Unfairness defined

Plevin v Paragon Personal Finance Ltd [2014] UKSC 61 (12 November 2014) is the first occasion when the UK Supreme Court has had the opportunity to consider the unfair relationship provisions that were added to the Consumer Credit Act 1974 in 2006.

The unfair relationship provisions give sheriffs very wide powers to reopen a credit bargain where the consumer alleges that it was unfair. Once the issue of unfairness has been raised, it is for the creditor to show that it is unfounded (s 140B(9)). The provisions are contained in ss 140A-140D of the Act, and replace the original extortionate bargain controls which proved of little use. In 30 years there was no reported case on them in Scotland, and very few in England.

Section 140A provides that a consumer must allege that the unfairness stems from the terms of a credit agreement, the way in which the creditor has enforced it or anything done by or on behalf the creditor. It was the last of these that the consumer was able to demonstrate in Plevin.

Mrs Plevin, a widowed college lecturer, considered borrowing money to pay off some assorted debts and carry out home improvements. About the time that she was thinking of doing this she received a mailshot from L, credit brokers, registered with the Financial Services Authority, the predecessor of the Financial Conduct Authority. She contacted L, and after a fact find conducted over the telephone, L suggested that Mrs Plevin take out a secured loan protected by a payment protection insurance (PPI) policy. A loan of £39,780 was arranged with Paragon Finance Ltd, to whom L had recommended she should apply. £34,000 was to pay off her existing loans and provide funds for home improvements, and the remaining £5,780 was to pay for a PPI policy taken out with Aviva Insurance; 71% of this premium was commission divided between L and Paragon, though they did not tell Mrs Plevin that this was the case. In Mrs Plevin’s circumstances this was a most unsatisfactory deal. She had no dependants, had existing life insurance, and her employer provided generous sickness and redundancy benefits.

On realising what a poor deal she had been persuaded to enter, Mrs Plevin sued both L and Paragon. She settled her claim against L but continued the claim against Paragon. Her case was that as a result of things done by or on behalf of Paragon she had found herself in an unfair relationship. The Court of Appeal held that she should succeed, on the basis that Paragon was responsible for L’s failure properly to advise her. Because it was bound by another Court of Appeal decision, Harrison v Black Horse Ltd [2012] Lloyd's Rep IR 521, the court reluctantly found itself unable to find that Paragon was liable for its own failure to inform Mrs Plevin of the scale of the commissions. Harrison had decided that compliance with the rules of a body such as the FSA precluded a claim for unfairness under s 140A. At that time the FSA imposed no duty on Paragon to disclose any commissions that it obtained. However, the court was able to find in Mrs Plevin’s favour on the basis that what L had done had been done by and on behalf of Paragon.

Where the unfairness lay

On appeal to the Supreme Court, the outcome was the same but for rather different reasons. The court held that Paragon was not responsible for L’s conduct. L was not Paragon's agent but the agent of Mrs Plevin. It could not be said that what L had done was done “on behalf of” Paragon. “On behalf of” in s 140A restricted the things that could be taken into consideration to the acts or omissions of those for whom the creditor was responsible, and these would be activities arising from agency, or deemed agency relationships. An example of the latter would be s 56 of the Consumer Credit Act 1974, which deems the acts of certain persons to be carried out as if they were the agent of the creditor.

However, Lord Sumption, delivering the only reasoned judgment, nevertheless found that Mrs Plevin had been the victim of an unfair relationship. He held that Paragon itself had acted unfairly in not disclosing the commissions. In doing so he overruled Harrison. In Harrison the Court of Appeal had held that a company that had complied with the rules of a regulatory body was thereby protected from a claim of unfairness. At the time of the agreement in this case Paragon was under no obligation to disclose any commissions. Lord Sumption pointed out that this outcome was not defensible, in that the regulatory rules were designed to set general minimum standards across an industry. The concept of unfairness under the Consumer Credit Act 1974 was designed to apply to the facts of a specific case and was a matter for the judgment of a court, though the rules might be some evidence of the standard of commercial conduct to be expected.

He therefore looked at the facts in this case and considered that the failure to disclose the commissions constituted unfairness. He observed that relationships between consumers and lenders were nearly always inherently unequal, but that by itself was not enough to reopen them. It must be shown that the relationship was so one-sided as substantially to limit the debtor's ability to choose. That was the case here, where Mrs Plevin was kept in ignorance of commissions totalling 71%. Although it had no legal duty to disclose this scale of commission, the fact that Paragon was the one party that knew the scale of the commission rendered it unfair not to disclose, as it was obvious that if she had known this Mrs Plevin might have reconsidered her decision.