ON APPEAL FROM THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION, MERCANTILE COURT
His Honour Judge Waksman QC, sitting as a Judge of the High Court
Strand, London, WC2A 2LL
B e f o r e :
LORD JUSTICE PATTEN
LORD JUSTICE TOMLINSON
| Harrison and Another
|- and -
|Black Horse Limited
Nicholas Elliott QC and Ruth Bala (instructed by SCM Solicitors) for the Respondent
Hearing date : 13 July 2011
Crown Copyright ©
Lord Justice Tomlinson :
"2. The basic facts are as follows: in July 2003 the Harrisons took out a loan from the Bank for £46,000 together with a single premium PPI policy which cost £11,500. As was common at the time, that premium was the subject of a separate loan which attracted its own monthly repayments of capital and interest alongside the main loan.
3. Then, by a further loan agreement made with the Bank on 24 July 2006, the Harrisons borrowed a further sum of £60,000 together with a further PPI policy at a cost of £10,200. Of the sum advanced, £54,815 was applied to discharge the previous loan and cancel its associated PPI. The balance of the 2006 loan went on household improvements and a holiday. The 2006 loan was to be repaid over a period of 23 years. The PPI associated with it would last for the first 5 years only, but was repayable by way of monthly instalments of capital and interest co-terminously with the main loan repayments. In the event, the 2006 loan was discharged by further re-financing on 2 March 2009. At the same time the PPI was cancelled. The total cost to the Harrisons of the PPI by the time of cancellation was £10,529.70.
4. The PPI was sold by the Bank to the Harrisons as agent for the actual insurer, Lloyds TSB General Insurance Limited ("Lloyds Insurance"). For the purpose of the Insurance Conduct of Business Rules then (but not now) in force ("ICOB") the Bank was an insurance intermediary acting on an advised basis but only in relation to the single product offered, namely this PPI provided by Lloyds Insurance.
5. The Bank earned a commission from Lloyds Insurance on the sale of the PPI in the sum of £8,887.49. This represents 87% of the premium paid by the Harrisons. It is common ground that the Bank did not disclose either the fact or amount of this commission to the Harrisons."
"Black Horse are part of the Lloyds TSB Group and we can only offer a product from the Lloyds TSB General Insurance Limited for Payment Protection Insurance.
Black Horse will only advise and make recommendations to you after we have assessed your needs for Payment Protection.
- Prompt for Demands and Needs – MUST BE READ IN FULL
I now need to take you through a questionnaire that will help us to recommend the type of cover that you actually need. This means that if the answers you give me indicate that you don't need payment protection, I will tell you this."
"3. Would you like your repayments to be paid for you whilst you are unable to work as a result of an accident or sickness for more than 45 consecutive days?
4. Would you like your repayments to be paid for you, whilst you are unemployed as a result of involuntary redundancy and remain so for more than 60 days?
7. Do you have any type of insurance that would specifically provide cover for the repayment of this agreement?"
"If you have answered "no" to question 7 above, this indicates that your demands and needs are those of a credit customer who wishes and needs to ensure that the repayments of your finance agreement are met now and for the first 5 years of the loan."
"Although the Harrisons said that they thought that the PPI was compulsory if they were to take the loan it was accepted that any such understanding was not caused by anything said or done by the Bank. Indeed, given that the script was followed, they must have been told by Ms Hutcheson that it was optional. The District Judge clearly proceeded on that basis as she was entitled, indeed bound to do. She also found that the Harrisons had taken out several PPI policies before this one, expected there to be one here and paid no particular attention to the information they received."
"In particular [Mr Harrison] accepted that he was not told that the policy was compulsory and could not explain why in the original particulars of claim it was specified that he was told that it was compulsory. He just thought he had to have PPI because he had it with previous loans. However, he also made the point that he was never told that he did not need a PPI but equally he could not recall that he had been told that he did need it. He confirmed that with the other loans that he had taken out, probably all of them, he had taken out PPI."
Mr Harrison confirmed to the District Judge that he was familiar with PPI as he had taken out several policies and had not made any claims under them. The District Judge also found that Mr Harrison did little more than scan read the paperwork. He did not read the Key Facts document at all. He agreed that he was put under no pressure. Mrs Harrison relied upon her husband to read the documents. She scan read them only. The Harrisons were at the time in their early fifties and both were in full-time employment. They had lived in their own home for twenty-four years. Their evidence was that the refinancing in 2009 pursuant to which the loan was paid off involved re-mortgaging their house. As at the date of their Witness Statements, December 2009, Mr Harrison had entered into a debt management arrangement and Mrs Harrison had entered into an individual voluntary arrangement. Not unnaturally both felt that their financial situation had been "made worse as a result of the extra debt incurred in purchasing" the PPI policies. I do not approach the case on the basis that they were sophisticated in financial matters, but it would be both patronising and unwarranted on the evidence to suggest that they would have had any difficulty in understanding the essential features of the entire transaction.
The judgments below
"8. It is common ground that by virtue of s150 of the 2000 Act the Bank was under a statutory duty to comply with the ICOB rules. Rule 4.3.1 sets out an over-arching duty as follows:
"to take reasonable steps to ensure that any . . . personal recommendation to buy a non-investment insurance contract . . . is suitable for the customer's demands and needs at the time the . . . recommendation is made. . ."
9. Rule 4.3.2 then sets out what information about the customer's demands and needs ("DAN") should be obtained by the Bank:
"In assessing the customer's demands and needs, the insurance intermediary must:
(1) seek such information about the customer's circumstances and objectives as might reasonably be expected to be relevant in enabling the insurer and its intermediary to identify the customer's requirements. This must include any facts that would affect the type of insurance recommended, such as any relevant existing insurance;
(2) have regard to any relevant details about the customer that are readily available and accessible to the insurance intermediary, for example, in respect of other contracts of insurance on which the insurance intermediary has provided advice or information . . ."
10. Having established the customer's DAN, Rules 4.3.6 and 4.3.7 set out particular matters which must be taken into account by the Bank when assessing the suitability of the policy:
In assessing whether a non-investment insurance contract is suitable to meet a customer's demands and needs, an insurance intermediary must take into account at least the following matters:
(1) whether the level of cover is sufficient for the risks that the customer wishes to insure;
(2) the cost of the contract, where this is relevant to the customer's demands and needs . . .
(1) where ICOB 4.3.6 R (2) applies an insurance intermediary should take into account the cost of the contract when compared to other non-investment insurance contracts that cover a similar range of demands and needs on which the insurance intermediary can provide advice or information . . .""
"2.3.2 A firm must take reasonable steps to ensure that it . . . does not
(1) . . . accept an inducement . . .
if it is likely to conflict to a material extent with any duty that the firm owes to its customers in connection with an insurance mediation activity . . .
(1) ICOB 2.3.2 R states that an inducement will only be considered unfair if it conflicts to a material extent with any duty that the firm owes to its customers. This means that the circumstances surrounding an inducement may determine whether or not it is unfair. It is a firm's responsibility to determine this.
(1) Inducements that operate at a distance from the sales process may not be unfair if they do not have an effect on the sales person's selling of a particular product . . ."
The judge accepted that there was no likelihood of any material conflict essentially because any commission was not paid or attributed in whole or in part to the actual sales person Ms Hutcheson and there was no evidence that she even knew the extent of the commission. Moreover, the "scripted" approach to what she could say to customers meant that there was little or no prospect of her attempting to mislead them into buying the policy. The size of the commission could make no difference. The judge specifically rejected a submission that irrespective of the system in place the commission was so large that there was always likely to be a conflict between interest and duty.
"The argument really is when taking into account the costs of the policy and the cover it offered, together with the fact that both the first and second defendants were earning significant amounts from the sale of the policy which were not disclosed to claimants, that effectively was unfair to the claimants who were the debtors."
With respect to Judge Platts I do not think that that open-ended approach is quite that required by s.140A of the Act which I set out below. The judge in that case found that the attitude of the borrowers might have been affected if they had known precisely how much commission the broker stood to receive if the PPI was sold. He also noted that "the real problem here was the behaviour of the broker who told the Claimants that they had to buy the PPI to get the loan" and who failed to disclose his interest in the transaction. The broker was however insolvent. The judge concluded:
"Whether the amount of the commission was justified or not or whether it was in accordance with the market at the time, there is bound as a result of it to be an incentive on the broker to sell the product without discharging its proper duties. In those circumstances, given the nature of the loan which was to consolidate existing debt and the amount of the premium of the PPI compared to what it covers, it seems to me that it would have been in the interests of fairness that the first defendant [the lender] should have satisfied itself that the claimants had given fully informed consent to the agreement knowing what it entailed.
I therefore ask myself the question of whether the defendant has satisfied me that the relationship between it and the claimants was fair and for the reasons given I am not persuaded that it has."
The appeal to this court
The legislative history
1) S.140A empowers the court to make an order under s.140B if it "determines that the relationship between the creditor and the debtor arising out of the agreement . . . is unfair to the debtor" in one or more of three identified respects;
2) S.140B specifies the orders which the court can make, and confers a broad remedial discretion;
3) S.140C provides for the interpretation of ss. 140A-140B and s.140D provides guidance on the interrelation of ss. 140A-140C and Part 8 of the Enterprise Act 2002 in these terms:-"The advice and information published by the OFT under s.229 of the Enterprise Act 2002 shall indicate how the OFT expects ss. 140A-140C of this Act to interact with Part 8 of that Act."
"(1) The court may make an order under section 140B in connection with a credit agreement if it determines that the relationship between the creditor and the debtor arising out of the agreement (or the agreement taken with any related agreement) is unfair to the debtor because of one or more of the following –
(a) any of the terms of the agreement or any related agreement;
(b) the way in which the creditor has exercised or enforced any of his rights under the agreement or any related agreement;
(c) any other thing done (or not done) by, or on behalf of, the creditor (either before or after the making of the agreement or any related agreement).
(2) In deciding whether to make a determination under this section the court shall have regard to all matters it thinks relevant (including matters relating to the creditor and matters relating to the debtor)."
"1.9 The guidance does not seek to define what is an unfair relationship but rather to indicate how Part 8 powers might be used in this area. It is for a court to determine whether there is an unfair relationship in an individual case. The courts are not required to have regard to OFT guidance, although they may choose to do so if they consider it to be relevant in the particular case.
. . .
4.44 As noted above, practices can contribute to unfair relationships even if they do not themselves involve any contravention of the law. In considering the unfairness of such practices the court might have regard to whether they are of a kind that has been identified as unfair in the past (whether by a court or in a regulatory context) or which is recognisably unfair according to established tests of fairness.
4.45 Regulatory guidance on what is or is not acceptable business practice may therefore be helpful in identifying lender behaviour falling within s.140A(1)(b) or (c) and which might attract enforcement action under Part 8 in respect of unfair relationships.
. . .
Other relevant matters
. . .
4.59 In particular, we would take into account whether there has been a breach of the rules or principles of the Financial Services Authority (FSA), for example in relation to linked insurance products such as payment protection insurance which may have been sold with the loan."
Background to the ICOB Rules
"Information provided by the insurance intermediary
1. Prior to the conclusion of any initial insurance contract, and, if necessary, upon amendment or renewal thereof, an insurance intermediary shall provide the customer with at least the following information:
(a) his identity and an address;
(b) the register in which he has been included and the means for verifying that he has been registered;
(c) whether he has a holding, direct or indirect, representing more than 10% of the voting rights or of the capital in the given insurance undertaking;
(d) whether a given insurance undertaking or parent undertaking of a given insurance undertaking has a holding, direct or indirect, representing more than 10% of the voting rights or of the capital in the insurance intermediary;
(e) the procedures referred to in Article 10 allowing customers and other interested parties to register complaints about insurance and reinsurance intermediaries and, if appropriate, about the out-of-court complaint and redress procedures referred to in Article 11.
In addition, an insurance intermediary shall inform the customer, concerning the contract that is provided, whether:
(i) he gives advice based on the obligation in paragraph 2 to provide a fair analysis, or
(ii) he is under a contractual obligation to conduct insurance mediation business exclusively with one or more insurance undertakings. In that case, he shall, at the customer's request provide the names of those insurance undertakings, or
(iii) he is not under a contractual obligation to conduct insurance mediation business exclusively with one or more insurance undertakings and does not give advice based on the obligation in paragraph 2 to provide a fair analysis. In that case he shall, at the customer's request provide the names of the insurance undertakings with which he may and does conduct business.
In those cases where information is to be provided solely at the customer's request the customer shall be informed that he has the right to request such information.
2. When the insurance intermediary informs the customer that he gives his advice on the basis of a fair analysis, he is obliged to give that advice on the basis of an analysis of a sufficiently large number of insurance contracts available on the market, to enable him to make a recommendation, in accordance with professional criteria, regarding which insurance contract would be adequate to meet the customer's needs.
3. Prior to the conclusion of any specific contract, the insurance intermediary shall at least specify, in particular on the basis of information provided by the customer, the demands and the needs of that customer as well as the underlying reasons for any advice given to the customer on a given insurance product. These details shall be modulated according to the complexity of the insurance contract being proposed.
. . .
There is no requirement for commission disclosure. Article 12.3 would seem to be the origin of the somewhat inelegant phrase "demands and needs" which finds its way into the ICOB Rules and the Black Horse script to which I have already referred. Perhaps it has lost something in translation.
11.6 We have considered whether we should reinforce this legal requirement by including it in our rules or whether we should require all firms to disclose commission regardless of whether they are acting as an agent of the customer or whether the customer asks for it.
11.7 There are two reasons why we think commission disclosure for private customers may be not be necessary in the insurance market compared to the investment business market:
- First, while commission disclosure is necessary for investments so that the customer knows how much of his premium is being invested, the same is not true for insurance as the cover provided is known upfront and not dependent on the commission
- Second, unlike the investment business market, there are relatively high levels of shopping around for some types of insurance (see Chapter 6) and the transparency of premiums means that it is easier for customers to compare policies and spot poor value products. An exception is where insurance is sold as a secondary purchase with other goods and services. For secondary purchase sales, our proposals that the premium is unbundled from the price of the associated goods and services and for consumer education should help consumers spot poor value policies and shop around if they wish.
11.8 There are a number of drawbacks and costs in requiring firms to disclose commissions in the private customer insurance market:
- Customer confusion. There is a danger that commission disclosure could confuse customers and make it more difficult for them to shop around. For example, if the premium for two policies is the same but commission varies, it is not necessarily the right choice for a customer to choose a policy that pays the lowest commission.
- Risk of information overload. Our consumer research on other financial products shows that we need to prioritise the information that is disclosed to private customers to avoid information overload. In terms of priorities, we think product disclosure and firm status disclosure are of greater importance than commission disclosure.
- Calculation costs for firms. Because there are often several intermediaries involved in distribution chains for insurance products, any requirements would need to be complex to avoid firms "hiding" commission and would impose additional costs on firms. Without detailed rules on what costs make up commissions, the amount disclosed will not be comparable because intermediaries perform different functions for insurers (e.g. some carry out claims handling on behalf of insurers while others do not) and the amount they are paid reflects this. Furthermore, to ensure a level playing field we would need to consider requiring insurers selling directly to disclose a 'commission equivalent' and this would also require detailed rules.
11.9 Given these risks, we are minded not to introduce rules on commission disclosure for transactions involving private customers beyond that already required as described in paragraph 11.5 above. We will, however, keep this under review in the light of our supervision and monitoring work and may decide to consult on a rule requiring commission disclosure in the private customer market at a later date.
Q.25 What are you views on our proposal not to introduce commission disclosure for private customers immediately but to keep this issue under review?"
"8.2 In CP160, we proposed that commission disclosure should not be introduced for private customers for two reasons:
- First, unlike investments, the price of non-investment insurance is transparent. This is not the case for investments, where commission disclosure is necessary for the customer to know how much of his premium is being invested; and
- Second, relatively high levels of shopping around for some types of insurance and the transparency of premiums means that it is easier for customers to compare policies and spot poor value products.
8.3 Nothing in the responses to CP160 caused us to change our view. Although some respondents argued that commission disclosure was needed where insurance was sold with other goods and services to help customers assess value for money, we consider that our product disclosure requirements are likely to be sufficient to mitigate the risks to customers. Specifically, in Chapter 7, we are proposing that the premium for insurance is shown separately from other goods and services and it is made clear to the customer whether or not the insurance is compulsory. If, in the light of supervision work, we think commission disclosure is necessary, we will re-consult at a later date.
8.4 Although we are not proposing rules on commission disclosure for retail customers, intermediaries are still subject to agency law which requires that when they are acting as the customer's agent they must disclose commission if the customer asks. "
"4.21 Our response
We continue to believe that requiring disclosure of commission to retail customers would not add to consumer protection. This is because it will not necessarily help customers make a better choice of product and the disclosure of further information (in addition to that required under ICOB 4 and ICOB 5) could result in information overload."
The arguments on the appeal
"The personal recommendation in (1) must be based on the scope of the service disclosed in accordance with ICOB 4.2.8R(6)."
This was he said relevant because it determined the extent of the reasonable steps required to be taken under Rule 4.3.1 and referred back to the disclosure required under Rule 4.2.8(6)R. Under Rule 4.2.2R an insurance intermediary must provide to the customer the information set out in Rule 4.2.8R in a durable medium at any time before conclusion of a non-investment insurance contract. That information includes:-
(4) Unless the insurance intermediary is an insurer, or a third party processor acting as such on behalf of an insurer, details of any holding, direct or indirect, that an insurance intermediary has that represents more than 10% of the voting rights or of the capital in an insurance undertaking.
(5) Unless the insurance intermediary is an insurer, or a third party processor acting as such on behalf of an insurer, details of any holding, direct or indirect, that an insurance undertaking or parent of an insurance undertaking has, that represents more than 10% of the voting rights or of the capital in the insurance intermediary.
(6) In relation to the non-investment insurance contract provided, whether the insurance intermediary has provided, or will provide, advice or information:
(a) on the basis of a fair analysis of the market; or
(b) from a limited number of insurance undertakings; or
(c) from a single insurance undertaking.
If (b) or (c) applies, the insurance intermediary must also disclose whether it is contractually obliged to conduct insurance mediation activity in this way."
It will be noted that these provisions derive from EU Directive 2002/92/EC on Insurance Mediation.
"We can only offer a product from Lloyds TSB General Insurance Limited for Payment Protection Insurance."
Under the rubric "2 Which service will we provide you with?", the Disclosure Document provides:-
"We will advise and make a recommendation for you after we have assessed your needs for: Payment Protection Plan"
Mr Doctor submits that the Initial Disclosure Document does not state whether Black Horse will provide advice or information on any of the bases set out in Rule 4.2.8(6) but I respectfully disagree. It is true that there is not an exact equivalence between a statement that an intermediary can only offer an insurance product from one source and a statement that an insurance intermediary has provided or will provide advice or information from a single insurance undertaking. Indeed the latter statement, apparently required by the rule where appropriate, is meaningless or at best ambiguous. I agree with Mr Doctor that what must have been intended by the word "from" in Rule 4.2.8(6)(b) and (c) is "in respect of". However, subject to that point, in my view the language of Rule 4.2.8(6) spells out a clear gradation, from a fair analysis of the market through advice or information in respect of a limited number of insurance undertakings to advice or information in respect of a single insurance undertaking. It is inherent in the third case that the intermediary will not offer advice or information as to the nature of insurance products offered by other than a single insurance undertaking. Where sub-paragraph (c) applies the intermediary is additionally to disclose whether it is contractually obliged to conduct insurance mediation in this way. In my judgment the Initial Disclosure Document supplies the information requested in a compliant manner. The language "we can only offer a product from Lloyds etc" is in context an indication that Black Horse is under a contractual restraint, underscored by the statement at paragraph 5 under the rubric "Ownership" that Black Horse is part of the LTSB Group of companies. I agree that looked at in the abstract it does not follow from the fact that an insurance intermediary sells only one product that it will not conduct a fair market analysis to determine that such product is suitable for its customer's needs. But the Initial Disclosure Document is not to be looked at in the abstract, but rather in the context of the Rule, which makes clear that being able to sell only one product and giving advice based upon a fair market analysis are in this context mutually exclusive. Furthermore, in the real world I do not believe that any reasonable person expects that an insurance intermediary who holds himself out as able to sell only one product will proffer advice as to the suitability of that product by reference to and comparison with other products available in the market.
"5.5.8 While respondents claimed to be interested in the price of the PPI, when questioned further it was actually the APR or price of the credit accompanying the PPI that they paid attention to. 44% of the respondents also thought that a loan application was more likely to be approved if they agreed to take out PPI at the same time. It is clear that the credit purchase is the main, if not sole, focus of a consumer when they take out PPI.
. . .
5.8.10 The lack of competition at point of sale means that consumers may make expensive purchases. Evidence for this is:
. . .
- Commission rates – the OFT work found that median average commission rates for single premium policies varied from 50% for first charge mortgages to 66% for those selling unsecured loans and motor finance PPI. Median average commission rates for regular premium PPI policies varied from 35% for first charge mortgages to 70% for retail credit. Such commission rates seem difficult to justify in terms of the effort in selling PPI alongside the associated credit product."
There is no suggestion in this extended discussion of the topic that rates of commission of this order generate a duty of disclosure which, if not discharged, is productive of unfairness in the relationship between lender and borrower. I appreciate that 87% is greater still than 70%, but (a) that is a median average which presupposes that some commissions must be higher still and (b) it is difficult to see that the increment from an already very high figure can affect the conclusion.
Lord Justice Patten
The Master of the Rolls