A quick re-cap of the background to the appeal
In 2006, Mr and Mrs Harrison (the borrowers) obtained a loan from the lender and were sold associated payment protection insurance (PPI) at the same time. The case was taken to the Court of Appeal by the borrowers following the first appeal judge's dismissal of the borrowers' claim of an 'unfair relationship' under sections 140A/B of the Consumer Credit Act 1974 (CCA).
The borrowers challenged two of the first appeal judge's conclusions as to compliance with the Insurance Conduct of Business Rules (ICOB). Specifically, the borrowers argued that the first appeal judge had erred in holding that:
- the receipt of the commission by the lender did not conflict to a material extent with its over-arching duty under Rule 4.3.1 to take reasonable steps to ensure that its recommendation to buy PPI was suitable for the borrowers' demands and needs; and
- Rule 4.3.6(2), obliging the lender to take into account cost of the policy in relation to the borrowers' demands and needs, was not engaged until cost was shown to be a matter of concern.
The Court of Appeal robustly refused the appeal and its main points and reasoning can be summarised as follows.
The FSA made an informed decision not to require lenders to disclose the receipt of or the extent of commission in the ICOB Rules
The gist of the borrowers' appeal was that the non-disclosure of the sizable commission (which was 87% of the premium paid on the sale of the PPI policy) created an unfair relationship. While the borrowers alleged various other aspects of 'unfairness', what was central to the appeal was that the commission was said to be disproportionate to the actual cost of the insurance. In fact it was so large as to give rise to a conflict of interest which the lender should have disclosed.
Tomlinson LJ disagreed and said in his view it did not point to unfairness in the relationship. He went on to say, both simply and in our view very logically:
"...the touchstone must in my view be the standard imposed by the regulatory authorities pursuant to their statutory duties...it is clear that the ICOB regime after due consultation and consideration does not require the disclosure of the receipt of commission. 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 obliged to disclose it pursuant to the statutorily imposed regulatory framework under which it operates."
It was noted that the Financial Services Authority (FSA) policy statement of 2010 on "The assessment and redress of PPI complaints" did not list non-disclosure of commission among the 15 common failings which were said to result in detriment or poor outcomes for consumers. The FSA was also aware of commission rates of 70% in the retail credit market but no changes were made to the ICOB regime.
There was no conflict of interest
The relevant ICOB Rules (2.3.2 and 2.3.7) provide that
"A firm must take reasonable steps to ensure that it does not ...accept an inducement... if it is likely to conflict to a material extent with any duty that the firm owes to its customers in connection with an insurance mediation activity."
The first appeal accepted that there was no likelihood of any material conflict essentially because the actual sales person did not receive, nor did she know about the commission. Specifically, the first appeal judge rejected the submission that the commission was so large that there was always likely to be a conflict between interest and duty.
The Court of Appeal agreed stating that the size of the commission was irrelevant given that there was no likelihood of a conflict of interest arising.
The cost of the PPI policy was not relevant
Rule 4.3.6(2) of the ICOB Rules obliges the creditor to take into account "the cost of the contract, where this is relevant to the customer's demands and needs..".
The Court of Appeal found there had been no breach of Rule 4.3.6(2) because the borrowers had not shown that cost was a relevant concern for them in their pre-sale demands and needs statement.
The lender was not under a duty to advise that the same cover could be obtained more cheaply elsewhere
Rule 4.3.7(1) obliges the lender to take into account "the cost of the contract when compared to other non-investment insurance contracts that cover a similar range of demands and needs on which the insurance intermediary can provide advice or information." [our emphasis added]. In this case there was unchallenged expert evidence that this form of PPI was very expensive when compared against policies payable by monthly premiums.
But the Court of Appeal found that there was no other product on which the lender could provide advice or information and therefore could not conduct a comparative exercise. It also stated that there was no reason to distinguish the sale of PPI from the sale of other products where sellers have no obligation to warn that their products are expensive.
There was no unfair relationship
Sections 140A-D of the CCA empower the court to grant relief to borrowers where the court determines that the relationship between the creditor and borrower arising out of the agreement is 'unfair'. Unfairness can be created by "any other thing done (or not done) by, or on behalf of, the creditor..".
The Court of Appeal highlighted that it is the relationship, and not the agreement, which has to be considered and (in order to be fair to both sides) the position of both the creditor and the debtor has to be considered.
Unlike the Unfair Contract Terms Act 1977, the Consumer Credit Act does not identify factors to be considered in rendering a relationship unfair. There has been little judicial guidance on the point to date but pertinent in this case was the OFT's published guidance on unfair relationships. The Court of Appeal said this guidance, not unnaturally, pointed in the direction of the regulatory framework, i.e. the ICOB Rules.
And hence because the lender complied with the ICOB regime, the Court of Appeal said it would be anomalous for there to be an unfair relationship – which must be right in our view to avoid confusion for all.
The Court of Appeal also criticised the decision in Yates and Lorenzelli v Nemo Personal Finance (2010). Nemo was very different to Harrison because it involved a broker who had a considerable incentive to sell PPI and positively misrepresented that PPI was a condition of the loan. The borrowers were informed that the broker would be paid a commission but not the extent of the commission (57.45%). The rationale of the Nemo decision was that by paying such a large commission, the lender created a conflict of interest for the broker which imposed a duty on the lender, in the interests of fairness, to satisfy itself that the broker had disclosed his interest to the borrowers.
The Court of Appeal thought that Nemo was of little assistance because of its quite different facts and because it thought the court in that case had been influenced to find against the lender because of sympathy for the borrower due to the broker's insolvency. It said that ordinarily such things should be irrelevant as the relationship between the lender and borrower.
In our view the judgment is both simple and logical. In short, Black Horse followed the rules laid down by the FSA in the ICOB regime. In these circumstances, the Court of Appeal found it straightforward to dismiss the appeal, not wishing to create an anomalous and confusing situation whereby a lender complying with the FSA's regulatory framework, was at the same time breaching the Consumer Credit Act. In doing so it took account of guidelines laid down by the OFT.
Our thoughts on the impact of the decision in practice
- There are many cases that have been stayed awaiting the outcome of this appeal. Although the decision will not necessarily knock these out completely as the commission is only usually one of a number of arguments raised against the lender, it will eliminate the commission argument and it will make it generally harder to credibly argue unfair relationships. There is no doubt that this will be a blow for claimant management companies and their legal advisers in bringing these types of claims.
- The decision should result in fewer 'fishing expeditions' by claimants in litigation proceedings by way of requests for further information relating to commission or pre-action or specific disclosure applications.
- Expert evidence on the cost of comparable monthly premium policies should now be irrelevant, where the creditor was only selling single premium policies.
- The fact that a PPI policy was very expensive should not be held to contribute to an unfair relationship.
- The decision reaffirms the clear message that compliance with the ICOB regime is key for lenders in this sector.
- We now have some reliable judicial commentary on how the courts should approach the issue of unfair relationships and in particular the emphasis that the issue needs to be looked at from both sides' positions, is encouraging for lenders.
- The decision in Nemo has been helpfully criticised and will be of little practical value in the future for borrowers in most cases.
- Despite public concern and having ascertained high rates of PPI commission, the Court of Appeal emphasised that the non-disclosure of commission had neither been highlighted as an issue by the FSA nor is it prohibited under the ICOB regime. We will monitor developments in this regard closely as it will be interesting to see what the FSA's next move is in relation to the sale of PPI.
Finally, Ruth Bala of Gough Square Chambers who appeared for Black Horse has kindly shared her thoughts on the case below:
"The size of the commissions received by lenders selling PPI may be viewed by many as distasteful (and "unfair"), but provided that the borrower was able to make an informed choice about whether to purchase the policy, non-disclosure of commission should not give rise to any remedy. The borrower is able to make an informed choice if his repayment obligations in respect of the PPI are clearly communicated to him, along with the key terms and conditions of the policy. Whether or not the lender will receive commission has no effect on the borrower's repayment obligations. In addition, where there are very specific rules regulating a certain area (in this case the ICOB Rules), it would give rise to unpredictability if the courts were to use vague, general provisions such as s140A to create more onerous obligations."