When can the courts reopen a credit agreement because it was “unfair”?
On 12 November 2014, the UK Supreme Court issued judgment in the matter of Plevin v Paragon Personal Finance Limited  UKSC 61. This judgment clarifies the role of sections 140A-D of the Consumer Credit Act 1974 and the potentially very wide powers they gift to the courts to look again at a credit agreement, when the borrower alleges an aspect of it was “unfair”.
Although the unfairness provisions have their home in the Consumer Credit Act 1974, their reach is much wider and can, in certain circumstances, also affect business lends provided to individuals.
Ms Plevin took out a personal loan, together with payment protection insurance. 71.8% of the insurance premium was a commission, payable to the lender and its intermediary. The level of commission was not disclosed to Ms Plevin. She argued that the non-disclosure of the commission, together with the lender’s failure to assess her suitability for PPI, made the credit agreement “unfair”. She argued that if the intermediary committed these omissions, it was done “on behalf of” the lender.
Lord Sumption, delivering the unanimous decision of the Supreme Court, concluded that the non-disclosure of the commission was “unfair enough” to justify the re-opening of the credit relationship.
In doing so, the Court has ruled that the previous leading authority of Harrison v Black Horse Ltd  Lloyd’s Rep IR 521 was wrong. Harrison had suggested that lenders’ compliance with relevant regulatory rules (in this case, ICOBs) could be determinative in assessing whether there was any “unfairness”.
The Court has ruled that while compliance with underlying regulation goes some way to assisting a lender facing an unfairness claim, it will not necessarily be conclusive. These are different questions, which can yield different answers. Wider considerations can result in an unfairness finding, including the characteristics of the borrower, their sophistication (or vulnerability), knowledge, market choice and creditor awareness of these factors. Pure compliance to the letter of the regulatory rules will no longer be the end of the story for lenders seeking to discharge the burden facing them on unfairness claims. The Court points out that there is no precise or universal test for unfairness under sections 140A-D - this assessment will depend on the court’s discretion and judgement, having regard to all of the relevant facts.
In better news for lenders, the Court also clarified that the statutory language “by or on behalf of” can only capture liability of third parties who have an agency (or deemed agency relationship) with the lender. In comfort to lenders, they now know that they will only have to pick up this third party liability when an agency relationship is in play. Although there will be much to play for in the determination of when agency is engaged, this is a not insignificant win for lenders, and restricts their exposure somewhat, even given the potential expansion in reliance on these provisions by borrowers in future.
While Ms Plevin’s case now returns to the County Court to decide what relief should be ordered to remedy the unfairness, the decision itself leaves financial institutions with the first clear and authoritative position on the reach of sections 140A-D of the 1974 Act. Although this decision was heard in the context of a PPI dispute, its application is potentially much wider.
The sweeping changes made to the 1974 Act in 2006 on unfairness have perhaps, until now, been a bit of a sleeping lion. A public decision at this level may encourage the use of sections 140A-D in more banking disputes - already an emerging trend. The provisions’ broad definition of unfairness, and the robust remedies available to successful claimants, may now mean that lenders start to hear more of the lion’s roar.
A copy of the UK Supreme Court decision can be viewed here.