The UK Supreme Court appeal arose out of a payment protection insurance (“PPI”) dispute between Mrs Plevin, the borrower, and Paragon Personal Finance Ltd, the lender. By way of background, PPI covers the borrowings on personal loans or credit cards on the occurrence of an insured event (such as sickness, injury or unemployment) and was sold to customers at the time of their taking out the loan. While in most cases the insurance was underwritten by an independent insurer, it resulted in a high commission for the lender arranging the PPI and, as has been extensively reported, many PPI policies were mis-sold.
The Consumer Credit Act 1974 applies to personal loans and PPI and, in particular, empowers 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 a 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 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 commissions totaling 71.8% of her premium resulted in an unfair relationship between her and Paragon, the lender. She stated that, to the extent LLP, the intermediary, had committed such defaults, it had done so “on behalf of” Paragon. This, she argued, engaged the provisions of the Consumer Act 1974 and rendered her relationship with Paragon unfair.
SUPREME COURT DECISION
The Supreme Court unanimously held that the non-disclosure of the commissions and the identity of those receiving them rendered the relationship unfair under the Consumer Credit Act 1974.
The Supreme Court reasoned that the decision in Harrison v Black Horse Ltd, the leading Court of Appeal PPI 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 applicable UK conduct of business rules were evidence of this standard, they could not be conclusive as to questions asked by the Consumer Credit Act 1974. The conduct of business rules impose a minimum standard of conduct, whereas the Consumer Credit Act 1974 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, the Consumer Credit Act 1974 introduces a broader test of fairness which is to be examined and determined by a Court, taking into account a wider range of considerations.
Bearing 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, the Court said, is a “classic source of unfairness” and whilst Mrs Plevin was taken to have known and assumed 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”. These commissions had gone far beyond any assumption by Mrs Plevin and had she 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, the lender, as they were the only party that could have known the full extent of them. As a result of the non-disclosure, the relationship between Mrs Plevin and Paragon was unfair.
The UK Supreme Court decision in this case is potentially good news for consumers who purchased PPI in Ireland and who are involved in their own litigation before the Irish Courts. There is, without doubt, an imbalance of power and knowledge in borrower-lender relationships but the UK Supreme Court has gone some way in redressing the balance. The decision highlights the view that the standard of fairness in a borrower-lender relationship is a matter for the Court, on which it must make its own evaluations.