Rocky relations

The Court of Appeal ruling last week in Harrison v Black Horse Ltd [2011] CLTC 102 was the first occasion the court gave detailed consideration to the relatively new unfair relationship regime in the Consumer Credit Act 1974 in relation to payment protection insurance. Introduced by sections 19 to 22 of the Consumer Credit Act 2006, new sections 140A to D replace the previous extortionate credit bargain provisions.

PPI claims have been commenced in county courts in very substantial numbers '“ mostly by claims management companies '“ and this decision will give some certainty and guidance as to their determination.

Mr and Mrs Harrison had earlier loans with the lender, Black Horse. In 2009 there was a re-financing and a PPI policy was sold with commission being earned by the lender which represented 87 per cent of the premium which was financed alongside the main loan. They brought a claim for a statutory remedy under section 140B of the 1974 Act on the basis that there was an unfair relationship within section 140A. There was also a claim for breach of statutory duty under the Financial Services & Markets Act 2000, the Insurance Conduct of Business Rules (ICOB) and in negligence.

They lost at first instance before the district judge. The lender failed to produce evidence from the individual employee who sold the PPI policy to the Harrisons, but the judge found that the script was followed and that therefore the employee must have told them that PPI was optional. Further, the Harrisons had taken out several PPI policies before. The High Court upheld the decision ([2011] CTLC 1).

Costly commission

Giving judgment on 12 October, the Court of Appeal found that, while there was concern about the amount of commission, the touchstone for an unfair relationship must be ICOB, which does not require disclosure. If an intermediary was required to disclose commission to avoid an unfair relationship it would be anomalous because there was no obligation to disclose it under ICOB. If things done or not done '“ within section 140A(1)(c) '“ are in compliance with ICOB, it was difficult to see where unfairness can arise. Even if non-disclosure had induced a misrepresentation it was doubtful whether this could give rise to an unfair relationship (the claimant had relied on the decision in Yates v Nemo, Manchester County Court, 14 May 2010, which the Court of Appeal criticised as an 'open-ended approach').

On the question of costs, the court said that, because only one product was offered, there was no need to advise on its suitability by reference to and comparison with other products. There was no basis to distinguish the sale of PPI from other products where there is no obligation on the part of the seller to warn the potential customer that the product is expensive.

Policy considerations

As a result, it seems that there is no point in bringing a claim for an unfair relationship under the 1974 Act if the lender has complied with ICOB. For example, the FSA considered carefully whether there should be disclosure of commission by an intermediary and did not include such a requirement in the rules. It would therefore be contrary to policy for that decision to be side-stepped by saying that the non-disclosure gave rise to an unfair relationship.

Leaving aside any exceptional circumstances and providing that the lender has in all relevant and material respects complied with ICOB, it appears that most PPI claims will fail if based upon unfair relationships, except where the customers' evidence is accepted that they were told that the PPI was compulsory. The problem for claims management companies and their lawyers is that these transactions were usually carried out years ago and courts may be sceptical of claimants saying that they clearly remember what they were told at a meeting especially where this conflicts with procedures, scripts and 'demands and needs' questionnaires.

More generally, most of these claims are brought under conditional fee agreements and the failure of such claims will be a significant blow to CMCs. Insurers will increasingly be reluctant to enter into after-the-event insurance (ATE) policies if claims of this nature become more difficult. Not only will the ATE insurer have to pay the bank's costs, but they will not be paid the premium (it is inconceivable that any significant number of these claimants would pay the premium for the ATE which can be in five figures).

Without ATE protection the bringing of these claims is hazardous at best. There is an alternative. The Financial Ombudsman Service (FOS) deals with PPI claims. There can never be any costs to the consumer who keeps all of any award made. It is difficult to see what benefit there is for the consumer in bringing county court claims which, because of the very substantial costs run up at an early stage in proceedings by the claimant's solicitors, will necessarily make banks much more tenacious in challenging the claims than they would those brought through FOS.

While this is unlikely to spell the end of PPI consumer credit litigation, it is certainly a major set-back for the claims management business.