The Supreme Court has handed down its judgment in ‘Plevin v Paragon Personal Finance Limited’. A copy of the judgment is available here.

Commission Disclosure

‘Harrison’ has finally been overruled, 4 years after the High Court judgment and 3 years after the CA. The “dismay” of the CA in Plevin and Conlon about this decision was justified [16].

The ICOB rules are “some evidence” of what the “standard of commercial conduct reasonably to be expected of the creditor” is, and “impose a minimum standard of conduct” [17]. However, the UR test does not solely contemplate whether there has been “breach of duty” – there may be unfairness for other reasons [17].

Non-disclosure of commission (here 72%) was unfair because it led to a “sufficiently extreme inequality of knowledge and understanding” [18]. It is difficult to say where the tipping point is re the size of commissions, but 72% was “a long way beyond it” [18]. It was the lender’s responsibility to disclose (despite the PPI being sold by the broker) because it was the only party which knew the size of both commissions and it was reasonable to expect the lender to disclose [19]-[20].

Wide-ranging comments on UR test:

– Creditor-debtor relationships are inherently unequal (and characterised by large differences of financial expertise), but that itself does not make them ‘unfair’ under s140A [10];

– There may be unfairness for a variety of reasons, which do not have to involve a breach of duty [17];

– The UR test differs from hard-edged requirements laid down in advance (such as ICOB); it involves forensic judgment by the Court after the event [17] (and is therefore somewhat unpredictable).

By or On Behalf of

Favourable judgment for lenders on this issue. “By or on behalf of” should be confined to common law agency and deemed agency. The broker was not acting as Paragon’s agent (indeed it was the debtor’s agent) and therefore it was not acting “on behalf of” Paragon for the purposes of the UR test.

This is an important limitation on the breadth of s140A. Restricting “on behalf of” to agency follows the ordinary meaning of the statutory words, and is supported by cross-referencing other CCA provisions [30].

On the CA’s interpretation (that anyone acting ‘on the creditor’s side of the transaction’ was caught), there were no coherent criteria to formulate any test [32]. In any event, the broker was not really on Paragon’s side, as it was the debtor’s agent [33].

“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.” [33]

Once ‘Harrison’ is discarded, s140A can be seen to give extensive protection to the debtor [34].


The ‘Harrison’ Issue

Lenders have been relying on ‘Harrison’ for the past four years (the High Court judgment was handed down in November 2010, followed by the Court of Appeal judgment in October 2011), so this judgment comes rather late in the day on the non-disclosure point.

The SC characterised the ICOB rules as “some evidence” of what the “standard of commercial conduct reasonably to be expected of the creditor” is, and stated that they “impose a minimum standard of conduct” [17]. This is peculiar – while compliance with ICOB should not be decisive of whether there is a UR, the ICOB rules are surely more than “minimum standards”, given that they are so prescriptive in their detail and have statutory force. Should the other parts of the FCA Handbook (e.g. CONC) also be treated as merely imposing “minimum standards”? If so, this would give rise to a great deal of uncertainty for lenders. However, surely it would be wrong to treat one part of the FCA Handbook as having greater force than another part?

Lord Sumption compares the ICOB rules which have been “laid down in advance” with the UR after-the-event broad brush assessment. Again, this foreshadows a lack of predictability for lenders in devising internal procedures.

It is surprising that there is no mention of the FCA Principles in the judgment, or of the fact that the ICOB rules themselves already incorporate concepts of “reasonableness” and “fairness” which must be complied with. Strikingly, there is no mention of ICOB r2.3, which is the other rule specifically dealing with receipt of commission, and which employs the concepts of “reasonableness” and “fairness”. Nor is there any mention of ICOB 5.5.14, which lays down specific rules on price disclosure (and does not require a breakdown of the components of the price).

It is interesting to consider whether it was necessary to remit to the county court – leaving the other issues aside, if non-disclosure by Paragon gave rise to a UR by itself, one would have thought that would be sufficient to justify relief (i.e. unravelling the PPI transaction). The borrower’s only evidence on this was that she would “certainly have questioned” the level of commission had she known about it – presumably she would have acted differently and not purchased the PPI (which the SC implies at [18]).

The ‘By or on Behalf of’ Issue

As for the second issue, the SC’s interpretation of “by or on behalf of” in s140A is clearly correct, when cross-referenced with other CCA provisions. Lenders will be relieved that their responsibility is limited to the acts and omissions of common law agents and deemed agents (especially given the reverse burden of proof in s140B(9)).

However, the judgment calls into question the interpretation of the corresponding obligations imposed on lenders by CONC. CONC 1.2.2 R provides:

“A firm must:
(1) ensure that its employees and agents comply with CONC; and
(2) take reasonable steps to ensure that other persons acting on its behalf comply with CONC.”

It is immediately obvious that the SC’s interpretation of “on behalf of” (in s140A) cannot be transplanted to 1.2.2 R, as subparagraph (2) in CONC is deliberately wider than (1) and therefore must cover persons who are not common law agents.

The SC (at [30]) contemplates a wider meaning of “on behalf of” in some other “special statutory .. context”, namely “in the place of”, or “for the benefit of” or “in the interests of”. It is possible that one of these interpretations should be given to CONC 1.2.2(2) R.

However, it is extremely unclear who the “other persons” covered by 1.2.2 R(2) might be. Would it have included LLP (the broker) in the ‘Plevin’ case? Presumably not, as the SC thought LLP did not even pass the CA’s test of “on behalf of” (“on the creditor’s side of the transaction”). The SC notes that LLP was in fact the borrower’s agent and not ‘on the creditor’s side’ at all – [33]. The SC even says that it is “far from clear” that the provisions of the FISA/FLA voluntary codes which refer to ‘supporting or subordinate intermediaries’ extend to the conduct of an intermediary such as LLP which was “not the agent of the creditor or in some way tied to the creditor” [36].

Therefore one must conclude that CONC 1.2.2 R covers persons who reside somewhere in the territory between being a common law agent and an ordinary introducing broker. Perhaps it might cover a motor dealer who acts as principal and not agent of the borrower (in a Branwhite v Worcester Works situation) While the ambit of s140A may now have been clarified, the scope of CONC is unresolved, which may cause problems where the two regimes overlap. A person (‘X’) who is not the creditor’s agent may be acting on the creditor’s “behalf” for the purposes of CONC 1.2.2(2) R, but not for the purposes of s140A.

Of course, as well as imposing a secondary liability on the creditor for acts or omissions by its common law agents, s140A also imposes a primary duty on the creditor with regards to its own acts or omissions. In Plevin the creditor had no primary duty to assess demands and needs itself, as this role had been specifically assigned by ICOB 1.2.3 to the broker (SC’s judgment [26]). However, where CONC does not assign liability for a particular duty to a person (X) acting on the creditor’s “behalf”, CONC 1.2.2(2) R imposes a primary duty on the creditor to “take reasonable steps to ensure” X’s compliance. Failure to do so would constitute a breach of CONC and doubtless also create an ‘unfair relationship’, as this would be something “done or not done” by the creditor (even though X was not acting on its “behalf” for the purposes of s140A).