Plevin v Paragon Personal Finance Ltd [2014] UKSC 61

Mrs Plevin obtained a loan and PPI policy via a broker, with 71.8% of the premium taken as undisclosed commission. The Supreme Court held that non-disclosure of the commission amount rendered the debtor-creditor relationship unfair under section 140A of the Consumer Credit Act 1974.

Facts

Mrs Susan Plevin, a fifty-nine-year-old widowed college lecturer, responded to a leaflet from an independent credit broker, LLP Processing (UK) Ltd. LLP arranged for her to borrow £34,000 from Paragon Personal Finance Ltd over ten years, secured on her home, together with a five-year Payment Protection Insurance (PPI) policy from Norwich Union with a single premium of £5,780 added to the loan.

Of the £5,780 premium, 71.8% was taken in commissions: LLP received £1,870 and Paragon retained £2,280, with only £1,630 remitted to Norwich Union. The FISA borrowers’ guide stated that commission was paid by the lending company, but neither the amount nor the identities of the recipients were disclosed to Mrs Plevin. Her only direct contact with Paragon was a “speak with” telephone call concerned with money-laundering compliance, not suitability.

Issues

The court had to decide, under sections 140A-140C of the Consumer Credit Act 1974, whether Mrs Plevin’s relationship with Paragon was unfair because of something “done (or not done) by, or on behalf of, the creditor” (section 140A(1)(c)). Two specific matters were relied upon:

• The non-disclosure of the amount of commissions payable out of the PPI premium.
• The failure of anyone involved to assess and advise upon the suitability of the PPI policy for Mrs Plevin’s needs.

A related question was whether acts or omissions of LLP could be attributed to Paragon as being done “on behalf of” the creditor.

Arguments

For Mrs Plevin

It was submitted that “on behalf of” in section 140A(1)(c) should be given a broad, non-technical meaning, capturing any intermediary paid a commission for introducing or procuring the business. On that basis, LLP’s conduct in failing to assess suitability and disclose commissions could render Paragon’s relationship with Mrs Plevin unfair.

For Paragon

Paragon argued that it owed no duty under the ICOB rules or the general law to disclose commissions or assess suitability, that LLP was not its agent (indeed being Mrs Plevin’s agent), and that following Harrison v Black Horse Ltd, compliance with the ICOB rules was the touchstone of fairness.

Judgment

Approach to section 140A

Lord Sumption (with whom the other Justices agreed) held that section 140A is deliberately framed in wide terms. What must be unfair is the relationship, not any breach of duty. The court departed from Harrison v Black Horse Ltd, holding it wrongly decided. The ICOB rules provide evidence of reasonable commercial conduct but cannot be determinative of the section 140A question, because the two provisions are doing different things: ICOB imposes hard-edged minimum obligations enforceable in damages, whereas section 140A involves a broader, discretionary assessment of fairness taking account of matters such as the debtor’s sophistication or vulnerability and the choices reasonably available.

Non-disclosure of commissions

The Court held that the non-disclosure of the amount of commissions made the relationship unfair. A sufficiently extreme inequality of knowledge and understanding is a classic source of unfairness. While Mrs Plevin must have known some commission was payable, at some point commissions become so large that keeping the customer in ignorance renders the relationship unfair. Commissions of 71.8% were “a long way beyond” that tipping point. Any reasonable person told that more than two-thirds of the premium was going to intermediaries would question the value of the product.

Although Paragon owed no legal duty to disclose the commissions, the unfairness arose from an omission for which Paragon was responsible. The creditor is responsible for an omission if it fails to take steps that (i) it would be reasonable to expect it (or someone acting on its behalf) to take in the interests of fairness, and (ii) would have removed or mitigated the unfairness. Paragon alone knew both commissions and could have disclosed them; in fairness it should have done so.

Failure to assess suitability

Under ICOB 4.3.1 and 4.3.2, the duty to assess suitability lay on the intermediary in contact with the customer – here LLP, not Paragon. The Court held that Paragon could not reasonably have been expected to conduct its own needs assessment when the regulatory scheme expressly assigned that duty to LLP.

Meaning of “on behalf of”

The Court rejected the Court of Appeal’s broad reading. The phrase “by or on behalf of the creditor” imports agency (actual or deemed). The Consumer Credit Act uses express and clear language when imputing responsibility for third-party acts to a creditor (for example, section 56, section 75, and section 140A(3) concerning associates), and those provisions would be pointless if section 140A(1)(c) already covered any conduct beneficial to the creditor. LLP was Mrs Plevin’s agent, not Paragon’s, and was not “on the creditor’s side”. The fact that its commission was routed via Paragon did not alter the identity of its principal.

Voluntary codes

The FLA and FISA codes have no statutory force and were not communicated to Mrs Plevin. They do not make an intermediary such as LLP the agent of the creditor. They are, at most, evidence of reasonable commercial standards. Where the code imposes obligations on “Members and their Intermediaries”, the natural reading is that the obligation falls on whichever of them performs the relevant function.

Outcome

The non-disclosure of the commission amount alone justified reopening the transaction under section 140A. The appeal was dismissed, but for reasons different from those of the Court of Appeal, and the case was remitted to the Manchester County Court to determine relief under section 140B.

Implications

The decision is significant in several respects:

• It overruled Harrison v Black Horse Ltd, decisively separating the question of unfairness under section 140A from compliance with FCA/FSA regulatory rules such as ICOB. Regulatory compliance is evidence of, but not the touchstone for, fairness.
• It confirms that non-disclosure of very high commissions on PPI (and similar products) sold to unsophisticated consumers can render a creditor-debtor relationship unfair, even where there is no legal duty to disclose. The Court did not set a precise threshold, but 71.8% was well beyond it.
• It clarifies that under section 140A(1)(c) the creditor is responsible for its own acts or omissions and those of its (actual or deemed) agents. “On behalf of” imports agency; intermediaries who are the customer’s agent, even if remunerated via the creditor, do not thereby become the creditor’s agent.
• The judgment identifies a general test for creditor responsibility for omissions: whether it would be reasonable in the interests of fairness to expect the creditor (or its agent) to take a step, and whether that step would have removed or mitigated the unfairness.
• The Court expressly left open whether the PPI policy was a “related agreement”, and whether its terms themselves caused unfairness, as those points were not argued.

The case is of practical importance to lenders, insurance intermediaries, and consumers, particularly in the context of the wider PPI mis-selling landscape. It expands the routes by which borrowers may seek to reopen credit transactions and disciplines the packaging and pricing of ancillary products with consumer credit.

Verdict: Appeal dismissed. The non-disclosure of the amount of commissions payable out of the PPI premium made the relationship between Mrs Plevin and Paragon unfair within the meaning of section 140A of the Consumer Credit Act 1974. The case was remitted to the Manchester County Court to determine what, if any, relief should be granted under section 140B.

Source: Plevin v Paragon Personal Finance Ltd [2014] UKSC 61