediary could advise upon. Claims that lenders or brokers, who only advise on one policy should have compared the policy to others on the market, therefore seem doomed to fail. Similarly, the issue of causation has (once again) been raised by HHJ Waksman QC. We have seen a substantial number of claims, often with little (if any) coherent evidence explaining why any breach of ICOB has caused the debtor’s loss. In many cases, it would have made very little difference to them. The Court’s warning that causation is a real issue for many claims will therefore be appreciated by lenders and brokers alike.

The issue of commissions has also been robustly dealt with by HHJ Waksman QC. In many cases, the fees paid by debtors for an intermediary’s services is nominal or, in many cases, nothing. So long as proper systems are in place to ensure a product is not mis-sold, and any recommendation is made in compliance with ICOB, there is (in our view) nothing wrong in commissions being paid. Indeed, the payment of commissions has arguably given debtors more choice. This decision, together with HHJ Harris QC’s recent decision in Vendalls & Vendalls v Black Horse Limited [2010], adopts a commercial and sensible approach to this issue.

We also endorse the Court’s decision on the unfair relationship claim. If a lender complies with ICOB, there should not (in our view) be any grounds for arguing that there was an unfair relationship. A similar approach should be taken where there is a technical breach of ICOB but it does not cause the debtor any loss. Finding an unfair relationship where there has been compliance, or non-compliance which had no effect on a debtor, would surely send the wrong message

In light of these recent and positive decisions for lenders, it must be doubtful whether after the event insurers, who have so far underwritten a substantial amount of this type of litigation, will remain active. Similarly, lenders and brokers facing such claims should review them to see if there are any grounds for summary judgment or strike-out now there is a clear High Court authority