Introduction

Earlier today, at 9:45am on 12 October 2011, the Court of Appeal handed down its long-awaited judgment in Harrison & Harrison v Black Horse Limited [2011] A3/2010/2996 dealing with the claim of unfair relationship under Section 140A of the Consumer Credit Act 1974 (the “CCA 1974”). In its emphatic judgment, the Court dismissed Mr & Mrs Harrison’s second appeal on whether the commission received for the sale of a policy of payment protection insurance (the “Policy”), which was undisclosed and amounted to 87% of the Policy’s premium, created an unfair relationship.

The Facts

Mr & Mrs Harrison are 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 was for £60,000 (the “Loan”) meaning the agreement was not regulated by the CCA 1974. Mr & Mrs Harrison also opted to take further credit of £10,200 to pay the premium for the Policy. The APR was 7.4%. They were provided with:

  • an initial disclosure document (setting out Black Horse’s status);
  • 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

On 15 February 2011 Lord Justice Tomlinson gave limited permission to appeal His Honour Judge Waksman QC’s decision (which was, in turn, an appeal of District Judge Marston’s decision). The appeal was intended to be limited to “the claim under s.140B of the Act and that the points raised in relation to the ICOB Rules can only be relevant by way of the context in which the claim arises”. Despite the limited aspect, Mr & Mrs Harrison also challenged during the hearing two of His Honour Judge Waksman QC’s decisions on compliance with the Insurance: Conduct of Business Rules (“ICOB”). They were:

  • the decision that the receipt of a commission “did not conflict to a material extent with its duty under Rule 4.3.1 to take reasonable steps to ensure that its recommendation to buy PPI was suitable for the customers’ demands and needs. He should have found a breach of Rule 2.3.2”; and
  • the decision that ICOB 4.3.6(2)R is not engaged unless cost is shown to be a matter of concern for the borrowers.  

After oral submissions, Mr & Mrs Harrison’s barristers, Brian Doctor QC and Andrew Clark, sought “to cast the net wider still, and in particular to withdraw the concession made in the lower courts to the effect that Black Horse had been under no obligation to undertake an exercise comparing the cost of its product with that of other contracts available in the market offering similar cover”.

The Decision

Delivering the leading judgment, Lord Justice Tomlinson decided that:

  • he would “pay tribute to the care and clarity” of District Judge Marston’s decision at trial in the County Court;
  • the County Court decision of His Honour Judge Platts in Yates & Lorenzelli v Nemo Personal Finance Limited (2010), Unreported, Manchester County Court, 14 May 2010 (which is often cited by borrowers and their advisers) was wrong and of no assistance. In particular, he did “not think that [such an] open-ended approach is quite that required” by the unfair relationship provisions. HHJ Platts’ decision “owes a lot I think to the circumstances that the broker was insolvent” and a misrepresentation was “ordinarily … irrelevant to the question of whether the relationship is unfair”;
  • if things done or not done by the creditor (as the Court may consider under Section 140A(1) (c)) “are in compliance with and involve no non-compliance with the statutorily prescribed regulatory regime, it is not easy to see from where the unfairness in the relationship is to be derived”;
  • the legislative provisions in Sections 140A to 140D of the CCA 1974:
    • required the relationship between the parties to be determined as unfair, not the agreement between them;
    • the question of unfairness required the Court to look at matters relating to the creditor and the debtor: it was not a one-sided consideration;
    • do not offer any guidance (unlike the Unfair Contract Terms Act 1977 or the Unfair Terms in Consumer Contracts Regulations 1999);
  • the Office of Fair Trading’s guidance on unfair relationships was “significant” because it points one, not unnaturally, in the direction of the regulatory framework” (ie ICOB);
  • there “is no requirement for commission disclosure”. Indeed, the EU Insurance Mediation Directive (adopted on 9 December 2002), the FSA’s consultation papers in December 2002 and June 2003, the FSA’s policy statement 04/01, ICOB and the Insurance: Conduct of Business Sourcebook (which replaced ICOB) did not require commission disclosure;
  • it is correct that Rule 4.3.6(2) only requires cost to be taken into account “where the customer has indicated that this is a relevant concern”: Rule 4.3.6(2) was not therefore engaged by Mr & Mrs Harrison;
  • the impact of Rule 4.2.8(6) (which was raised for the first time on this second appeal and, even then, after the close of oral submissions) is that it “spells out a clear gradation, from a fair analysis of the market through advice or information in respect of a limited number of insurance undertakings to advice or information in respect of a single insurance undertaking”;
  • in “the real world, I do not believe that any reasonable person expects that an insurance intermediary who holds himself out as able to sell only one product will proffer advice as to the suitability of that product by reference to and comparison with other products available in the market”;
  • the submissions by Mr Doctor QC that the initial disclosure document did not provide notification of Mr & Mrs Harrison’s right to “request a list of the insurance undertakings with whom Black Horse dealt” was “absurd”: Rule 4.2.8 deals with the situation where a customer “wishes to assert that a contract which should have been selected on the basis of a fair analysis of the market has not been so provided”; • Mr Doctor QC’s argument “really resolves to a single point that, in the absence of an explanation, the commission is so egregious that it gives rise to a conflict of interest which it was the lender’s duty to disclose. Only disclosure could give the borrowers the opportunity to decide whether they wished to purchase a product in the circumstances where the lender derived so significant a benefit from the purchase”;
  • while the “commission here is on any view quite startling … I struggle however to spell out of the mere size of the undisclosed commission an unfairness in the relationship between the lender and borrower”;
  • the “touchstone must in my view be the standard imposed by the regulatory authorities pursuant to their statutory duties, not resort to a visceral instinct that the relevant conduct is beyond the Pale”;
  • it would “be an anomalous result if a lender was obliged to disclose receipt of a commission in order to escape a finding of unfairness under s.140A of the Act but yet not obligated to disclose it to the statutorily imposed regulatory framework under which it operates” and “Mr Doctor had no answer to this point”;
  • the circle cannot be squared “by arguing that a recommendation of suitability cannot be objective if given by a lender in receipt of a large commission. The judge rejected that submission on the facts of this case. There is also the obvious difficulty in deciding where the line is to be drawn”;
  • a “seller is not ordinarily obliged to warn his buyer that his product is expensive when compared to other similar product and in my judgement it is telling that in this heavily regulated market no such obligation has been imposed”; and
  • the “non-disclosure of commission is not listed amongst the fifteen common failings which were said to result in detriment or poor outcomes for consumers. The FSA knew from its earlier work that the median average undisclosed commission … was 70%”.

The appeal was therefore dismissed by Lord Justice Tomlinson (and Lord Neuberger and Lord Justice Patten agreed).  

Comment

This is an extremely important decision from the Court of Appeal. As Lord Justice Tomlinson remarks, this decision is a “test case to provide guidance in many other cases which have been stayed pending our decision”. Given the clear and unanimous decision, it must be now beyond doubt that the taking of an undisclosed commission, no matter how big or small, does not create an unfair relationship. The Court of Appeal was at pains to explain the detailed (and thoughtful) history of insurance regulation and, in particular, the fact that commission disclosure is not required (and never has been) for retail customers. It was no accident that the decision was made to not require the disclosure of commission: it was clearly an issue on the FSA’s radar but not one which warranted a rule. The FSA does require there to be a statement of price which Black Horse provided to Mr & Mrs Harrison. For a long time, we have consistently made the point that there should be no free-standing obligation on the seller of a product to explain the factors that make up a product’s price. The Court of Appeal fully accepted this point.  

The Court of Appeal has now, for the first time, clarified the impact of the unfair relationships provisions. As His Honour Judge Waksman QC decided in Carey & Others v HSBC Bank plc & Others [2009] EWHC 3417 (QB), the evidential burden of proving the alleged facts giving rise to the unfairness is on the debtor and, once he or she has proved those facts (but only if they do), the legal burden of proof shifts onto the creditor to prove that the relationship is fair. The Court of Appeal came to a similar conclusion (and, it is suggested, tacitly approved Carey) by making two important points: firstly, it is the relationship (not the agreement) which must be considered; secondly, the relationship includes consideration of the creditor’s position and the debtor’s position. Equal weight must be given to both the creditor and the debtor. It is therefore telling that the Court of Appeal, noting that Black Horse had complied with ICOB, decided that the “touchstone must in my view be the standard imposed by the regulatory authorities pursuant to their statutory duties, not resort to a visceral instinct that the relevant conduct is beyond the Pale”. Plainly, that must be correct. It is also important to note that the Court of Appeal effectively overruled the County Court’s decision in Nemo. That decision, to use Lord Justice Tomlinson’s own words, “owes a lot I think to the circumstances that the broker was insolvent”: we agree. The simple fact that the broker may (or may not) have done something should not, on its own, create an unfair relationship.  

Given the Court of Appeal’s unanimous decision, the issue of commission disclosure and whether it creates an unfair relationship is now well and truly resolved. There is no obligation on a lender or intermediary to disclose the amount of the commission. Any failure to do so cannot create an unfair relationship. If a lender complies with ICOB, there should not (in our view) be any grounds for arguing that there was an unfair relationship. Similarly, if there is a technical or trivial breach of ICOB (or some other regulatory provision), that should not create an unfair relationship. The Court must look at the relationship or relationships and see whether the breach causes that relationship or relationships to be unfair as a whole: not the other way around. It is suggested, given the Court of Appeal’s findings, that it does not matter if the borrower, knowing the full amount of the commission, would not have proceed to enter into the Policy. The lender did not need to provide that information so there can be nothing unfair in the relationship. It is therefore clear that a finding of unfairness will be made in limited circumstances where the breach or conduct is so serious that it makes the relationship unfair. So far, there have been a number of County Court decisions (which are recorded in the OFT’s unfair relationship guidance, which has recently been revised) which must, given the Court of Appeal’s decision, be wrong. No doubt the OFT’s guidance will need further revision to take into account the important lessons given by the Court of Appeal.

It is important to note that the Court of Appeal, the High Court and the County Court had no issue with the fact that the original salesperson was not produced to give evidence at trial. The witness evidence was considered by Lord Justice Tomlinson (and referred to in his judgment). It therefore follows that a failure by the lender or broker to produce the original salesperson is not fatal: it is completely understandable that such a witness cannot be produced. The Court of Appeal also made it clear that the unfair relationship test is not an economic test: the Court of Appeal refused to express a view (or “draw a line in the sand”) on what is (or is not) a fair amount. It is the relationship which is considered: Mr & Mrs Harrison were provided with the required information and chose to enter into the Policy. Pulling all of the strands together, it must be the case that (despite the apparently wide statutory wording) a viable unfair relationship claim will be difficult to bring.  

It will be interesting to see how payment protection insurance litigation develops once claims management companies and their advisers digest the implications of this landmark test case. Lenders already see borrowers conveniently allege that cost was a “relevant concern” to them. As the Master of the Rolls wryly observed during oral arguments, “well they would do, wouldn’t they?”.