Unfair relationship? Court says no

The long running Harrison case involving payment protection insurance has finally come to an end with the withdrawal of the appeal to the Supreme Court. Fiona Hayles from SGH Martineau LLP looks at what this means for lenders, customers and PPI claims

The withdrawal of the appeal to the Supreme Court in the case of Harrison & Harrison v Black Horse Limited is welcome news for lenders. However, it is unlikely to be so positively received by borrowers, nor the solicitors representing them or the claims management companies that have been keen to encourage parties to bring their claims so that they can profit from the referral to legal advisors.

The question now, therefore, is exactly where does the now unchallenged ruling from the Court of Appeal in the Harrison case leave lenders and borrowers and more generally the future of payment protection insurance (PPI) claims.

Background

The facts of this case are all too familiar. In July 2003 Mr and Mrs Harrison obtained from Black Horse a secured loan of £46,000 along with a single premium PPI policy. In July 2006 they refinanced this loan by taking out a further advance from Black Horse of £60,000, which was repayable over 23 years.

They also obtained further single premium PPI cover, at a cost of £10,200. The PPI was for a period of five years only and was repayable over the 23 year term of the loan. Both the loan and PPI were discharged in March 2009 and by that time, the total cost of the PPI, inclusive of interest was £10,529.70.

The Harrisons subsequently issued a claim seeking redress under the unfair relationship provisions contained within section 140 of the Consumer Credit Act 1974 (“the Act”). Lenders will be aware that these provisions, introduced by the 2005 reforms to the Act, provide the courts with widespread powers to examine the lending relationship – and not just the agreement itself – and to take remedial action including setting aside the entire lending relationship.

Mr and Mrs Harrison argued that an unfair relationship had been created because Black Horse had failed to disclose to them that it would receive a large commission from the insurer for the sale of the PPI. They also argued that Black Horse had breached a number of the Insurance Conduct of Business (ICOB) Rules and that the policy was unsuitable in any event. They also pointed to the length of the PPI and its cost as evidence of unfairness.

The Harrisons lost their claim at first instance County Court level and therefore appealed. In December 2010 the High Court also found against the Harrisons, a decision that they again appealed, this time to the Court of Appeal.

In October 2011 the Court of Appeal handed down judgment again rejecting the Harrisons’ claims. That judgment (as detailed below) was extremely robust and gave clear guidance on the issue of unfair relationships in consumer credit agreements. Somewhat surprisingly the decision was again appealed by the Harrisons, this time to the final forum available to them: the Supreme Court.

The appeal was not expected to be heard by the Supreme Court until mid to late 2013. Lenders will be aware that this resulted in considerable uncertainty as to the correct legal position, with many PPI claims brought on similar grounds to those in Harrison being stayed pending the decision by the Supreme Court.

The uncertainty caused by the appeal to the Supreme Court has now of course been removed, and the Court of Appeal’s decision remains the decisive authority binding on courts of first instance. It is therefore important to reflect on exactly what the Court of Appeal found in 2011, and what this means for lenders and borrowers alike.

The Court of Appeal decision

Much of the focus of the Harrisons’ appeal was on the non-disclosure of the very large commission received by Black Horse in relation to the PPI. Although the Court of Appeal accepted that the level of commission (£8,874 out of the £10,200 premium, some 87 per cent, was retained by Black Horse as commission) was “quite startling” and that it would be viewed by many as “unacceptable conduct” on the part of the lender, the mere size of the undisclosed commission did not render the relationship unfair within the meaning of the Act.

Great emphasis was placed by the court on the fact that under the ICOB rules there was no obligation on Black Horse to disclose the receipt of commission, and that it would be an anomalous decision if the court found that despite the regulatory regime in place, a lender was obliged to disclose receipt of commission in order to escape a finding of unfairness under section 140 of the Act.

In respect of the other various ways in which it was alleged Black Horse had failed to comply with ICOB, the Court of Appeal also found against the Harrisons. One of the key aspects here was the cost of the PPI policy. The Harrisons argued that ICOB rule 4.3.6(2) required an intermediary to assess the suitability of the policy in terms of cost where this is relevant to the customer’s demands and needs, and that Black Horse had not carried out this assessment.

The court ruled that this requirement only applied where the customer expressly indicated that cost was a concern to them. Black Horse, as a single product lender, was under no obligation to consider or advise the Harrisons on the cost of the PPI policy, or carry out a comparative exercise to assess whether cheaper cover was available elsewhere.

Finally, the court also found that in the case of the Harrisons, their belief that the loan was a condition of the borrowing was self-induced and there was no evidence to suggest that this created an unfairness in the relationship, or that Black Horse caused, knew of or exploited this misunderstanding.

The legal position post-Harrison

Given that the appeal to the Supreme Court has been withdrawn, the Court of Appeal’s decision now remains the leading authority for unfair relationship cases. In the PPI arena, this means in practice as follows:

• A failure to disclose the existence of or level of commission will not automatically create an unfair relationship.
• Any claim that the PPI was expensive or available more cheaply elsewhere will not by itself create an unfair relationship. Further, if the seller of the PPI was subject to ICOB or ICOBS (Insurance Conduct of Business Sourcebook) then it was only obliged to advise on the product sold. It was not obliged to provide advice on whether cheaper policies were available elsewhere in the market place.
• If the lender or insurance intermediary has complied with ICOB or ICOBS then the court will not look to impose an unfair relationship. In such circumstances it will be very difficult for a borrower to succeed.
• The unfair relationship test within section 140 of the Act requires the court to look at the lending relationship between the parties as a whole, and not just the terms of the agreement.
• For a claim based on the mis-sale of PPI to succeed, the borrower must be able to show that he has suffered loss as a result of the actions of the lender or intermediary. For example, in Langley v Paragon Personal Finance Limited & Central Capital Limited, although the court found that the intermediary had made a misrepresentation to the borrowers, they had not relied on this and it did not alter the course of action that they would have taken and therefore no loss could be attributed to it.

What happens now?

In the short term the vast number of PPI claims in the court system that have been stayed need to be resolved. The claims can now be reactivated and directions set to take them forward to trial. Indeed, lenders may decide that certain claims which are on “all fours” with the Harrison decision may be suitable for strike out applications.

It may of course be that lenders will now face a raft of applications to amend claims, as the borrowers’ solicitors seek to differentiate their cases from the Harrison ambit. In this respect, lenders can potentially expect to see more individually styled pleadings that attempt to show why cost was a particular concern for the borrower in question; that a misrepresentation was made during the sales process upon which reliance (and loss) was placed; or potentially a return to wider Consumer Credit Act issues such as multiple agreement (noting, for example, that the leading judgment of Heath v Southern Pacific Mortgages Limited in relation to section 18 of the Act does not deal with an agreement containing PPI).

ATE

Of more immediate concern may be the ability of borrowers to meet the costs that lenders have been forced to incur in defending the claims issued against them. The vast majority of PPI claims have been facilitated by way of after the event (ATE) insurance for borrowers so that they are insured in relation to their liability to meet any costs order made against them.

The availability of ATE insurance must now be questionable, and indeed, it seems to be the position that ATE insurance already in place is slowly being withdrawn, or insurers are simply refusing to pay out on claims made under the insurance terms. Without the availability of insurance, then the business model of claims management companies and borrowers’ solicitors loses its drive.

Jackson Costs Reforms

The added sting to the tail in relation to PPI claims may also be the impact of the Jackson Costs Reforms, which are currently due to be implemented in April 2013. Amongst the proposed reforms is the removal of the recoverability of insurance premiums by the successful party against their opponent.

In the consumer credit arena, those premiums are often larger than the damages sought, and premium levels will almost certainly increase as a result of the Harrison decision. As such, borrowers will be faced with the unsavoury decision between making a claim with ATE protection, or paying for ATE cover which may cost more than the damages eventually recovered.

In this respect, the comments of His Honour Judge Gregory in the recent decision of Barnes v Black Horse Limited are also worth noting. Here, the court looked at the level of costs that Mr Barnes’ solicitors had incurred in what was a low value PPI claim for only £1,500. The solicitors’ costs as against this amounted to some £30,000, including the ATE insurance premium and the 100 per cent uplift on fees. The court found that such a level of fees was “outrageous” and questioned for whose benefit the litigation had been brought.

In terms of new claims, unless there can be a clear differential from the Harrison factual matrix then it will be difficult for them to succeed, and lenders may now see a marked decline in court proceedings.

However, as will be noted from the plethora of ‘Reclaim Your PPI’ television adverts, telemarketing activity and influx of “spam” text messages, the claims management companies industry is not yet ready to shut up shop. Instead, lenders may see an increase in the level of complaints made to the Financial Ombudsman Service (FOS). This involves a determination outside of the judicial process utilising a test of “fairness” rather than the strict legal principles of the court based system.

Evidentially, borrowers are more likely to succeed in a claim made via FOS than through the courts, though the legal costs of their advisers will not be recoverable. Instead borrowers will in all likelihood simply pay over a percentage of any refund received as payment.

Comment

For lenders and intermediaries, the withdrawal of the Harrison appeal is excellent news and will allow previously stagnant litigation to now progress with a favourable legal basis on which to proceed.

However, it is worth sounding a word of warning. The industry that has grown up around this area of claims has too much invested to see them accept, without further argument, the status quo. It is therefore likely that borrowers’ solicitors will be waiting to cherry pick a new case that can be used to challenge the Harrison decision and set further new law in this area. Whilst it is very much a case of ‘business as usual’ for PPI claims from now on, lenders should not expect that this arena will remain unchallenged.

Fiona Hayles is a senior associate in the dispute resolution group at SGH Martineau LLP