PPI broker which failed to assess customer's needs acted on behalf of customer, not credit provider, rules Supreme Court

The Court said that the sale could not be treated as something done "by or on behalf of" the credit provider. The ruling said that the relevant statutory code assigned the task of conducting the needs assessment to the broker, and that the broker was not acting as the credit provider's agent but as the agent of the customer, even though its commission was paid via the credit provider.

However, the Supreme Court found that the relationship between the credit provider and the customer was unfair because of the size the commissions payable to both itself and the broker and the fact that these were not disclosed to the customer.

In 2006 Susan Plevin borrowed £34,000 in a personal loan from Paragon Personal Finance Ltd (Paragon) and took out a payment protection insurance (PPI) policy, which was underwritten by Norwich Union. Her dealings in respect of both the loan and the insurance were with the broker   LLP Processing (UK) Ltd (LLP).

In 2009 Plevin sued Paragon and LLP. She claimed "they were in breach of their duties as her fiduciary agents". Plevin received £3,000 to settle her claim against LLP but continued separately to argue that she had been treated unfairly by Paragon.

However, Plevin also claimed Paragon was liable for unfairness which arose from a failure to disclose to her the amount of commissions paid when she took out her PPI policy, a breach for which she also claimed Paragon was liable.

The Supreme Court ruled that under the Consumer Credit Act it was unfair for Plevin not to be told what the commissions payable on her PPI premium would be. Of the £5,780 Plevin paid as a PPI premium, a total of 71.8% of the fee was retained as commission for the sale by Paragon or passed on by the lender to LLP. Lord Sumption said that had Plevin known this, she would have questioned whether the policy she was purchasing represented value for money. This non-disclosure did make the relationship between Plevin and Paragon unfair.

"A sufficiently extreme inequality of knowledge and understanding is a classic source of unfairness in any relationship between a creditor and a non-commercial debtor," Lord Sumption said. "At some point commissions may become so large that the relationship cannot be regarded as fair if the customer is kept in ignorance. At what point is difficult to say, but wherever the tipping point may lie the commissions paid in this case are a long way beyond it."

"Any reasonable person in her position who was 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 she was left in ignorance in my opinion made the relationship unfair," the judge said.

The Supreme Court ruled that Paragon was responsible for the unfairness stemming from the non-disclosure of the commission payments to Plevin. Significantly, this decision has overturned a previous decision of the Court of Appeal in a PPI case between a Mr and Mrs Harrison and lender Black Horse in relation to the same provisions of the Consumer Credit Act.

"Paragon was the only party who must necessarily have known the size of [the commissions received by both Paragon and LLP]," Lord Sumption said. "They could have disclosed them to Plevin. Given its significance for her decision, I consider that in the interests of fairness it would have been reasonable to expect them to do so. Had they done so this particular source of unfairness would have been removed because Plevin would then have been able to make a properly informed judgment about the value of the PPI policy."

Separately the Supreme Court rejected Plevin's claim that Paragon should be liable for the failure by LLP to conduct a needs assessment on the basis that LLP's actions or omissions, as the broker, were undertaken "by or on behalf of" Paragon. Paragon was the credit provider under the Consumer Credit Act, which means that a court can reopen a credit agreement if it considers the relationship between the creditor and debtor was unfair because, for example, of any act or omission by or on behalf of the creditor.

The wording of the Act, however, implies that a broker must be acting as an agent of a creditor to be said to have committed acts or omissions on behalf of the creditor. There was no agency relationship between Paragon and the broker LLP in its sale of PPI to Plevin, the court said.

"LLP was not only not the agent of Paragon. It was the agent of Plevin, as her pleadings correctly assert," Lord Sumption said in the Supreme Court's judgment. "LLP was not 'on the creditor's side' and could not have been consistently with its status as the debtor's agent. LLP's only relationship with Paragon consisted in the facility that they must have arranged with Paragon (and ten other lenders) to introduce its principals to them. No doubt it was in Paragon's interest to do more business, but even in a 'non-technical sense' that does not amount to acting for Paragon or becoming involved on Paragon's side."

"It is, moreover, important not to lose sight of the particular function of LLP which is relevant for present purposes, namely assessing Mrs Plevin needs and advising on the suitability of the product. That was what was said to have been done 'on behalf of' of Paragon ... But it was not even in the loosest sense a function that they performed for or for the benefit of Paragon. It was a function which they performed, however defectively, for the sole benefit of Plevin," the judge said.

Finally, the Court also found that the absence of a regulatory duty under the Insurance Conduct of Business (ICOB) Rules was not conclusive, but it was highly relevant as Paragon could not reasonably be expected to perform a duty which the relevant statutory code assigned to someone else, namely LLP.