Keywords: consumer contract, PPI, non-disclosure
In the UK Supreme Court's judgment of Plevin v. Paragon Personal Finance Limited UKSC 61, it was held that the failure to disclose a commission of 71.8 percent made the consumer contract unfair. This case may have wider implications for disclosure of commission in Hong Kong.
In the UK, Payment Protection Insurance (PPI) is commonly sold as part of the loan. PPI covers loan repayments if an insured event occurs (such as sickness or injury).
The commissions for PPI are high, ranging from 50-80 percent. For Mrs. Pelvin, she purchased PPI for her loan with Paragon Person Finance Ltd (Paragon). Both the PPI and the loan were arranged through credit broker, LLP Processing (UK) Ltd (LLP), which subsequently went into insolvency. The commission for the PPI was 71.8 percent of the premium (£5,780), with LLP taking £1,870 and Paragon taking £2,280.
Section 140A(1)(c) of the Consumer Credit Act 1974 of UK allowed the Court to re-open a credit agreement which is unfair because of anything done or not done by, or on behalf of, the creditor. Mrs. Pelvin complained that the relationship with Paragon was unfair because (i) the non-disclosure of the commission and (ii) the failure to advise on the suitability of the PPI for her needs.
The Supreme Court found that the failure to disclose commission and the identity of the recipients made Mrs. Pelvin's relationship with Paragon unfair. While there was no duty under the applicable regulation (Insurance Conduct of Business Rules) to disclose commission and Paragon owed no duty to Mrs. Pelvin, the Supreme Court considered that Section 140A(1)(c) was not about breach of duty, but about whether the consumer agreement was rendered unfair due to Paragon's acts or omissions.
The Supreme Court found that unfairness could arise when there was extreme inequality of knowledge. This was a matter of degree. While Mrs. Pelvin must have known some commission was payable, if commissions become so large, it would be unfair to keep the consumer ignorant. If the consumer knew more than two thirds of the premiums would be paid as commission, they may question whether the insurance would be value for money.
On the second issue about whether LLP's failure to assess the suitability of the LLP for Mrs. Pelvin could be considered something by or on behalf of Paragon, the Supreme Court considered that given LLP was not the agent of Paragon, its actions or failures were not by or on behalf of Paragon.
The appeal was dismissed with the result that the case was remitted back to the Manchester County Court to decide what relief should be ordered under the Consumer Credit Act 1974.
Implications for Hong Kong
In Hong Kong, insurance brokers are currently self regulated and belong to one of two broker associations, namely the Professional Insurance Brokers Association and the Hong Kong Confederation of Insurers. Both associations have recently introduced requirements to inform clients that the brokers are receiving commission. However, the obligation is only to inform clients that the brokers will be remunerated. There is no requirement to inform the amount of remuneration unless the client asks.
As a result of the case Hobbins v. Royal Skandia Life Assurance and Clearwater International HCCL No. 15 of 2010, brokers are required to disclose commission above normal market levels, otherwise this could be considered as illegal secret profits.
Hong Kong does not have an equivalent legislation as the UK Consumer Credit Act. Section 140A(1)(c) of the Consumer Credit Act and Plevin v. Paragon deals with transparency and providing sufficient information to the consumer. Paragon was not the broker, but it received high levels of commission and its failure to disclose made the relationship unfair. The purpose of the no secret profit rule in the Hong Kong case of Hobbins v. Royal Skandia is also to provide transparency. If so, there is a potential argument that a high level of commission could be considered above market and will need to be disclosed to the client. The contrary argument would be whether this would be above market levels if everyone in the market is receiving commission of this level for this particular product.
Insurance agents in Hong Kong are currently regulated by the Hong Kong Federation of Insurers. There are no obligations under applicable regulations for insurance agents to disclose commissions. The Hobbins case is also about brokers, not insurance agents. However, Plevin v. Paragon is about intermediaries generally (as Paragon was not a broker). While there are currently no direct obligations on agents, the trend in both the regulatory framework and case law is towards customer transparency and fairness.
Given the current trends and particular the upcoming Independent Insurance Authority, which will have direct powers to regulate and supervise brokers and insurance agents, we expect that the focus will be treating customers fairly and transparency in dealings with customers (particularly consumers).
Originally published 20 May 2015
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