Fairness in consumer finance
I’m not sure that all the implications of Lord Sumption’s very recent judgement in Plevin v Paragon Personal Finance Limited  UKSC 61 have fully sunk in. This is a PPI case concerning nondisclosure of high levels of commission to intermediaries. I shan’t discuss the details of the case insofar as they are relevant to other PPI claims, nor why the specific facts led to the Supreme Court overruling lower judgments about the applicability of certain regulations in the FCA’s insurance conduct of business rules: anyone looking at a PPI case will want to read the decision directly.
But Lord Sumption ingeniously found another way to get to the answer required: even though these ICOB rules were technically not breached, he found that the provisions in s.140A Consumer Credit Act 1974 (as amended) allow the court to reopen a credit agreement under very broad circumstances where there is an unfair relationship between the creditor and debtor. He found (at paragraph 18) that there was such unfairness where there had been a failure to disclose the levels of commission payable:
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. It is a question of degree. Mrs Plevin must be taken to have known that some commission would be payable to intermediaries out of the premium before it reached the insurer. The fact was stated in the FISA borrowers’ guide and, given that she was not paying LLP for their services, there was no other way that they could have been remunerated. But 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.
This I think is a very powerful judgement relevant in much wider circumstances. It provides a general yardstick (albeit uncalibrated) for assessing unfairness. For although the circumstances where s.140A is applicable are limited, there are other areas covered by legislation such as the Unfair Terms in Consumer Contracts regulations where this analysis may apply. (The thought crossed my mind that Sumption’s own line in OFT v. Abbey might be affected, but sadly it is not, for the argument that succeeded in that case was that there was a statutory kick-out for the price of the contract, which was exempt from a fairness requirement under UTCC regulations.)
But there are a large number of consumer finance complaints considered by the Financial Ombudsman Service, many of which involve information asymmetries. They are to be determined by the Ombudsman “by reference to what is, in his opinion, fair and reasonable in all the circumstances of the case” – a power which allows him to apply principles of fairness to, for example, investment products.
These complaints often fall into this simple mould: financial institution offers a product which the consumer buys without knowing of some feature which, if known, would have caused him not to buy or retain the product. When it comes to, say, deposit interest rates being silently dropped after the product launch, the FOS treat that as the legitimate exercise of commercial judgment, and won’t uphold complaints (at least not mine) even where the bank breached its advertising obligations unless the consumer can show he relied on the false advertisement.
Sumption’s fairness principle turns this around, and makes it clear that a financial institution should not leave a consumer “in ignorance” of a feature or change to a product which would affect the decision of a reasonable person.
The principle is eminently reasonable, and has the merit of agreeing with the common sense analysis of such a situation. I shall be interested to see if the FOS start to adopt it. In considering what is fair and reasonable in all the circumstances of the case they are obliged to take into account relevant law.