Plevin v. Paragon Personal Finance Limited  UKSC 61
UK Supreme Court overrules Harrison v. Black Horse and separates the decision concerning the fairness of a consumer credit transaction from adherence to conduct of business rules. This important case considers the circumstances which will make an amount of commission relevant for the determination of fairness under section 140A the Consumer Credit Act.
The facts of the case
The case concerned Mrs Plevin, a widowed lecturer living in her own house with a mortgage and unsecured personal debt. Mrs Plevin had no dependants and had generous sickness cover provided by her employer.
Mrs Plevin responded to a leaflet posted through her door sent by a credit broker called LLP Processing (UK) Ltd (LLP). The offer was to refinance Mrs Plevin’s debts with security provided by her home. (LLP went into liquidation before the trial.)
Mrs Plevin called LLP to express her interest in the offer of refinancing. During the call, LLP assessed her demands and needs on the basis of the information provided by her as required by the Insurance Conduct of Business Rules (ICOB), then in force.
During the call a quotation for a product was made by LLP to Mrs Plevin. The proposal was for her to borrow £34,000 from Paragon Personal Finance Limited (Paragon). Alongside the refinancing loan, a payment protection insurance (PPI) policy was offered, payment for which would be made as a single premium of £5780 added onto the loan. After the call, LLP sent an application form and a Key Facts document to Mrs Plevin.
After the application was submitted, an employee of Paragon rang Mrs Plevin as part of their standard anti-money laundering policy. The only other contact she had with Paragon was when cheques were sent by Paragon covering the refinancing, the premium and an additional sum for home improvements.
Of the £5,780 premium paid for the PPI cover, £4,150 was commission (equal to 71.8 per cent). Paragon received the commission from the PPI provider, Norwich Union, retaining £2,280 and sending £1,870 to LLP.
Amongst other issues dropped before the case was heard before the Supreme Court, Mrs Plevin brought a claim against Paragon arguing that the relationship was unfair within the meaning of section 140A of the of the Consumer Credit Act 1974 (CCA). The unfairness arose from two things:
- The non-disclosure of the amount of commission.
- The failure to assess and advise upon the suitability of the PPI for Mrs Plevin’s needs.
The Consumer Credit Act – the court’s power to determine a relationship unfair
Sections 140A-D of the CCA confer power on the court to re-open credit transactions which are determined to be unfair. Under section 140B CCA the court can make an order where the relationship between the creditor and the debtor arising out of an agreement is unfair because of one or more of the following factors: the terms between the parties; the way a creditor has enforced his rights; or ‘any other thing done (or not done) by, or on behalf, of the creditor’ (either before or after the agreement has been entered into) (section 140A (c) CCA). Where a debtor alleges that the relationship in relation to the agreement is unfair, it is for the creditor to prove that it is not.
The Insurance Conduct of Business requirements
At the time of the agreement insurance intermediaries were required to comply with ICOB. The rules created duties between an intermediary and its customer. Where there are several intermediaries in a chain, ICOB applied only to the intermediary ‘in contact with the customer’. In Mrs Plevin’s case both LLP and Paragon were acting as intermediaries but for most purposes LLP was the intermediary for ICOB purposes.
ICOB did not require that the intermediary disclose the amount or existence of any commission paid.
The Supreme Court’s decision and the case of Harrison
The leading case on section 140A and the application of ICOB to sales of PPI was Harrison v Black Horse  Lloyd’s Rep IR 521. Harrison was a decision of the Court of Appeal in which an application was made by a borrower under section 140A CCA to determine whether the commission for the sale of a PPI policy (which amounted to 87 per cent of the premium paid) was unfair within the meaning of the CCA. Tomlinson LJ declined to find that such commission (although ‘quite startling’) amounted to an unfair relationship as there had been no breach of ICOB. Since Harrison, the position has been taken that as there is no regulatory obligation to disclose the existence of commission, the amount of commission paid will not result in an agreement being unfair under section 140A CCA. This decision has bound a number of cases taken in relation to the sale of PPI added onto loans.
Lord Sumption gave judgment for the Supreme Court. The Supreme Court found that Harrison was wrongly decided. The Court’s decision is that the unfairness of a creditor-debtor relationship should not be dependent upon the regulatory rules set out in ICOB. ICOB will provide evidence of the standard of conduct expected but ‘cannot be determinative of the question posed by section 140A’. The concerns of the CCA and ICOB are different and should not be confused. Section 140A is entirely concerned with whether the relationship between a creditor and debtor was unfair. The reason for unfairness cannot be limited by whether or not there has been a breach of duty. The court may take into consideration a wider range of issues including the characteristics, sophistication and vulnerability of the debtor and the facts they could reasonably be expected to know or assume.
In determination of question (1) therefore, the Supreme Court decided that the non-disclosure of the commission payable made the relationship between Mrs Plevin and Paragon unfair within the meaning of section 140A CCA. Lord Sumption stated:
‘A sufficiently extreme inequality of knowledge and understanding is a classic source of unfairness in any relationship between a creditor and a non-commercial debtor. It is a question of degree. Mrs Plevin must be taken to have known that some commission would be payable to intermediaries out of the premium before it reached the insurer… But at some point commission may become so large that the relationship cannot be regarded as fair if the consumer is kept in ignorance’.
Although Paragon owed no duty to Mrs Plevin under ICOB, the breadth of section 140A required only that the creditor was responsible for an omission making the relationship with the debtor unfair if he failed to take such steps: as would be reasonable to expect to take in the interests of fairness; and, would have removed the source of that unfairness so that the relationship is no longer unfair.
The Court went on to consider question (2) which concerned whether Paragon was required to assess Mrs Plevin’s demands and needs in relation to the PPI when ‘acting on behalf of’ LLP. The Court determined that they had no such obligation. The requirement contained in ICOB required only that the intermediary making a personal recommendation to a customer was required to consider whether the product met the customer’s needs. This duty was owed by LLP, not Paragon who was not acting as intermediary for these purposes. Merely because Paragon received commission from Norwich Union this did not result in their becoming an intermediary for the purposes of the relevant section of ICOB (or otherwise):
‘The practice by which the agent of a consumer of financial services is remunerated by the supplier of those services has often been criticised. It is, however, an almost universal feature of the business, and it is of the utmost legal and commercial importance to maintain the principle that the source of the commission has no bearing on the identity of the person for whom the intermediary is acting or the nature of his functions’.
The non-disclosure of the amount of commission had the result of making Paragon’s relationship with Mrs Plevin unfair. Accordingly, the court was able to re-open the transaction under section 140B CCA.
For further information, Plevin v. Paragon Personal Finance Limited  UKSC 61.
Figurasin v. Central Capital Limited  EWCA Civ 504
This case concerned a mis-selling claim against an intermediary who sold payment protection insurance alongside a loan.
The case is an appeal from a first instance judgment brought by the Figurasins (F). F had contacted a lender and broker (CCL) in order to get a loan. The loan which they were given had PPI added to it. Their claim against the lender was dropped before the case went to trial. F had telephoned CCL in order to arrange the loan.
The conversation followed a sales script and was recorded. As a result of the telephone conversation F took out a loan inclusive of PPI. Little discussion took place about the cost of the PPI during the telephone call. CCL failed to break down the separate cost of the loan and PPI and interest. However, documents were sent to F after the call which showed a full break-down of each element of the loan and PPI. The Court of Appeal held that this was too late for compliance with ICOBS. In particular, the brokers failure to disclose the cost of the PPI during the sales call was a breach of ICOBS 2.2.3(1).
The subsequent receipt of documentation did not address the breach. F was entitled to rely on the information they had received during the sales call. The case further clarifies that full disclosure of policy details must take place during the sales process and cannot be rectified with full information at a later date, even if the contract is concluded after the receipt of the paperwork.
For further information, Figurasin v Central Capital Limited  EWCA Civ 504.
Saville v. Central Capital Limited  EWCA Civ 337
The Court of Appeal has allowed an appeal by a couple who took out Payment Protection Insurance (PPI) with a loan, overturning the previous decision by Manchester County Court. In his judgment Floyd LJ considered the obligations of intermediaries to ensure that recommendations to buy insurance policies meet the customers’ demands and needs. Following Harrison v Black Horse  EWHC 3152 (QB) Floyd LJ set out the test to be applied to the issue of breach of a statutory duty in a sale of PPI. The correct approach is to ask whether, if the obligations set out in ICOBS had not been breached, would the damage have occurred? In other words, would the customer have purchased the particular PPI policy if the intermediary had followed the requirements of ICOBS which seek to ensure that products meet the demands of the customer and their needs.
In 2006 Mr and Mrs Saville decided to take out a loan to refinance their existing debts. They found a credit broker, Central Capital (Central), following an online search. Central offered the Savilles a sum repayable over 25 years. A separate contract was arranged by Central for PPI to protect against the event of loss of income. The policy also provided term life cover. The term of the policy was 5 years. The premium of £13,347.05 was added to the underlying loan of £54,500.
The Savilles had two main arguments in their case before the District Court: they had not wanted to buy PPI but believed they were obliged to in order to get the loan; and, if they wanted any insurance cover for the loan they would want it to cover the entire 25 year period of the loan. It was common ground that Central had not complied with ICOBS rules when selling the PPI to the Savilles. The question before the Court of Appeal was whether the District Court judge had been right to conclude that the Savilles had not established any loss causally attributable to Central’s breach of the statutory duty to ensure the product sold met the customers’ demands and needs.
The decision of the court
Distinguishing the facts of the case from those in Harrison v Black Horse, Floyd LJ found that there was evidence that the breach of ICOBS did have a causative impact on the purchase of PPI. The trial judge should have asked what the Savilles would have done had Central made open and fair enquiries directed at the level of PPI cover required. Although the Savilles knew that they were offered a 5 year policy, Floyd stated that knowing about some characteristic of a complex product or contract is a different thing from wanting that characteristic "if given a free choice".
The trial judge was wrong to place the reliance upon the Saville's general concern to reduce costs. His decision to reject the Savilles’ evidence that they wanted cover to last for the full duration of the loan on the basis that longer cover would have been more expensive to them was wrong.
The judge at first instance had made no assessment of whether the PPI policy sold met the Saville’s demands and needs in order to be suitable for them. Although the Saville’s understood what they were in fact sold, Central fell short in their duty to ensure that the PPI policy met their demands and needs. To determine otherwise would have the unwelcome result of shifting the responsibility for assessing suitability to the customer.
Central should have discovered the demands of the Saville’s as to the policy term by means of “an open and fair question”. Furthermore, the fact that the Savilles purchased a 5 year policy in the context of their desire to reduce costs does not establish that, had they been asked about the length of term they wanted, they would have chosen the 5 year period rather than a policy to cover the full term of the loan.
The breach of ICOBS rules (in particular ICOBS 4.3.1R) was causative of the loss to the Savilles who would not have paid £13,347 for PPI had the rules been complied with.
Our thoughts on the case
Saville v Central Capital demonstrates the need for intermediaries to ensure that they have recommended products to customers which meet a genuine need. It is not good enough to argue that simply because the customer knew that they had bought a product ipso facto, it must have been suitable for them. In order to meet the duty to ensure that products meet the customers’ demands and needs in ICOBS, the intermediary must ensure that both the demands and the needs of the customer are given sufficient consideration.
Floyd LJ was willing to establish a causal link between breaching a requirement of ICOBS and the loss suffered through payment of the premium for unwanted PPI. Furthermore, the judgment determines that it is the responsibility of the intermediary to prove that they have complied with the requirements of ICOBS and that they established that the policy sold was suitable.
The case should alert intermediaries to the need to evidence for each policy sold how a decision was reached about suitability. Firms should ensure that sales scripts provide for open questions about the type and level of cover sought. It will be imperative to be able to evidence that the customer made a free choice about whether or not to purchase the product and this choice should be evidenced if firms are to avoid facing responsibility for unwanted policies down the line.
For further information, Saville v. Central Capital Limited  EWCA Civ 337.
Jones v. Environcom Ltd (No 2)  EWCA Civ 1152
The assured’s business involved, amongst other things, recycling refrigerators. It was necessary to remove compressors, and in some cases this could be done only with the use of plasma guns. Those devices posed a risk of metal splatter and sparks which could cause fires. A major fire occurred as the result of the use of a plasma gun, and the insurers avoided the policy on the ground that there had been non-disclosure of the use of plasma guns, of a series of small fires caused by such guns and of a fire shortly before the renewal of the policy. The claim against the insurers was settled for £950,000, and the assured sought to recover the shortfall in its loss of some £6 million from its brokers.
David Steel J dismissed the claim.
- The brokers had been in breach of their duty to warn the assured of its duty of disclosure: it was not enough for the brokers to rely upon its written standard form explanations and warnings.
- The brokers were also in breach of duty by failing to take adequate steps to elicit the information which required to be disclosed, and if it had done so the existence of the fires would have come to light.
- However, the breaches had not caused the assured’s loss:
- had there been disclosure, the loss would not have been insurable at all or, if it was, then it would not have been insurable on terms and premium acceptable to the assured;
- the assured had been in breach of its Waste Management Licence, and that was a material fact which would have been relied upon by the insurers had other grounds for avoidance not existed; and
- had there been renewal, the policy would have demanded that the use of plasma guns ceased, in which case there would have been no loss. The brokers appealed on the sole ground, not raised at trial, that if the brokers owed a duty to ensure that the assured’s practices were such as to render cover unnecessary. The Court of Appeal held that the pleadings would have to be amended to admit this defence, and that it was not appropriate at appeal stage to admit a new defence which was not merely a point of law but raised sensitive issues of mixed fact and law. The appeal was thus rejected.
For further information, Jones v. Environcom Ltd & Anor  EWCA Civ 1152 (13 October 2011)
Harrison v Black Horse Ltd  EWCA Civ 1128
In July 2003 the Harrisons borrowed £46,000 from the Bank, and at the same time took out a single Payment Protection Insurance (PPI) policy costing £11,500. The premium was borrowed by means of a separate loan. In July 2006 the Harrisons borrowed a further £60,000 (to discharge the previous borrowing and the PPI policy, with the balance on household improvements and a holiday), and they took out a further PPI policy at a cost of £10,200. The loan was repayable over 23 years, and the PPI was to last for five years only but the premium was payable co-termimously with the loan repayments.
The 2006 loan was discharged in March 2009 and the PPI policy was cancelled, by which time it had cost the Harrisons £10,529.70. The PPI policy was sold by the Bank as agent of the insurers, Lloyds TSB General Insurance Ltd, and the Bank’s commission was £8,887.49 (87 per cent of the premium). The Bank did not disclose either the fact or amount of this commission to the Harrisons. The Harrisons claimed damages from the Bank.
HHJ Waksman dismissed the claim.
- Under section 150 of the Financial Services and Markets Act 2000 (FSMA) the Bank was under a statutory duty to comply with Insurance Conduct of Business Rules (ICOB), and rule 4.3 required the Bank to take reasonable steps to ensure that any personal recommendation to buy an insurance contract was suitable for the customer’s needs. On the facts the Bank had complied with the requirements of the rule, in that it had sought all relevant information by a detailed questionnaire. Further, there was no breach of rule 2.3 which prohibits the acceptance of an inducement by an agent to the extent that it was likely to conflict with the agent’s duty to the customer: although the commission was an inducement, the salesperson acting for the Bank did not receive any part of the commission and was unaware of its extent – there was no causal link between the commission and the sale.
- Insofar as there was a duty of care owed by the Bank, there was no breach of that duty.
- There was no unfair relationship between the parties within section 140A of the Consumer Credit Act 1974 so that there was no basis for a remedy under section 140B: the Harrisons had not been told that the PPI policy was compulsory, and they had been given an opportunity to consider it.
The Harrisons appealed, arguing that the judge had been wrong in finding that there had not been an unfair relationship. The Court of Appeal dismissed the appeal. The Court of Appeal held that under the ICOB Rules there was no requirement of disclosure of commission to a consumer, and it would be anomalous if the lender was obliged to disclose receipt of a commission in order to escape a finding of unfairness under section 140A of the Act even though he was not obliged to disclose it under the ICOB Rules.
For further information: Harrison & Anor v. Black Horse Ltd  EWCA Civ 1128 (12 October 2011).
Ground Gilbey Ltd v. Jardine Lloyd Thompson UK Ltd  EWHC 124 (Comm)
Jardine Lloyd Thompson UK Ltd (JLT), brokers, placed material damage and financial loss insurance for the claimants, the owners of Camden Market, in March 2005 with an underwriting agent, Fusion Insurance, acting for the insurers. The policy was renewed in 2006 and 2007. The premises were surveyed in 2005 and the survey identified the use of liquefied petroleum gas portable heating appliance (PHAs). The insurers sought their removal but, despite a ban by the claimants, stallholders continued to use them. The renewed policy issued in March 2007 contained a new endorsement (the Survey Condition) which stated that “cover under this Policy is conditional upon” receipt of acceptable survey reports and also “completion to the Underwriters' satisfaction of all requested risk improvements within timescales stipulated by the Underwriters”. The clause concluded by stating that the “Underwriters reserve the right to amend the terms of the cover (which for the avoidance of doubt includes the withdrawal of cover) if either [condition was] not satisfied”. JLT did not specifically draw the claimants’ attention to the Survey Condition.
An email from the insurers sent to JLT on 9 October 2007, stated that “all [PHAs] are to be removed from the premises together with any cylinders or other fuel … Completion: Immediate”. This email was not passed to the claimants by JLT. In the next three months there were various communications between Fusion and JLT in which the question of PHAs was raised by Fusion but not properly answered by JLT.
On 9 February 2008 a major fire occurred at Camden Market, caused by clothes being ignited by a PHA. In the negotiations the presence of PHAs was raised by the insurers. The claim was ultimately settled for £3.825 million, which was about 70 per cent of the estimated loss. The claimants asserted that the true amount of their loss was around £5.6 million and that the shortfall of around £1.7 million was the result of breach of duty by JLT.
Blair J gave judgment for the claimants.
- JLT’s duty was to obtain a policy which was suitable for the claimants’ needs and, following the inception of cover, to communicate to the claimants information which might affect the coverage. On the facts there were three breaches of duty: failure to obtain a policy which allowed the use of PHAs; failure to give any advice regarding the Survey Condition introduced at the time of the 2007; and failure to pass on the email of 9 October 2007.
- The loss suffered by the claimants was caused by JLT: had the email been passed to the claimants, they would not have ignored it; and the settlement reached by the claimants with the insurers was reasonable in that even though there was a strong argument that the insurers had no right to rely upon the Survey Condition to refuse to pay the loss (as opposed to cancelling the policy, which they had not done), the settlement for 70 per cent of the loss was within the range (albeit on the outer edge) of what was reasonable.
- The claimants had shown that, in the absence of coverage issues, the amount recoverable would have been £5.6 million, and there was no deduction to be made for contributory negligence before the fire.
For further information: Ground Gilbey Ltd & Anor v Jardine Lloyd Thompson UK Ltd  EWHC 124 (Comm) (02 February 2011)