The unfair relationship
The Supreme Court's decision in Plevin v Paragon Personal Finance Limited considered the question of whether non disclosure of a significant amount of commission earned by a lender created an unfair relationship.
The relationship between the borrower and the lender will always be, to some extent, unfair, as has long been recognised and was mentioned again by the Supreme Court in Plevin. The relative financial strength, expertise and experience of the parties means that lender and consumer simply cannot negotiate on a level playing field. The role of the consumer credit regime is to ensure that so far as possible, a balance can be struck between parties, and s.140A of the Consumer Credit Act 1974 (the "CCA") makes statutory provision for when a relationship may be considered unfair, and gives the court the power to make the creditor reduce or discharge a loan under a credit agreement, if it considers it to be unfair.
In this case, the borrower Mrs Plevin received a leaflet from an independent credit broker, LLP Processing (UK) Limited (LLP) who arranged for her to borrow £34,000 from Paragon Personal Finance Limited (Paragon). At their recommendation, she also took out Payment Protection Insurance (PPI) at a premium of £5,780. Of this £5,780, only £1,630 was paid to the insurers, with the remaining £4,150 (being 72%) retained by Paragon and LLP by way of commission.
In 2009, the borrower raised an action, claiming that both the failure to assess and advise on the suitability of the PPI for Mrs Plevin's needs, and the failure of Paragon and LLP to disclose the level of commission was sufficient to make the relationship unfair. The claim against LLP was settled under the Financial Services Compensation Scheme, LLP having collapsed during the financial crisis. But Paragon disputed the claim, noting that the Insurance Conduct of Business Rules (ICOB) did not contain any obligation to disclose levels of commission, and relying on the previous case of Harrison v Black Horse Limited, which had emphasised the importance of ICOB in setting out the duty of lenders.
The Supreme Court judgment
The Supreme Court has now disagreed, overturning Harrison and in doing so making clear its view that ICOB did impose a minimum standard of conduct, but it did not provide the final word on fairness. S.140A of the CCA is much wider in its test of fairness of the borrower-lender relationship, and allows the court to consider not only if there is a breach of duty, but all aspects of the relationship in ascertaining its assessment of what is fair.
On the facts, it was held that Mrs Plevin's ignorance of the level of commission was sufficient to make the relationship unfair. Lord Sumption emphasised her evidence that if she had known about the very high level of the commission going to Paragon and LLP, she would have questioned whether the policy was worthwhile. By keeping Mrs Plevin ignorant, Paragon covered up the element of incentive that they had in her taking out PPI, and so made the relationship unfair.
The case emphasises the importance of s140 of the CCA in all dealings with consumers and the wide ranging powers of the court to consider the bigger picture and all aspects of the relationship not just whether specific rules in the FCA handbook have been met.
Lender's liability for broker actions
There was some relief for lenders, however, in that the Supreme Court reversed the decision of the Court of Appeal which had held that Paragon were responsible for LLP's failure to carry out a needs assessment and advise Mrs Plevin on the suitability of the PPI. S140A(1)(c) allows the court to consider "any other thing done or not done by or on behalf of the creditor" The court took the view that LLP was not acting as Paragon's agent in this regard (and in fact was acting for Mrs Plevin), and as a result Paragon could not be held liable for their failings. Hence the words "by or on behalf of" in the context of s140A is restricted to the concept of agency.
However the judgment didn't require to consider what is now in CONC, which at 1.2.2R states "a firm must (a) ensure that its employees and agents comply with CONC; (b) take reasonable steps to ensure that other persons acting on its behalf comply with CONC." With agency dealt with in (a) it seems unclear exactly who the lender may be responsible for in (b), if a broker such as LLP in the Plevin case isn't included?
Use of one agreement covering regulated and unregulated business
In the case of Plevin, there was no question regarding whether or not the CCA applied - it was indisputably a regulated agreement. However, the recent high court case of Northern Rock Asset Management Plc v (1) Jeffrey Patrick McAdam (2) Ann Hartley looked at the more unusual scenario of when the CCA regime might apply to an agreement which the lender did not consider to be regulated.
Prior to 6 April 2008 (when the loans in question were agreed), the CCA provided that a consumer credit agreement was regulated if the amount of credit did not exceed £25,000. The loans in this case fell within the range of £25,000-30,000, and so were not covered by the statutory regime. But like many lenders throughout this period, Northern Rock Asset Management (NRAM) used a standard suite of loan documentation for all lending, regardless of the sum. This standard documentation contained numerous references to the CCA and the additional rights and remedies to be enjoyed by the borrower under the CCA, and did not make it clear that this regime would not apply to any loan over £25,000.
The question before the court was whether even though the CCA did not normally apply to a loan at this level, it should be held to apply to the credit agreement in this case. The borrower's argument was that both parties had signed the loan documentation complete with references to the CCA regime, and so the regime should be incorporated by the simple operation of contract law, regardless of any statutory limits. This argument was ultimately accepted by the court.
Beyond the requirement to revisit their loan documentation, the financial consequences of the court's decision are significant for NRAM. The CCA requires lenders to provide periodic statements for fixed sum credit, which NRAM had not been doing for the loans before the court, or for the estimated 41,000 loans for similar sums which had also used the standard form loan documentation. Failure to provide statements in line with CCA requirements means that the debtor has no liability to pay interest or any other charges for the period that the lender is in breach and has not provided the necessary statement in the required form. Accordingly, NRAM now faces the prospect of repaying interest and charges for these loans, and has set aside some £261 million to meet future claims.
It should be noted that in mid-January NRAM requested leave to appeal, and so it may be some time before this question is finally resolved. It seems to be increasingly common in the market to produce one standard document that can be used by a consumer and for example a sole trader who is exempt from the CCA because for example the business exemption applies. Hence a regulated and unregulated agreement being contained within 1 document, albeit unlike in the NRAM case, such documents tend to make it clear when the CCA does not apply. Nonetheless, lenders who use standard documentation across their loan books will be watching the progress of any appeal closely.