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This appeal arose in the context of a payment protection insurance (“PPI”) dispute between Mrs Plevin (the respondent) and Paragon Personal Finance Ltd (the appellant). Briefly, PPI covers the repayment of specific borrowings (such as repayments under a personal loan or credit card) on the occurrence of an insured event (such as sickness, injury or unemployment) and was often to sold to consumers at the time of their taking a loan, with a one-off premium paid up-front and rolled into the capital sum borrowed. Typically, it would result in a high commission for the intermediary arranging the PPI and, as has been widely reported, many policies were mis-sold.

Sections 140A to 140D of the Consumer Credit Act 1974 apply to personal loans and PPI and, in particular, empower the courts to re-open a credit agreement which is alleged to be unfair to the borrower on the basis of:

1. the terms of the agreement, or an related agreement;

2. the way in which the lender has exercised or enforced his rights; or

3. anything which is done, or not done, “on behalf of” the lender (section 140A(1)(c)).

In addition, the Insurance Conduct of Business Rules (the “ICOBR”) – which regulate the insurance industry – require an intermediary making a “personal recommendation” to a consumer in respect of an insurance contract to take “reasonable steps” to ascertain whether the recommended insurance is suited to the consumer’s needs. There is no requirement to disclose commissions under the ICOBR.

In 2006, Mrs Plevin took out a personal loan for £34,000 with Paragon through an intermediary, an independent credit broker called LLP Processing (UK) Ltd. In addition to the loan with Paragon, LLP proposed that she take out PPI with Norwich Union, Paragon’s designated insurance partner. The PPI premium of £5,780 was then added to the amount of the loan. Of this premium, 71.8% was commission and was shared between LLP (£1,870) and Paragon (£2,280), with the remainder being paid to Norwich Union.  Mrs Plevin was neither informed of the amount nor the recipients of the commission.

Mrs Plevin argued that the non-disclosure of these commissions, coupled with a failure to identify whether PPI was suited for her needs, resulted in an unfair relationship between her and Paragon.  She stated that, to the extent LLP had committed such defaults, it had done so “on behalf of” Paragon. This, she argued, engaged the provisions of section 140A(1)(c) of the Act and rendered her relationship with Paragon unfair.

Appellate history

Mrs Plevin initially brought her case against both Paragon and LLP. The claim against LLP was settled for £3,000 but the case against Paragon proceeded to be heard in the Manchester County Court and subsequently the Court of Appeal ([2013] EWCA Civ 1658).

It was held in both the County Court and the Court of Appeal that the non-disclosure of the commissions by LLP and Paragon did not render the relationship unfair. In both cases, the court applied the decision in Harrison v Black Horse Ltd [2012] Lloyd’s Rep IR 521, which found that a failure to disclose the commissions did not result in an unfair relationship as the ICOBR did not impose a statutory obligation on the lender to do so.

However, the Court of Appeal, in contrast to the earlier decision of the County Court, found that a failure by LLP to assess Mrs Plevin’s suitability for PPI created an unfair relationship as LLP’s omission was done (or not done) “on behalf of” Paragon. Paragon subsequently appealed to the Supreme Court, which heard the matter on 11 and 12 June 2014.

Supreme Court Decision

The Supreme Court unanimously dismissed the appeal. In the lead judgment, Lord Sumption (with whom Lady Hale, Lord Clarke, Lord Carnwath and Lord Hodge agreed) held that the non-disclosure of the commissions and the identity of those receiving them rendered the relationship unfair under section 140A(1)(c) of the Act. The failure to conduct a suitability assessment, however, did not.

The Supreme Court’s reasoning was as follows:

Non-disclosure of the commissions

Lord Sumption held that the decision in Harrison v Black Horse Ltd, the leading Court of Appeal authority, was wrong. The court’s determination of fairness may be influenced by the standard of commercial conduct which is to be reasonably expected of the lender and whilst the ICOBR were evidence of this standard, they could not be conclusive as to questions asked by section 140A of the Act. Rather, they serve different purposes. The ICOBR impose a minimum standard of conduct, whereas section 140A of the Act is concerned with whether the lender’s relationship with the borrower was unfair. The relationship may be unfair for a number of reasons which do not necessarily require a breach of duty. As such, section 140A introduces a broader test of fairness which is to be examined and determined by the court, taking into account a wider range of considerations.

With this in mind, the non-disclosure of the commissions to Mrs Plevin rendered the relationship unfair. An inequality of knowledge between a creditor and a debtor is a “classic source of unfairness” (Lord Sumption at paragraph 18 of the judgment) and whilst Mrs Plevin was taken to have known that some commission would be payable to LLP, at some point commissions may “become so large that the relationship cannot be regarded as fair if the customer is kept in ignorance” (ibid.). These commissions had gone far beyond that tipping point and had Mrs Plevin known about them she might well have questioned the value for money of taking out the PPI. The responsibility to disclose the commission payments lay with Paragon, as they were the only party that could have known the full extent of them.

Failure to conduct suitability assessment

Lord Sumption found that Paragon “could not have reasonably been expected to conduct its own suitability assessment and advise Mrs Plevin accordingly” (Lord Sumption at paragraph 26 of the judgment). Whilst the absence of a regulatory duty cannot be conclusive in determining fairness, in this context Lord Sumption held that it was highlight relevant. The ICOBR impose a duty to conduct a suitability assessment but imposes such duty on the intermediary – in this case, LLP – as this is the party dealing directly with the consumer. As such, Paragon could not have been reasonably expected to perform a function which the relevant statutory code assigned to someone else.

In contrast to the Court of Appeal decision, however, Lord Sumption held that LLP’s failure to conduct the suitability assessment was not something done “by or on behalf of” Paragon. The words “on behalf of” import agency and LLP were not acting as Paragon’s agent. There was nothing in the statutory context to suggest a wider interpretation. Further, the words “by or on behalf of” refer to things done or not done either by the lender itself, or by somebody else whose acts or omissions engage the lender’s responsibility as if the lender had done them or not done them itself. In addition, the Act extensively imputes responsibility to the lender for acts or omissions of other parties who are not (or who are not necessarily) acting as agents; when it does so, it does so in clear and obvious terms. Finally, if the words “by or on behalf of” extended beyond an agency (or deemed agency) relationship, there would be no coherent criteria (statutory or otherwise) for determining what, if any, connection was required between the lender and the acts or omissions causing the unfairness.

As a result of the non-disclosure, the relationship between Mrs Plevin and Paragon was unfair and the agreement could be re-opened. The case was therefore remitted back to the Manchester County Court to decide what relief, if any, should be ordered.

Comment

It is perhaps unsurprising that the Supreme Court dismissed the appeal. Indeed, Lord Sumption stated that the standard of fairness in a debtor-creditor relationship is a matter for the court, on which it must make its own determinations (paragraph 17 of the judgment). In doing so, the court will look at the characteristics of the debtor including their sophistication or vulnerability and the facts which he or she could reasonably be expected to know or assume.

This is good news for consumers who may have purchased complex financial products like PPI. There is almost universally an imbalance of power and knowledge in creditor-debtor relationships and whilst certain provisions of a credit agreement are not necessarily always unfair, the Supreme Court has gone some way in redressing the balance. Consumers may be able to point to the relevant provisions of the Act to re-open certain transactions, and lenders may need to carefully consider the information that they provide.

It is not all bad news for lenders; they will only be liable for the acts or omissions of a third party intermediary under section 140A(c) where there is an agency (or deemed agency) relationship.