It seems that every month we hear about more lenders setting aside yet more money to deal with PPI claims. The recent case law of Plevin v Paragon Personal Finance Ltd (2013) and Scotland and Reast v British Credit Trust Ltd (2014) brings no reassurance to lenders that the end is in sight. These cases extend the boundaries of PPI claims by placing responsibility on the lenders for the mis-selling and misrepresentation of PPI by their brokers.
In December the Court of Appeal in Plevin v Paragon Personal Finance Ltd held that the mis-selling of PPI by a broker was something done "on behalf of" the lender within the meaning of the unfair relationship provisions as set out in section 140 of the Consumer Credit Act 1974 (CCA). As such it was therefore a "related agreement" entitling the Court to exercise its wide ranging remedial powers against the lender under section 140B of the CCA.
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In broad terms, the Court of Appeal held that any act or omission by a person who would be viewed by the ordinary reasonable person as having played some part in the bringing about of the credit agreement would be caught by the legislation.
In another poor decision for lenders, the Court of Appeal in Scotland and Reast v British Credit Trust Ltd has now confirmed that a lender was responsible for any misrepresentation by a broker or agent under the unfair relationship provisions.
This entitled the Court to exercise its wide powers under the legislation and in this instance ordered the lender to reimburse the borrower for the PPI premiums paid plus interest, despite the premiums having been paid directly to a third party and despite the lender playing no part in the mis-selling and misrepresentation.
The Court of Appeal was satisfied that any misrepresentations were made by the broker as the lender’s agent under section 56 of the CCA. Furthermore, while the Insurance Conduct of Business Rules (ICOB) did not apply to the lender, they did provide a "benchmark" or "touchstone" for the salesman’s conduct against which that conduct should be measured. Hence, despite the underlying documentation setting out the correct position, the relationship was still found to be unfair.
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By GlobalDataA brief examination of the facts of this case demonstrates how potentially unfair this ruling can be on innocent lenders
The case concerned a visit to the borrowers’ property by two double glazing salesmen. They wrongly told the borrowers that they had to take out a separate PPI policy with a third party in order to secure the loan from the lender, British Credit Trust (BCT). They also mislead them about the terms of the PPI policy (which in fact provided cover for only five years against a 10-year loan term), and failed to establish that the borrowers already had the benefit of an employee sick pay scheme which made it unlikely that any additional PPI cover was necessary nor in their best interests. BCT were never in direct contact with the borrowers, were not involved in any of the negotiations, and the salesmen were not BCT’s agents at common law. Moreover BCT would have lent the money even without any PPI cover being purchased.
Both Plevin and Scotland & Reast represent bad news for lenders and underline the Court of Appeal’s stated intention to apply the widest possible interpretation of the Act’s statutory provisions aimed at providing a statutory framework of protection for consumers.
The Financial Conduct Authority Consumer Credit Sourcebook (CONC) is unequivocally clear in Rule 1.2.2 (2) that firms must "take reasonable steps to ensure that other persons acting on its behalf comply with CONC". Lenders are therefore putting in place checks and balances on third parties who act on their behalf to ensure compliance with CONC (on both their parts).
There’s a risk that provisions put in place by lenders will constitute "reasonable steps." Under the new FCA regime they could still leave lenders liable for mis-selling and misrepresentation by brokers under this recent case law. The ideal would be for the lender’s controls on third parties to be so stringent that they protect the lender from liability under both these Court of Appeal outcomes and the FCA requirements. But realistically to what extent is it possible for the lenders to be all-seeing and all-knowing of third parties’ actions?
The Supreme Court will soon be revisiting the Court of Appeal’s decision in Plevin and while lenders will no doubt hope that they take a more favourable view, which may ease some of the pressure on them, they could still be liable for brokers’ actions under CONC and face enforcement action from the FCA.
Katherine Clark is a solicitor at Ford & Warren
