Section 140A of the Consumer Credit Act 1974, so far as material, provides: '(1) The court may make an order under section 140B in connection with a credit agreement if it determines that the relationship between the creditor and the debtor arising out of the agreement (or the agreement taken with any related agreement) is unfair to the debtor because of one or more of the following— (a) any of the terms of the agreement or of any related agreement; (b) the way in which the creditor has exercised or enforced any of his rights under the agreement or any related agreement; (c) any other thing done (or not done) by, or on behalf of, the creditor (either before or after the making of the agreement or any related agreement).'
The respondent (P) responded to an unsolicited leaflet put through her letter box by an independent credit broker (LLP), offering to arrange refinancing of her existing liabilities. LLP completed an internal form during a phone call with S and then proposed that she should borrow £34,000 from the appellant (Paragon), repayable in instalments over ten years, and take out payment protection insurance (PPI) for five years with Norwich Union. The PPI premium was £5,780. LLP sent P a letter recording their proposal. The borrower information guide, which was enclosed with LLP’s letter, informed P that commission was paid by the lending company, but did not state the amount of that commission or the identity of the recipients. Subsequently, Paragon sent her a copy of the credit agreement, the PPI certificate and four cheques. Of the £5,780 premium, 71.8% was taken in commissions from the premium before it was remitted by Paragon to Norwich Union. P brought proceedings against LLP and Paragon. As against Paragon, P claimed that, in respect of the PPI policy, her relationship with Paragon had been unfair within the meaning of s 140A(1)(c) of the Consumer Credit Act 1974, because of something done or not done by, or on behalf of, the creditor. It was contended that the unfairness arose from: (i) the non-disclosure of the amount of the commissions; and (ii) the failure of any of those involved to assess and advise upon the suitability of the PPI for her needs, given that it covered only half the term of the loan, that she had no dependents, that she already had life insurance and that her terms of employment included generous sickness and redundancy benefits, so far as those matters had represented defaults on the part of LLP. P’s case was that LLP had committed the defaults on behalf of Paragon. The county court and the Court of Appeal, Civil Division, dismissed the claim so far as it was based on non-disclosure of the commission, holding that that non-disclosure and the failure by Paragon to assess the suitability of PPI for P had not made the relationship unfair for the purposes of s 140A of the Act in the light of the decision of Harrison v Black Horse Ltd  All ER (D) 112 (Oct) (Harrison). Harrison held that where there was no breach of the Insurance Conduct of Business Rules (the ICOB rules), either in charging commission or in failing to disclose it, there was no unfair relationship under s 140A of the Act. The Court of Appeal further held that LLP’s failure to conduct a needs assessment of P, in breach of the ICOB rules had been something done ‘by or on behalf of ‘ Paragon, which had made its relationship with P unfair. Paragon appealed.
The issues for consideration were: (i) whether Harrison had been correctly decided and, if not, whether the non-disclosure of the commissions payable out of P’s PPI premium had made her relationship with Paragon unfair; and (ii) whether Paragon had owed a legal duty to assess P’s needs and advise her on the suitability of PPI for her, and whether the acts or omissions of LLP in that regard had been done or not done on behalf of Paragon.
The appeal would be dismissed.
(1) Harrison had been wrongly decided. The view which a court took of the fairness or unfairness of a debtor-creditor relationship might legitimately be influenced by the standard of commercial conduct reasonably to be expected of the creditor. The ICOB rules were some evidence of what that standard was. However, they were not determinative of the question posed by s 140A of the Act. The question whether the debtor-creditor relationship was fair was not the same as the question whether the creditor had complied with the ICOB rules, and the facts which might be relevant to answer it were manifestly different. An altogether wider range of considerations might be relevant to the fairness of the relationship, most of which would not be relevant to the application of the rules. They included the characteristics of the borrower, her sophistication or vulnerability, the facts which she could reasonably be expected to know or assume, the range of choices available to her, and the degree to which the creditor was or should have been aware of those matters. The application of s 140A had to depend on the court’s judgment of all the relevant facts. What had to be unfair, for the purposes of s 140A, was the relationship between the debtor and the creditor. Although the court was concerned with hardship to the debtor, sub-s 140A(2) envisaged that matters relating to the creditor or the debtor might also be relevant. The alleged unfairness had to arise from one of the three categories of cause listed at sub-paras (a) to (c) of the section. The great majority of relationships between commercial lenders and private borrowers were probably characterised by large differences of financial knowledge and expertise. It was an inherently unequal relationship. However, it could not have been Parliament’s intention that the generality of such relationships should be liable to be reopened for that reason alone. A sufficiently extreme inequality of knowledge and understanding was a classic source of unfairness in any relationship between a creditor and a non-commercial debtor. The question which arose under s 140A(1)(c) was not whether there was a legal duty to disclose the commissions. It was whether the unfairness arising from their non-disclosure had been due to something done or not done by the creditor (see , - of the judgment).
The non-disclosure of the commissions payable out of P’s PPI premium had made her relationship with Paragon unfair. Any reasonable person in her position who had been told that more than two thirds of the premium was going to intermediaries, would be bound to question whether the insurance represented value for money, and whether it was a sensible transaction to enter into. The fact that P had been left in ignorance had made the relationship unfair. The unfairness which had arisen from the non-disclosure of the amount of the commissions had been the responsibility of Paragon, which had been the only party that had, necessarily, to have known the size of both commissions. It could have disclosed them to P. Given its significance for her decision, in the interests of fairness, it would have been reasonable to have expected them to do so (see ,  of the judgment).
Harrison v Black Horse Ltd  Lloyd's Rep IR 521 disapproved;
(2) Section 140A of the Act was undoubtedly intended to introduce a broad definition of unfairness. Section 140(1)(c) extended to any case in which human action or inaction produced unfairness. The only limitation on the extreme breadth of sub-para (c) was that the action or inaction in question had to be 'by or on behalf of the creditor'. Putting the matter at its very lowest, those words envisaged a relationship between the creditor and the person whose acts or omissions had made the relationship unfair. In their ordinary and natural meaning, the words 'on behalf of' imported agency. The Act made extensive use of the technique of imputing responsibility to the creditor for the acts or omissions of other parties who were not, or not necessarily, the creditor’s agents. But when it did, it invariably did it in express and clear terms (see - of the judgment).
The ICOB rules had applied in the present transaction only to LLP. They had not applied to Paragon, nor had Paragon owed any other legal duty to assess P's needs and advise her on the suitability of PPI for her. Although the absence of a regulatory duty was not conclusive, in the present context, it was highly relevant. In all the circumstances, Paragon could not reasonably have been expected, in the interests of fairness, to have conducted their own needs assessment and to have given P advice about it. LLP's function, however defectively, in conducting a needs assessment of P had not been something done 'by or on behalf of' Paragon, but had been done for the sole benefit of P. It followed that the Court of Appeal had been wrong to say that the acts or omissions of LLP had been capable of making P’s relationship with Paragon unfair. The Court of Appeal appeared to have regarded LLP as having become closely involved in the transaction on the creditor’s side. That was not correct. LLP had not been the agent of Paragon. It had been the agent of P (see , , ,  of the judgment).
The conclusion that the non-disclosure of the amount of the commissions had made Paragon’s relationship with P unfair was enough to justify the reopening of the transaction under s 140A of the Act. It was, however, the only basis on which the transaction could be reopened. It followed that the appeal had to be dismissed, although for reasons different from those given by the Court of Appeal. The case would be remitted to the county court to decide what, if any, relief under s 140B of the Act should be ordered unless that could be agreed (see  of the judgment).
Gaspet Ltd v Elliss (Inspector of Taxes)  STC 572 applied; R (on the application of Cherwell District Council) v First Secretary of State  All ER (D) 414 (Oct) Rochdale Borough Council v Dixon  PTSR 1336 considered.
Decision of Court of Appeal, Civil Division  All ER (D) 152 (Dec) Affirmed On Other Grounds
Hodge Malek QC, James Strachan QC and John Campbell (instructed by Miller Gardner Solicitors) for P.
Jonathan Crow QC, Ian Wilson and Sandy Phipps (instructed by Irwin Mitchell LLP) for Paragon.
Link to full judgment here.