Over-turning the Court of Appeal’s decision, the Supreme Court has ruled that non-disclosure of the significant amount of commission earned by a lender created unfairness in the borrower’s relationship with it; Plevin v Paragon Personal Finance Ltd  All ER 128 (Nov).
Mrs Plevin telephoned the brokers, LL Processing (UK) Ltd (LLP), having received an unsolicited flyer from them offering to refinance her existing loans. LLP then conducted a demands and needs assessment over the telephone and recommended a loan, together with payment protection insurance (PPI). LLP followed up with letter enclosing a policy summary and a key facts document, which informed her that a commission would be paid to the lender (and the broker) in relation to the PPI. Paragon Personal Finance Ltd (Paragon), one of LLP’s panel of lenders, entered into a credit agreement with Mrs Plevin after she signed LLP’s application form and Paragon conducted a money laundering compliance telephone call with her. Paragon agreed to lend Mrs Plevin £34,000 and a further £5,780 to pay for a single premium policy of PPI. The 71.8 percent commission paid by the PPI insurer on the £5,780 policy was split between Paragon (who received £2,280) and LLP (£1,870).
Later, in 2010, Mrs Plevin’s PPI mis-selling claim against LLP was settled for £3,000 and paid from the Financial Services Compensation Scheme.
Claim against Paragon
Section 140A of the Consumer Credit Act 1974 (CCA) provides that a court may order the creditor to reduce, discharge or repay a loan under a credit agreement should it determine that the relationship between the creditor and the debtor is unfair to the debtor because of one or more of a list of factors, including:
“…any other thing done (or not done) by, or on behalf of, the creditor (either before or after the making of the agreement or any related agreement).” (section 140A(1)(c))
Mrs Plevin argued that due to either:
- the things done or not done “on behalf of” Paragon by LLP, including the failure to assess and advise on the suitability of the PPI for her needs (given that she already had life insurance, adequate sickness and redundancy benefits with her employer and that the length of the PPI only covered half the term of the loan), and/or
- the non-disclosure of the amount of commission received for the PPI
caused an unfair relationship to exist between her and Paragon qualifying for relief under section 140 of the CCA.
“On behalf of”
The Supreme Court decided that the Court of Appeal was wrong to decide that LLP was operating as Paragon’s agent. It observed that “on behalf of” meant the creditor’s agent or deemed agent. In fact, LLP had operated as Mrs Plevin’s agent, introducing her (and other customers) to Paragon. LLP’s advice to Mrs Plevin “was not even in the loosest sense a function that they performed for or for the benefit of Paragon. It was a function which they performed, however defectively, for the sole benefit of Mrs Plevin.” The Supreme Court, therefore, held that the relationship between Mrs Plevin and Paragon was not unfair due to anything done or not done by LLP.
The Supreme Court did consider, however, that the Plevin/Paragon relationship was unfair for the second reason; the failure by Paragon to disclose the amount of the commission received.
This required the Supreme Court to overturn the decision in Harrison v Black Horse Ltd  All ER(D) 112 (Harrison) which established that where there was no breach of the Insurance Conduct of Business Rules, either in charging commission, or in failure to disclose it, there can be no unfair relationship established under section 140 CAA. The Supreme Court thought the Harrison approach was too narrow and that other factors, not just code compliance, had to be considered, such as the characteristics and level of knowledge of the borrower, the range of choice she had and the lender’s awareness of these issues.
The non-disclosure of the amount of commission payable out of the PPI premium made Mrs Plevin’s relationship with Paragon unfair. It was reasonable to consider that a person in her position who was told that more than two thirds of the premium she paid for the PPI was going to intermediaries would question whether the insurance was value for money and a sensible decision. Given the likelihood that disclosure would have affected her decision, non-disclosure amounted to unfairness.
As a result of the Supreme Court’s findings of an unfair relationship, the case will be remitted to the County Court of Manchester to decide what relief under section 140B CCA should be ordered.
The decision of the Supreme Court is welcomed in so far as it prevents the net of potential targets for wrongful conduct in the mis-selling of PPI from becoming unfeasibly wide. It is entirely unreasonable to hold a lender responsible for the dealings of separate and independent brokers and other intermediaries.
The case makes it clear that lenders can only be responsible for their actions and omissions and those of their agents or deemed agents. Any claims under Section 140 CCA which allege mis-selling or mis-conduct by a third party that is not the creditor’s agent are doomed to fail.
Unfortunately, the Supreme Court’s decision with respect to the non-disclosure of the amount of the commission, leads to potential difficulties. Regulatory obligations require the disclosure of the existence of any commission arrangement, which did happen in this case. Previously, the fact that a lender (or its agent) had complied with its regulatory obligations, made it very difficult indeed for a customer to argue that the lender had nevertheless acted unfairly. The Supreme Court’s decision has eradicated that certainty. A Lender’s compliance with its regulatory obligations is now only one of a number of factors when considering the fairness of its relationship with the borrower. The limited guidance in the judgment suggests that a court must look at the wider picture and analyse the whole relationship between the creditor and debtor to assess its fairness. It did acknowledge, however, that the relationships of the majority of private borrowers and commercial lenders will be inherently unequal and thus it would take a sufficiently extreme imbalance to invoke section 140 CCA.
But, what amount of commission requires notification to the debtor to avoid the relationship being labelled unfair? In this case it was 71.8 percent. Would 70 percent be deemed unreasonable and 72 percent always unfair? Neither the Court of Appeal nor the Supreme Court could say; the Court of Appeal acknowledging that the “tipping point” would be very difficult to identify.
Finally, Section 140 CCA is discretionary. It is entirely possible, that even though the Supreme Court decided that relationship between Mrs Plevin and Paragon was unfair, the County Court at Manchester may not order discharge or any reduction or repayment of the loan. Walker Morris will monitor the proceedings and report in due course.
For more advice on PPI mis-selling claims, agency relationships and lenders’ regulatory obligations, contact a member of our team.