Supreme Court hands down judgment in PPI Mis-selling Case

The Supreme Court has handed down judgment in the case of Plevin v. Paragon Personal Finance Limited [2014] UKSC 61.

Background

In 2006, Mrs Plevin responded to a leaflet put through her letter box by an independent credit broker, LLP Processing (UK) Limited (“LLP”), offering to arrange a secured loan. Mrs Plevin telephoned LLP who completed a Demands and Needs Statement during the call. LLP proposed that she should borrow £34,000 from Paragon Personal Finance Limited (“Paragon”) over a period of 10 years and take out PPI for 5 years with Norwich Union. The PPI premium was £5,780 which was payable at the outset of the loan. LLP subsequently sent Mrs Plevin a proposal for the loan and the PPI, a Key Facts document describing the cover and an application form, which Mrs Plevin completed and returned to LLP. Mrs Plevin was then telephoned by Paragon who confirmed various details with her and in March 2006, Paragon sent Mrs Plevin a copy of the loan agreement, the PPI certificate & 4 cheques.

In respect of the PPI premium of £5,780, 71.8% was taken in commissions; £1,630 was sent by Paragon to Norwich Union, and LLP and Paragon retained £1,870 and £2,280 respectively. Mrs Plevin was notified in the Finance Industry Standards Association’s (“FISA’s”) guide that “commission is paid by the lending company” but the amount nor the identity of the recipients was disclosed.

The Proceedings

Mrs Plevin brought proceedings against LLP and Paragon in January 2009. The claim against LLP was settled and paid for by the Financial Services Compensation Scheme as LLP had gone into liquidation. Whilst the proceedings were complicated, the key issue was whether the relationship between Mrs Plevin and Paragon was unfair; such unfairness had arisen as a result of the non-disclosure of the amount of the commissions and the failure of LLP and Paragon to assess and advise Mrs Plevin on the suitability of the PPI as it only covered half of the loan term and that she already had life insurance and sickness and redundancy benefits.

The Law

The relevant provisions relating to unfair relationships are found in sections 140A – C of the Consumer Credit Act 1974 (“the Act”). Section 140A is very widely drafted and allows the court to exercise its discretionary powers. The relationship between the creditor must be found to be unfair and although the court is concerned with the hardship of the debtor, it should also take into account the position of the creditor so that even if there are features of a relationship which are harsh against the debtor, this would not automatically create an unfair relationship. Further, the unfairness must arise from one of the categories contained in section 140A (1) (a) to (c). Finally, the Court acknowledged that it is likely that there will be some inherent unfairness due to the size and knowledge differences between lenders and borrowers.

The Insurance Conduct of Business Rules (“ICOB”) is relevant to insurance intermediaries. LLP and Paragon both acted as insurance intermediaries here, LLP proposing the PPI policy to Mrs Plevin and Paragon as it arranged the insurance with Norwich Union. However,  ICOB applies only to the insurance intermediary in contact with the customer.

Under the Insurance Mediation Directive, certain minimum categories of information must be disclosed by an insurance intermediary, but this does not include commissions. However under ICOB, even though there is a requirement for disclosure by an insurance intermediary, this requirement is to commercial customers only and purely if the customer requests this information and does not apply to a non-commercial customer, even if such a customer asks for the information.

Non-Disclosure of Commissions

The Supreme Court here found that the non-disclosure of the commissions payable out of Mrs Plevin’s PPI premium made her relationship with Paragon unfair. The Court accepted that Mrs Plevin must have known that some commission would have been payable to intermediaries but that the commission paid had become so large that the relationship could not be regarded as fair if the customer is kept in ignorance. Whilst the Court accepted that it would be difficult to decide what level would create an unfair relationship, it considered that the level of the commission here was a long way beyond any tipping point as Mrs Plevin would have questioned whether the PPI represented good value for money . As a consequence, the Supreme Court found that the Court of Appeal had previously wrongly decided Harrison v. Black Horse Ltd as although the premium in that case was found to be “quite startling”, the relationship was not unfair because the lender had not breached ICOB in either charging the commission or failing to disclose it.

The reason for this is that ICOB imposes a minimum standard of conduct applicable in a wide range of situations and provides for damages in the event of a breach whereas section 140A introduces a wider test of fairness of the creditor-debtor relationship which can be considered by the courts. Accordingly, the Court found that the fact that Mrs Plevin was left in ignorance as to the commissions paid made the relationship unfair.

The Court then considered whether this position arose as a result of something done or not done by or on behalf of Paragon. The Court found that Paragon did not owe a legal duty to Mrs Plevin under ICOB to disclose the commissions and as they were not her agent or adviser, they did not owe such a duty under the general law either. However, it accepted that as the unfairness arose from the non-disclosure of commissions and as Paragon were the only party who knew the size of the commissions, they could have informed Mrs Plevin of the size of the commission and that in the interests of fairness, they should have done so as this would have meant that Mrs Plevin was properly informed.

Failure to assess the suitability of the PPI

Under ICOB, Paragon did not owe a legal duty to assess Mrs Plevin’s needs and to advise her on the suitability of PPI for her purposes as LLP was the only intermediary with contact with Mrs Plevin. Further, the Supreme Court found that Paragon could not reasonably have been expected in the interests of fairness to conduct its own needs assessment and to provide Mrs Plevin with advice on it, particularly as the relevant statutory code expressly assigned this to someone else, LLP.

The Court also examined whether the acts or omissions of LLP were done or not done on behalf of Paragon and concluded that LLP’s failure to conduct a needs assessment of Mrs Plevin could not be treated as something done by or on behalf of Paragon as LLP were not acting as Paragon’s agent. The Court found that there was nothing in the wording of section 140A (1) (c) to suggest a wider meaning of the phrase “by, or on behalf of, the creditor” and that the ordinary meaning of these words imports an agency  which is how the courts have previously construed them and that nothing in this case would demand a wider interpretation. The Court noted that the Act makes extensive use of making the creditor liable for the acts and omissions of other parties who might not be its agents but that where it does so, it makes it in clear terms. As a consequence, the Supreme Court found that the Court of Appeal was incorrect to conclude that the acts or omissions of LLP were capable of making Mrs Plevin’s relationship with Paragon unfair.

The Voluntary Codes

The Court briefly reviewed the voluntary codes of the Finance & Leasing Association and FISA and found them to have no legal status except as between the associations and their members and that they had no statutory force. It was accepted that the codes could provide some evidence of what would constitute reasonable standards of commercial conduct in that field.

Future

The Supreme Court, having overturned Harrison, concluded that the non-disclosure of the amount of the commissions made Paragon’s relationship with Mrs Plevin unfair so that the transaction should be re-opened. Paragon’s appeal was consequently dismissed, although for different reasons to those given by the Court of Appeal, so that the case is now remitted to be remitted back to the County Court to decide what relief should be granted to Mrs Plevin under section 140B.

This clearly is an important judgment as it provides the Supreme Court’s view on the interpretation of the unfair relationship provisions of the CCA in practice whilst also clarifying the meaning of the phrase “by, or on behalf of, the creditor”.