UK Supreme Court overrules Harrison v Black Horse and separates the decision concerning the fairness of a consumer credit transaction from adherence to conduct of business rules. This important case considers the circumstances which will make an amount of commission relevant for the determination of fairness under section 140A the Consumer Credit Act.
The facts of the case
The case concerned Mrs Plevin, a widowed lecturer living in her own house with a mortgage and unsecured personal debt. Mrs Previn had no dependants and had generous sickness cover provided by her employer.
Mrs Plevin responded to a leaflet posted through her door sent by a credit broker called LLP Processing (UK) Ltd (LLP). The offer was to refinance Mrs Plevin’s debts with security provided by her home. (LLP went into liquidation before the trial.)
Mrs Plevin called LLP to express her interest in the offer of refinancing. During the call, LLP assessed her demands and needs on the basis of the information provided by her as required by the Insurance Conduct of Business Rules (ICOB), then in force.
During the call a quotation for a product was made by LLP to Mrs Plevin. The proposal was for her to borrow £34,000 from Paragon Personal Finance Limited (Paragon). Alongside the refinancing loan, a payment protection insurance (PPI) policy was offered, payment for which would be made as a single premium of £5780 added onto the loan. After the call, LLP sent an application form and a Key Facts document to Mrs Plevin.
After the application was submitted, an employee of Paragon rang Mrs Plevin as part of their standard anti-money laundering policy. The only other contact she had with Paragon was when cheques were sent by Paragon covering the refinancing, the premium and an additional sum for home improvements.
Of the £5,780 premium paid for the PPI cover, £4,150 was commission (equal to 71.8 per cent). Paragon received the commission from the PPI provider, Norwich Union, retaining £2,280 and sending £1,870 to LLP.
Amongst other issues dropped before the case was heard before the Supreme Court, Mrs Plevin brought a claim against Paragon arguing that the relationship was unfair within the meaning of section 140A of the of the Consumer Credit Act 1974 (CCA). The unfairness arose from two things:
- The non-disclosure of the amount of commission.
- The failure to assess and advise upon the suitability of the PPI for Mrs Plevin’s needs.
The Consumer Credit Act – the court’s power to determine a relationship unfair
Sections 140A-D of the CCA confer power on the court to re-open credit transactions which are determined to be unfair. Under section 140B CCA the court can make an order where the relationship between the creditor and the debtor arising out of an agreement is unfair because of one or more of the following factors: the terms between the parties; the way a creditor has enforced his rights; or ‘any other thing done (or not done) by, or on behalf, of the creditor’ (either before or after the agreement has been entered into) (section 140A (c) CCA). Where a debtor alleges that the relationship in relation to the agreement is unfair, it is for the creditor to prove that it is not.
The Insurance Conduct of Business requirements
At the time of the agreement insurance intermediaries were required to comply with ICOB. The rules created duties between an intermediary and its customer. Where there are several intermediaries in a chain, ICOB applied only to the intermediary ‘in contact with the customer’. In Mrs Plevin’s case both LLP and Paragon were acting as intermediaries but for most purposes LLP was the intermediary for ICOB purposes.
ICOB did not require that the intermediary disclose the amount or existence of any commission paid.
The Supreme Court’s decision and the case of Harrison
The leading case on section 140A and the application of ICOB to sales of PPI was Harrison v Black Horse Lloyd’s Rep IR 521. Harrison was a decision of the Court of Appeal in which an application was made by a borrower under section 140A CCA to determine whether the commission for the sale of a PPI policy (which amounted to 87 per cent of the premium paid) was unfair within the meaning of the CCA. Tomlinson LJ declined to find that such commission (although ‘quite startling’) amounted to an unfair relationship as there had been no breach of ICOB. Since Harrison, the position has been taken that as there is no regulatory obligation to disclose the existence of commission, the amount of commission paid will not result in an agreement being unfair under section 140A CCA. This decision has bound a number of cases taken in relation to the sale of PPI added onto loans.
Lord Sumption gave judgment for the Supreme Court. The Supreme Court found that Harrison was wrongly decided. The Court’s decision is that the unfairness of a creditor-debtor relationship should not be dependent upon the regulatory rules set out in ICOB. ICOB will provide evidence of the standard of conduct expected but ‘cannot be determinative of the question posed by section 140A’. The concerns of the CCA and ICOB are different and should not be confused. Section 140A is entirely concerned with whether the relationship between a creditor and debtor was unfair. The reason for unfairness cannot be limited by whether or not there has been a breach of duty. The court may take into consideration a wider range of issues including the characteristics, sophistication and vulnerability of the debtor and the facts they could reasonably be expected to know or assume.
In determination of question (1) therefore, the Supreme Court decided that the non-disclosure of the commission payable made the relationship between Mrs Plevin and Paragon unfair within the meaning of section 140A CCA. Lord Sumption stated:
‘A sufficiently extreme inequality of knowledge and understanding is a classic source of unfairness in any relationship between a creditor and a non-commercial debtor. It is a question of degree. Mrs Plevin must be taken to have known that some commission would be payable to intermediaries out of the premium before it reached the insurer… But at some point commission may become so large that the relationship cannot be regarded as fair if the consumer is kept in ignorance’.
Although Paragon owed no duty to Mrs Plevin under ICOB, the breadth of section 140A required only that the creditor was responsible for an omission making the relationship with the debtor unfair if he failed to take such steps: as would be reasonable to expect to take in the interests of fairness; and, would have removed the source of that unfairness so that the relationship is no longer unfair.
The Court went on to consider question (2) which concerned whether Paragon was required to assess Mrs Plevin’s demands and needs in relation to the PPI when ‘acting on behalf of’ LLP. The Court determined that they had no such obligation. The requirement contained in ICOB required only that the intermediary making a personal recommendation to a customer was required to consider whether the product met the customer’s needs. This duty was owed by LLP, not Paragon who was not acting as intermediary for these purposes. Merely because Paragon received commission from Norwich Union this did not result in their becoming an intermediary for the purposes of the relevant section of ICOB (or otherwise):
‘The practice by which the agent of a consumer of financial services is remunerated by the supplier of those services has often been criticised. It is, however, an almost universal feature of the business, and it is of the utmost legal and commercial importance to maintain the principle that the source of the commission has no bearing on the identity of the person for whom the intermediary is acting or the nature of his functions’.
The non-disclosure of the amount of commission had the result of making Paragon’s relationship with Mrs Plevin unfair. Accordingly, the court was able to re-open the transaction under section 140B CCA.
For further information: