Another victory for lenders on PPI

In the case of McCrossan & Gould v Black Horse Ltd the borrowers had taken out a loan for £16,000 from the lender in order to pay existing debts owed to various creditors. The loan was secured against the borrowers' home. The borrowers also took out a loan to pay the one-off premium for the payment protection insurance (PPI) they had decided to purchase.

The borrowers brought proceedings against the lender claiming that they should not be held to their PPI contract. Their first claim was for misrepresentation. The borrowers argued they had been told that unless they took and paid for PPI, they would not be able to obtain their requested loan. Needless to say, what actually happened at the meeting was disputed. However, the court found in favour of the lender.

The borrowers' second claim was for breach of statutory duty relating to the assessment of their "demands and needs". The judge found that the PPI recommended by the lender was suitable and there was no breach of the Insurance Code of Business (ICOB) rules. Finally, the borrowers alleged there was an unfair relationship between them and the lender because the PPI was an expensive and unsatisfactory product. Again, this complaint was wholly rejected by the court.

The loan agreement provided that PPI was an optional extra

The loan agreement was divided into two sections, intended to cover two distinct loans - the principal sum to be borrowed and the PPI. The loan agreement contained a tick-box next to the words "I wish to purchase optional payment protection plan". That part of the loan additional to the principal sum, £16,000, was described on the form as the "payment protection plan".

In the judge's opinion, ticking the box could only indicate a decision to take the additional loan. Equally, the taking of the PPI and the loan to finance it was, at least on the face of the agreement, clearly an optional extra. In cross-examination, Mr McCrossan accepted that he had ticked the box after he had initially left it blank.

Beneath the tick-box, wording specified that the borrowers understood they were purchasing the products on credit and that those terms could be found in the agreement. The agreement also included the borrowers' right to cancel the PPI, which if exercised, would result in reduced payments relating to the sum borrowed to fund the PPI premium.

The payment protection plan was optional, not a condition of taking out credit and could have been cancelled at any time

The right to cancel was also set out in the payment protection plan policy document issued by the lender. Additionally, the policy document expressly stated that the payment protection plan, was optional and not a condition of taking out the credit.

Allegations by the borrower

The borrowers alleged that the lender's employee had told them that PPI was not optional and had to be taken in order to secure the loan. This allegation was made despite the fact that both the loan agreement and protection plan set out express provisions regarding PPI. The issue for the court was whether the lender's employee had misrepresented the true position.

In relation to the "demands and needs questionnaire", the borrowers agreed that the relevant questions had been discussed with them. However, they alleged their answer to one of the questions had been incorrectly recorded. According to Mr McCrossan, he had spoken to the lender on two separate occasions in order to cancel the PPI.

The lender denied any misrepresentation. The relevant employee was no longer employed by the lender and consequently another employee (Mr Starling) gave evidence on behalf of the lender. He took the court through the lender's standard 'script' which employees would be expected (and trained) to follow in similar circumstances.

No misrepresentation by lender - borrowers' evidence rejected

Importantly, before considering whether the alleged misrepresentation took place, the judge reminded himself that "the PPI was (having regard to the standard documentation issued by Black Horse) clearly intended by the creditor to be optional."

The judge found that Mr McCrossan's requests to cancel the PPI were inconsistent with his evidence that the PPI was a condition of obtaining the loan. Similarly, the judge found that Mr McCrossan's admission that he had ticked the relevant box to opt-in to the "optional payment protection plan" was also contradictory.

The judge was very clear on the conflicting versions of what happened at the relevant meeting: "I reject the evidence of the borrowers that they were told that the PPI was mandatory." Further, he found that "Insofar as there is a conflict between the documents produced by Black Horse as explained by Mr Starling, and the evidence of the borrowers, I prefer on each occasion the evidence of Black Horse and Mr Starling." In particular, the judge accepted that the "needs and demands questionnaire" recorded accurately the responses given by the borrowers.

No breach of the ICOB rules - questionnaire is sufficient - no loss to borrowers in any event

The borrowers also alleged that the lender had breached the mandatory provisions of the ICOB rules in two respects. The first related to the suitability of the PPI. The relevant factual issues were whether the lender had taken reasonable steps to ensure that the PPI was suitable for the "demands and needs" of the borrowers. This was dependent on the lender obtaining relevant information and details from the borrowers and explaining to them the duty to disclose relevant information.

The second aspect was the lender's requirement to have regard to the cost of the PPI when considering suitability. The judge referred to the High Court decision in Harrison v Black Horse, which we discussed in our alert at the time where it was established that the lender must have regard to cost where cost is relevant to a borrower's demands and needs.

The judge concluded there had been no breach since cost had not appeared to be relevant to the borrowers' needs. The judge found that the lender's employee had properly dealt with the demands and needs questionnaire. The PPI was suitable for the needs of the borrowers "as the borrowers revealed them" and the questionnaire was sufficient in establishing there had been no breach of the duty to ensure suitability.

Importantly, as with Harrison, the judge commented in this latest case that if he was wrong and on the facts there had been a breach of the ICOB rules, it would not have resulted in any loss to the borrowers. Accordingly, the claim would fail.

No unfair relationship

Finally, the borrowers asserted that the relationship between them and the lender was an "unfair relationship" (pursuant to the Credit Consumer Act 1974) because the PPI was an expensive and unsatisfactory product. The judge referred to the Harrison Court of Appeal judgment mentioned above, which provides guidance on unfair relationships.

In brief, HHJ Bird summarised various overarching criteria for determining whether a relationship is unfair. He confirmed that the "relationship", and not the agreement, between the parties must be deemed to be unfair. Further, although the requisite "unfairness" is unfairness to the borrower, regard should be had to the creditor. Lastly, the court should not resort to a "visceral instinct that the relevant conduct is beyond the Pale."

Applying the principles set out in Harrison, the judge concluded that the lender had no need to discuss the cost of PPI when considering suitability of the product. The judge commented that the "borrowers opted for the PPI, knowing its cost, how the premium was to be funded and the cover it provided. The borrowers chose to insure against the risk of a future inability to pay, and the lender properly established what the demands and needs of the borrowers were". Ultimately, the judge had "no difficulty in concluding that there was no unfair relationship in the present case".

Comment

On paper, this case did not look very promising. The original salesperson was no longer employed by the lender and the cost of the PPI appeared high.

This was a secured loan and the lender had to follow the correct procedure. The borrowers had the 'consideration period' afforded by section 58 of the Consumer Credit Act 1974. It is very difficult for borrowers to credibly assert that they were rushed into the transaction or didn't know what they were signing up for.

This is yet another example of a court preferring the evidence of a compliance analyst from a lender over the first-hand account of borrowers. Even in cases where the original sales person has been called to give evidence, rarely do they remember the particular transaction. More often, they can only testify to the sales process and their training - the same evidence that the lender's compliance analyst gave in this case.

The first appeal judgment of HHJ Waksman QC in Harrison v Black Horse is still very useful for trial judges hearing these sorts of cases. This judgment considers in some detail the provisions of the ICOB rules. The trial judge here applied this in deciding that cost was not relevant to suitability under the ICOB rules.

The insurance here looked expensive costing £13,949.01. The judge reserved his judgment and considered the Court of Appeal judgment in Harrison where Lord Justice Tomlinson said: "In any other context the suggestion that the charging of a high price for a product freely and readily available more cheaply elsewhere in the market is indicative of unfairness in the relationship between seller and buyer would be met with incomprehension". The claimants had been unable to show that cost was relevant.

Lenders facing these claims need to be able to hold their nerve. The Court of Appeal decision in Harrison is not enough for lenders to win these cases. This is because the issue of fact as to whether PPI was mandatory or optional will need to be determined on the facts of each individual case.

The borrowers could have taken their case to the Financial Ombudsman Service (FOS). The FOS would have dealt with it using a different set of criteria which is far more favourable to claimants than a court process. In many ways, these cases are less about obtaining damages for clients and are more about generating profit costs for solicitors instructed by Claims Management Companies.

In Dickinson v Black Horse, on appeal, HHJ Kay QC branded an order for costs of nearly £30,000 on a £2,000 claim "a quite staggering sum". Here the costs schedule served before trial sought a sum in excess of £10,000 but this is usually an understatement as it omits success fees and "after the event" (ATE) insurance premiums. We frequently see costs claims for £30,000, £40,000 or over £50,000 for simple, low value claims.

It is not surprising that the Government has now acted to ban these arrangements in the future. On 24 May 2012, Mr Jonathan Djanogly MP, Under Secretary of State at the Ministry of Justice announced that Part 2 of the Legal Aid, Sentencing and Punishment of Offenders Act 2012 (LASPO) will be brought into force in April 2013. From this date, successful claimants will have to pay any success fee and ATE insurance premium from their damages. It will no longer be possible to recover them from the losing party.

So, if a similar case involving a post-April 2013 Conditional Fee Arrangement was heard and a court found in favour of the claimants, then on the same facts as this case, the claimants would not receive any compensation. This is because it would all be taken to pay their insurers or solicitors. Once LASPO is in force, these speculative court claims should finally start to dry up.