PPI: The End Of The Story? Irwin Mitchell Act In Landmark Case 12.11.2014 On 12 November 2014, the Supreme Court handed down its judgment in the long running saga of PPI litigation and the interpretation of the ‘unfair relationship’ provisions contained within s.140 of the Consumer Credit Act 1974 (“the Act”). In its decision in Plevin v Paragon Personal Finance Limited , the Supreme Court has now delivered the leading and authoritative decision in this arena. Background Mrs Plevin was a college lecturer. She took out a secured loan with Paragon for £34,000 along with a single premium PPI policy for an additional £5,780. All of Mrs Plevin’s dealings regarding the purchase of the loan and PPI were with a broker, LL Processing (UK) Limited (“LLP”) and it had been LLP who had conducted the relevant demands and needs assessment and who had recommended the purchase of the PPI. At first instance trial, Mrs Plevin had claimed that an unfair relationship existed because of first, the non-disclosed commission regarding the PPI; and second, because of the things done ‘on behalf of’ Paragon by LLP. The claim was dismissed by the trial judge on the basis that the question of the non-disclosure of commission was firmly governed by the leading Court of Appeal authority of Harrison v Black Horse Limited and because LLP was the intermediary to whom the relevant Insurance: Conduct of Business rules (“ICOB”) provisions applied (being the customer facing intermediary); and that as there was no agency relationship between LLP and Paragon, Paragon could not be responsible for LLP’s actions for the purposes of the unfair relationship provisions. Mrs Plevin appealed that decision to the Court of Appeal. Court of Appeal Before the Court of Appeal, Mrs Plevin argued that the wording of ‘on behalf of’ in section 140A(1)(c) of the Act should be given a wider meaning than pure agency so that acts/omissions of any party who ‘played some part in the bringing about of the credit agreement for the creditor’ would be caught. Mrs Plevin also claimed that the fact that Paragon was a member of both the Finance & Leasing Association (“FLA”) and the Finance Industry Standards Association (“FISA”) and agreed to be bound by their codes of conduct imposed greater standards of regulation and relevant conduct upon Paragon. The Court of Appeal allowed the appeal. Whilst there could be no decision on the non-disclosure of commission, given the authority of Harrison, the Court of Appeal found that the purpose of the Act was consumer protection and therefore that Paragon should be responsible for a broad interpretation of the words ‘on behalf of’ such that this did not just apply to a strict agency approach. In such circumstances, Paragon would be liable for LLP’s actions, even though LLP was not Paragon’s agent. Further, the Court of Appeal found that the voluntary codes of the FLA and FISA were also important so that the imposition of a monitoring responsibility by lenders over credit brokers under those codes meant that the ICOB delineation of responsibility could not be entirely correct. Paragon appealed the decision regarding the ‘on behalf of’ provisions and the voluntary codes to the Supreme Court; and Mrs Plevin cross-appealed regarding the non-disclosure of commission previously governed by the Harrison decision. Supreme Court In a unanimous decision given by Lord Sumption, the Supreme Court has given a considered judgment which is the first time that the unfair relationship provisions have been scrutinised at such high judicial level. The starting point for the Court was the purpose of the unfair relationship regime. It was noted that it is the relationship itself that must be unfair; not necessarily the terms in question. Further, that matters relevant to the creditor must also be taken into account, because they might be important to protect the creditor. Finally, the Court noted that generally, relationships between a creditor and debtor might always be categorised as being ‘inherently unequal’, but that by itself, this did not mean that such relationships should always be reopened. As against this backdrop, the Supreme Court went on to consider the question of why the relationship between Paragon and Mrs Plevin was said to be unfair. Mrs Plevin claimed that the unfairness stemmed from two key points, first, the non-disclosure of commission on the sale of the PPI; and second, because LLP had failed to properly assess the suitability of the PPI for Mrs Plevin, and that this should be said to be Paragon’s responsibility as something done or not done ‘on behalf of’ Paragon by LLP. • Non-disclosure of commission In relation to the non-disclosure of commission, the Court noted that pursuant to ICOB, the existence of or amount of commission is not required to be disclosed (other than in a commercial customer context). Further, this regulatory requirement was the result of a considered policy by the FSA that such disclosure was not necessary, largely because the commission should be seen as of no higher relevance than any other selling cost of an insurance transaction, and that disclosure of the insurance premium alone would suffice. In Harrison, the Court of Appeal decided that because commission disclosure was not required under ICOB, it would be anomalous to frame the unfair relationship test differently so that non-disclosure could create an unfair relationship. However, the Supreme Court refused to follow the Court of Appeal, and found that Harrison had been wrongly decided. Lord Sumption found that whilst the ICOB rules provide ‘some evidence’ of the standard for fairness, they cannot in themselves be determinative, because they address a different question. Whilst the ICOB rules impose the relevant standard of conduct for a variety of situations, the unfair relationship regime uses a test of fairness to see whether a particular transaction needs to be reopened ‘as a matter of judicial discretion’, and the factors which the Court can take account of are wider and different. In the Supreme Court’s view, the decision in Harrison was wrong, and in this particular case, the non-disclosure of commission regarding the PPI made the relationship between Mrs Plevin and Paragon unfair. The Supreme Court found that “extreme inequality of knowledge and understanding’ is a classic source of unfairness in a relationship. Whilst Mrs Plevin must have had some knowledge that a commission was to be paid, she did not know how much, and in this case, given the level of commission, to make the relationship fair, she should have been told the amounts in question. Further, that unfairness could be said to result from Paragon’s failure to disclose the commission. Paragon knew the size of the commission and, the Supreme Court found, should have disclosed those amounts in order to comply with the interests of fairness. • ‘On behalf of’ The second question for the Supreme Court was whether things done or not done by LLP could be regarded as having been done ‘on behalf of’ Paragon. Under the ICOB rules, only the customer facing intermediary (i.e. in this case, LLP) was the party who was required to assess suitability of any insurance. Paragon was under no regulatory duty to assess Mrs Plevin’s demands and needs or advise on the suitability of the PPI for her. However, the Court of Appeal’s decision had meant that regardless of this, the acts of LLP could still be laid at Paragon’s door as acts having been done ‘on behalf of’ Paragon. The Supreme Court rejected the Court of Appeal’s interpretation. Given that ICOB expressly provided that the customer facing intermediary alone had responsibility for assessing demands and needs, Paragon could not be expected to perform the same function. Further, the Supreme Court went on to consider the wording of the Act and what had been meant by its drafters. Lord Sumption agreed with Paragon’s arguments: that for this section of the Act to ‘bite’, there must be an agency or deemed agency relationship. In other contexts within the Act (such as s.56 and s.75) it specifically imputes responsibility for actions of another if those relationships would not be covered by agency. But the unfair relationship provisions do not do this, which, the Supreme Court found, pointed to the interpretation that should be given. Finally, the Supreme Court found that the interpretation which the Court of Appeal had given to the ‘on behalf of’ provisions was so wide that it made the definition largely unworkable. The Supreme Court therefore found that for the ‘on behalf of’ provisions to take effect, there must be an agency or deemed agency relationship. • Voluntary Codes Finally, the Supreme Court considered the impact of Paragon’s membership of the FLA and FISA and the existence of those bodies’ voluntary codes. Once again, the Supreme Court disagreed with the Court of Appeal. It found that the codes had no legal status save as between those associations and their members. The most that could be said about them was that they were evidence of what would be the reasonable standards of conduct for lenders and intermediaries in this field and nothing more. The Supreme Court therefore also overturned the Court of Appeal’s decision in this respect. Conclusion The decision has wide implications for those in the industry. We now have the benefit of the Supreme Court’s decision on what the unfair relationship provisions of the Act should mean in practice. We know that non-disclosure of commission, even though specifically not required by the relevant regulatory regime, ICOB, can still amount to an unfair relationship. This is because under s.140, what the court is asked to do is consider the relationship between the parties rather than specific compliance with underlying regulation. We also know that the court has a wide discretion to look at what it views as an unfair relationship. This reminds us that whilst the Supreme Court can set guidance for this area of law, in practice, each particular relationship must be judged on its own merits and circumstances, and what might be viewed as unfair as between one borrower and creditor, might not be so viewed for another. Further, we also now know that for an act to be done ‘on behalf of’ a creditor for the purposes of s.140, this must mean an agency or deemed agency relationship. This provides much needed clarity to the law and ensures that lenders do not find themselves ‘on the hook’ for actions of a party in circumstances where it was never envisaged that liability would so pass. This is again of real importance for the industry and should be welcomed. We also know that lenders and intermediaries will not be effectively penalised for becoming members of trade associations and agreeing to comply with higher levels of standards of behaviour. The Supreme Court has made clear that such codes do not assume the extreme importance that the Court of Appeal had allowed. Again, this should be regarded as a welcome decision for business efficacy in the lending industry. Finally, it should also be noted that the Supreme Court has not in fact made any decision as to the appropriate relief to be awarded to Mrs Plevin. Instead, the claim has been remitted back to the first instance court to decide what level of relief, if any, should be awarded. As a result of this, there remains no authority as to what the appropriate level of relief should be for non-disclosure of commission. The PPI saga is therefore not yet at an end. 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