A transcript of the presentation made by Consumer Credit partner Ian Norman to the Institute of Credit Management Secured Lending Group:
Good morning ladies and gentlemen. It is a pleasure to be here again to talk to you about developments in the world of consumer credit. It has been an extremely busy couple of years since I was last here, as those regulated under the Consumer Credit Act 1974 have in some circumstances had to grapple with the advent of the Consumer Credit Directive. As this does not apply to loans secured on land unless the secured creditor opts into it, I do not propose to speak any more of this. I can already hear the sighs of relief, but please, spare a thought for those of us who have had to face this rather fragmented regime!
That does not mean to say that there has not been plenty going on worthy of discussion at this meeting. In June 2010, when I was last here, I was focussing on the numerous ways in which debtors were seeking to relieve themselves of their debts, using the technicalities of the 1974 Act as their weapon. I am pleased to say that, for the most part, the Courts (from the County Court to the Supreme Court) dealt with such claims in a pragmatic and sensible way.
I thought it would be useful to run through developments in the law, which may well affect lenders in the secured lending market such as yourselves, before we take a look at yet more fundamental regulatory change on the horizon in the coming years.
Interest Rate/APR | Sternlight –v- Barclays Bank Plc 
In July 2010 a number of Claimants issued claims against a number of different banks and financial institutions for declarations that their consumer credit agreements were irredeemably unenforceable. Why? Because they claimed that by applying the various APRs stated in the credit agreements, the interest rates were mis-stated.
As the interest rate is one of the sacred “prescribed terms” under the Consumer Credit Act, if missing or mis-stated, it can in certain circumstances render the agreement irredeemably unenforceable.
The Claimants commissioned a report by a mathematician and computer expert and proceeded to challenge the interest rates by working back from the APR that was set out in each of the agreements. In each case they argued that the interest rate was incorrect pursuant to the calculations carried out by the expert, because the APR is the driver for the interest rate and not vice versa.
What did the Court make of this? The Court rejected the Claimants’ argument on the basis that:
- The APR is not the driver of the interest rate; the monthly interest rate and the annual interest rate are what they are stated to be in the credit agreement;
- The Court referred to the fact that many consumer credit agreements enable the creditor to vary the interest rate during the life of the agreement and therefore the APR is only valid as a comparator at the moment at which the credit agreement is entered into. If the APR cannot act as the driver over the whole of the life of the agreement, it suggests that it should not act as the driver at all; and
- The Act does not dictate how the interest rate is to be expressed.
Accordingly, the challenge failed.
This decided an issue which had great potential to cause significant difficulty to lenders in all walks of lending regulated under the Act.
Phoenix Recoveries (UK) Limited SARL –v- Kotecha (2011)
The next case serves as a reminder to creditors to ensure that they keep enough documentation on file to ensure that they can comply with the requirement to supply a true copy of the credit agreement and in order to comply with their obligations under s.77 or 78 of the Act.
What is the obligation on creditors under ss.77 and/or 78?
The creditor under a regulated agreement for the provision of credit, within twelve working days after receiving a request in writing to that effect from the debtor and payment of a fee of [£1], shall give the debtor a copy of the executed agreement (if any) and of any other document referred to in it, together with a statement signed by or on behalf of the creditor.
If the creditor fails to comply with such a request the credit agreement is unenforceable whilst the default continues.
In Kotecha, the credit agreement was entered into with Beneficial Bank Plc in May 1998. Beneficial Bank then merged with HFC Bank Plc. The debtor made a request under s.78 in February 2007. Shortly after he defaulted on his obligations under the credit agreement and HFC served a default notice on him. Legal proceedings were commenced in February 2008 and later in 2008 HFC assigned the benefit of the credit agreement and the legal proceedings to Phoenix.
The debtor disputed that the terms set out in the document supplied in response to his request were those of the original agreement. He therefore alleged that as a result of this Phoenix was not entitled to enforce the agreement.
What was the result?
The Court of Appeal held the copy agreement stated the incorrect name of the creditor, interest rate and the terms and conditions incorrect or missing. The creditor had therefore failed to comply with the requirements of the Act. Until it was able to do so, the creditor was not entitled to judgment of the outstanding balance.
Creditors and/or assignees should ensure that they retain, or have available to them, sufficient resources to ensure that they are able to provide accurate information to the debtor in order to comply with ss.77/78 of the Act.
Default Notices – American Express –v- Brandon
This case is a reminder that creditors must observe the minimum 14 day period given to the borrower under a default notice served under the Act.
Whilst it sounds evident, a District Judge and a High Court Judge did in fact give judgment for a creditor in the case of American Express Services Europe Limited –v- Brandon (2010) where the 14 days had not technically been observed. This was later reversed by the Court of Appeal.
What is required?
Before a creditor can become entitled to take certain steps to enforce an agreement by reason of a breach by the debtor, it must serve a default notice and allow the debtor not less than 14 clear days to remedy the breach.
So what did the creditor do wrong in this case?
In this case the creditor put in the notice that in order to remedy the breach, payment must be received by the creditor “within fourteen calendar days from the date of [the] Default Notice”
The debtor argued that this did not take account of the fact that the default notice would not be received until the day after. Therefore he had not been given the statutory period he should have to remedy the breach (even though he had no intention of complying with the default notice in any event)!
Initially the District Judge dismissed the breach as being de-minimis. Mr Brandon appealed. The High Court decided that as the creditor had not taken any enforcement action until nearly two years after the default notice was served, there was no prejudice to Mr Brandon and it was not relevant.
The Court of Appeal disagreed. It held that the statutory period of 14 days was there to be observed and any breach of the same could not be regarded as de-minimis. As the creditor is not entitled to issue proceedings for the balance outstanding under an agreement until a valid default notice has been served, there is a risk that the creditor would have to start from scratch
What can the creditor do to avoid this problem?
It is advisable to allow 16 days, being 14 days plus one day for service by first class post, plus the day on which the creditor proposes to take the action. Action would therefore not be taken until the 17th day after the sending of the default notice to the debtor.
Assignment under the Consumer Credit Act 1974 – Patricia Jones –v- Link Financial Limited (2012)
In ordinary contract law, under an assignment or transfer of property, only rights and not duties pass from the assignor (the person transferring the property) to the assignee (the person receiving the property).
In this case, the debtor entered into a credit agreement with GE Money Consumer Lending Limited. The debtor fell into arrears and on 16 January 2009. On 15 June 2009 the debt was assigned to Link. Notice of the assignment was given to the debtor by Link on 6 July 2009.
The debtor argued that Link was not entitled to enforce the credit agreement on the basis that:
- Only a creditor as defined by the Act can enforce a regulated credit agreement; and
- An assignee, such as Link, is not a creditor as defined in the Act as only rights and not duties pass by assignment.
Who is a creditor under the Act?
The Act defines the creditor as:
“the person providing credit under a consumer credit agreement or the person to whom his rights and duties under the agreement have passed by assignment or operation of law…” (s.189(1) of the Act)
The High Court determined that an assignee such as Link becomes the “creditor” as defined under the Act because:
- Statutory duties pass by assignment because it is by reason of the assignment that the assignee (in this case Link) becomes obliged to fulfil them; and
- If the debtor’s case was correct, the consequences would be remarkable and the debt would fall into a “black hole”. (Link would not be able to enforce the agreement because it is not “the creditor” as defined in the Act and GE Money would not be able to enforce the agreement because it is no longer the owner of the same).
This is a positive decision for original creditors and assignees. Link was entitled to enforce the credit agreement, subject to performance of its duties as creditor.
This is a very sensible decision and is backed by the weight academic opinion from some of the most learned commentators on consumer credit law.
The Unfair Relationships provisions of the Act, which were introduced as a result of the Consumer Credit Act 2006, have perhaps seen the most development over the last couple of years. They came into force on 6 April 2007 in respect of all new credit agreements made on or after that date and in respect of all existing agreements after 6 April 2008. They are to be found at sections 140A-C of the Act. They apply to all credit agreements made with ‘individuals’ and therefore apply to agreements regardless of whether they are regulated by the Consumer Credit Act 1974. Therefore, unregulated agreements for credit above the former regulatory threshold of £25,000 are covered. First charge mortgages made under the FSA’s regime are however excluded.
These provisions were criticised at consultation stage, with many in the industry saying that they went too far and gave the Court too much discretion. Section 140A gives the Court the power to make an order under s.140B if the relationship between the debtor and the creditor is unfair to the debtor because of one or more of the following:
- Any of the terms of the agreement or any related agreement;
- The way in which the creditor has exercised or enforced any of this rights under the agreement or any related agreement; and
- 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).
In deciding whether to make a determination under its powers, the court must have regard to all matters it thinks relevant in relation to both the creditor and the debtor.
What can the Court do?
If the Court determines that the relationship between the debtor and the creditor is unfair to the debtor within the meaning of s.140A of the Act, it can:
- Require the creditor to repay any sum paid by the debtor by virtue of the agreement or any related agreement;
- Require the creditor to do, or not to do (or to cease doing) anything in connection with the agreement or any related agreement;
- Reduce or discharge any sum payable by the debtor;
- Direct the return of any property provided as security;
- Otherwise set aside any duty imposed on the debtor by virtue of the agreement or any related agreement;
- Alter the terms of the agreement or any related agreement; and
- Direct accounts to be taken.
It should be noted that once the allegation that the relationship between debtor and creditor is unfair is raised by the debtor, the burden of proof is on the creditor to show that the relationship is, in fact, fair.
What has the court made of this so far?
Debtors have sought to avail themselves of these provisions in order to defend enforcement proceedings and in particular, to bring claims for the miss-selling of Payment Protection Insurance.
Let’s take a look at some of the developments on this front.
Paragon Mortgages Limited –v- McEwan-Peters
The creditor advanced various amounts to the debtor’s companies and to the debtor in partnership through which he carried on a buy-to-let property business. At the peak of his business in 2007, he had acquired 200 properties with a debt to Paragon of approximately £32 million. Many of these loans were made to two companies RMP Properties (Leeds) Ltd and RMP Properties (Headingly) Ltd owned by McEwan-Peters, but some were also made to McEwan-Peters personally.
The case went before the High Court in respect of loans made to McEwan-Peters personally as mortgagor or in respect of guarantees given by him personally. In the course of 2007 the portfolio fell into arrears and in July 2008 McEwan-Peters met with representatives of Paragon. At this meeting he claimed that Paragon had promised him that it would not enforce its legal rights under the mortgages and guarantees unless they were three months or more in arrears. By May 2009, formal demands for repayment had been made on both companies and McEwan-Peters personally.
The Unfair Relationships Claim
During the case, McEwan-Peters raised a number of allegations under the unfair relationships provisions of the Act and the court responded to such allegations, as follows:
- The mere fact that the mortgages were repayable on demand is not unfair; this is a common clause in use throughout the industry;
- McEwan-Peters claimed that a term making the loans repayable on demand was unfair. His difficulty was though that it was a common clause deployed widely in the industry and there had been many earlier transactions involving him on the very same terms; and
- The formal demand was not issued by reason of an improper motive nor was it the result of an arbitrary decision by Paragon;
- Paragon had not acted improperly. The Court accepted Paragon’s general submission that the whole of McEwan-Peters’ corporate and personal buy-to-let business was in terminal trouble. His leverage was excessive and in a falling market disposals of property were being used to fund outgoings. Accordingly, the demand in May 2009 cannot be categorised as remotely unfair; and
- Although an initial demand was issued to McEwan-Peters personally in August 2008, at a time when his personal portfolio was not in arrears, the demand relied on by Paragon was issued in May 2009 when the portfolio was in arrears.
In any event, the RMP Leeds portfolio had been substantially in arrears since February 2008 and in August 2008 following an agreement by McEwan-Peters to transfer funds from his personal portfolio to the company accounts, he had cancelled all bankers orders without notice and had thereafter failed to account to Paragon for rent.
This case has helped to set the bar in unfair relationships claims, in that the Court when faced with allegations may look at industry practice, the motives of a creditor, whether it has acted arbitrarily and whether in all the circumstances the relationship is unfair.
Yates & Lorenzelli –v- Nemo Personal Finance Limited & Anr (2009)
This case involved two principal issues:
- Whether the sale of a PPI policy rendered the relationship between the creditor and the debtor unfair to the debtor within the meaning of s.140A of the Act; and
- Whether the credit agreement was a multiple agreement under the Act and therefore whether the credit to finance the PPI element of the loan was irredeemably unenforceable.
Yates and Lorenzelli wished to consolidate their debts. They needed to borrow £60,500 but instead borrowed nearly £78,000.00, being £60,500 for consolidation, approximately £15,500.00 to fund a single premium PPI policy and £2,000 to pay a broker fee.
The Judge had to grapple with this case on limited evidence, as the second claimant Miss Lorenzelli, as well as the second Defendant broker, did not take part in the proceedings.
The creditor retained £8,800 by way of commission and the broker £4,200. The Defendants had been given a booklet referring to the fact that commission would be paid in respect of the sale of PPI but they were not told the amount of the commission.
What did the Court make of this? The Unfair Relationships claim. The Judge concluded that the relationship was unfair to the debtors because:
- The PPI was disproportionately expensive for the benefits that it provided;
- The fact that the amount of commission being paid to the creditor and the broker was not disclosed to the debtors was significant;
- The amount of commission was important because it created an incentive for the broker to sell the policy and gave rise to a conflict of interest that the creditor could not ignore;
- The debtor’s assessment of the advice given by the broker would have been different had they known about the amount of commission paid; and
- The Claimants had been led to believe that they had to take out the PPI in order to obtain the credit and were not informed of their right to cancel the PPI.
The judge also found that the agreement was unenforceable. Given the amount of the cash loan was unregulated when taken up. The creditor had also treated the PPI loan as unregulated too, even though it was within the then threshold of £25,000. It had not set out this part of the loan in accordance with the Act.
The Judge found that the cash loan and the PPI loan fell into different categories under the Act, that the PPI part was a separate facility and therefore, in theory, the PPI part was irredeemably unenforceable.
We will see that this case has since been distinguished in respect of both the unfair relationships claim and the multiple agreements issue. It may well be decided differently today, as we will discover. It was significant that the debtors were told that they had to take the PPI in order to obtain the loan. This case was therefore decided narrowly on these specific facts, particularly when one looks at developments since.
Harrison –v- Black Horse Limited 
This case had a long journey through the High Court and the Court of Appeal. The Harrisons were also granted leave to appeal to the Supreme Court; however the appeal has now been withdrawn and a settlement agreed.
The Harrisons took out a loan for £60,000 with a PPI for £10,200. The loan was for 23 years but the PPI policy would last only 5 years. The creditor sold the policy as agent for the insurer and under the Insurance Conduct of Business Rules (ICOB). In this case the creditor earned a commission of £8,800 on the sale of PPIand which was undisclosed.
The debtors alleged that the relationship between them and Blackhorse was unfair to them for the following reasons and the courts rejected those allegations as follows:
- Blackhorse had failed to comply with ICOB. Why? The cost of the policy was more than other products available on the market.
This was rejected because:
- Blackhorse had confirmed that it was only able to advise them with regard to one product, therefore there was no duty compare products;
- The cost of the PPI had clearly been set out in writing to the debtors; and
- The debtors had not indicated that cost was a particular issue for them.
Blackhorse had failed to consider the mismatch between the loan and PPI terms. It should have considered this and advised them about it but did not. This claim failed though, because there was no evidence that had Blackhorse not have breached its duty, the debtors would not have taken the PPI.
The debtors argued that the commission paid to Blackhorse as a result of the sale of PPI created a conflict of interest. However, the court distinguished this case from Yates because the salesperson in this case was bound to follow a script, which confirmed categorically that the PPI was optional and that therefore the debtors were not misled as they had been in Yates. There was no evidence in this case that had the debtors known about the payment of commission payable to the creditor; they would not have taken the PPI policy.
The Court referred to the fact that the ICOB rules, after consultation by the FSA, had not included an obligation for firms to disclose the payment of and/or amount of commission to customers. It suggests that where creditors can show that they have complied with relevant rules or guidance issued by regulators there will be no unfairness.
Plevin –v- Paragon Personal Finance Limited & LL Processing (UK) Limited (in Liquidation) 
This is a very recent case, which was decided on 4 October 2012. It is a county court case and so is not binding precedent. The case involved two issues:
- A claim that the relationship between Paragon and the debtor was unfair to the debtor within the meaning of s.140A of the Act as a result of the sale of a single premium PPI; and
- A claim that the PPI element of the loan was unenforceable because the agreement was a multiple agreement and the creditor had failed, in respect of the PPI loan (which was for less than £25,000 and therefore regulated), to set out the terms of the loan in accordance with the Act.
The Unfair Relationships claim more or less followed the Court of Appeal decision in Harrison and so I will not repeat that. Yet more relief for you!
The Court’s analysis of the unenforceability claim, which we saw in the case of Yates earlier is interesting. It is therefore useful to take a quick look at this.
In this case Mrs Plevin took out a loan for £34,000 with Paragon, with an additional £5,780 to fund a single premium PPI policy. As with Yates, the terms of the loan as to interest and repayment applied to the PPI loan also.
In this case the Judge decided that the PPI loan was not unenforceable because:
- The relevant provisions of the Act are anti-avoidance provisions, but there was no evidence that Paragon had sought to avoid the consumer protection afforded to Plevin under the Act;
- The terms for the credit provided in respect of the cash loan and the PPI policy were the same; and
- The PPI loan could not and would not exist in isolation without the main loan. The Judge in Yates had taken this to be a separate facility, but the Judge here held differently. Whilst the principal loan could exist without the PPI loan, the same could not be said for the PPI loan. Once the offer of the PPI loan was accepted by signing the relevant box in the credit agreement, it was subsumed into the main loan and became part of it.
As a result of the above, both the principal loan and the PPI were enforceable.
This has helped to stem the tide of PPI claims, though I do know that very recently the Court of Appeal has given permission to appeal on a case which could challenge Harrison. This case is Holdstock –v- EPF. This case is one to watch out for.
In my view, the decision on multiple agreements in this case is correct, as it follows the analysis of Professor Goode and decision of the Court of Appeal in Southern Pacific Mortgages Limited –v- Heath, accurately.
The Future of Consumer Credit Regulation: A New Frontier
It seems that the regime for the regulation and oversight of consumer credit is about to reach a new frontier.
I am sure that many know that from April 2013 the FSA will become the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA). It is intended that the oversight of consumer credit will move from the Office of Fair Trading (OFT) to the FCA sometime in April 2014.
A few days ago, I was at a conference where the FSA were speaking and heard that this date could however be put back or a transitional period of two years imposed.
Why the need for change?
- The Consumer Credit Act has become somewhat disjointed as a result of numerous recent amendments;
- Concern that having two completely different regulatory regimes under the Consumer Credit Act and the Financial Services and Markets Act 2000 can create weakness;
- The CCA and FSMA regimes can lead to dual regulation e.g. as is currently the case in the advertising of certain types of credit;
- The rigidity of the Act can inhibit the development of new innovative products and services within the consumer credit industry;
- The regulatory regime under CCA needs to give stronger powers for oversight to any regulator; and
- The need for more forward looking regulatory intervention.
How? It is anticipated that as part of any new regulatory regime, the new FCA will have greater powers to include:
- The power to detect and deal with consumer detriment before it happens;
- Power to intervene – for example, to ban potentially harmful products for 12 months without consultation;
- Power to provide rules and guidance at the point of sale; and
- Power to inspect firms and for in-depth supervision of firms which are considered to cause the greatest risks to the FCA’s objectives.
“We will retain the features of the FSA that work and will build on the knowledge and experience of the OFT” Will Amos, FSA
What will it look like?
- Good question – we are still in the dark as to how it will work, to include how credit brokers and lenders will be licensed;
- Certain aspects of the CCA are here to stay; and
- Even if the Act is repealed, the provisions of the CCD will have to remain in order to comply with European Law.
The latest suggestions I have heard are that:
- Consumer credit and banking will not be treated in the same way;
- Capital requirements will not be imposed on all firms; and
- The CCA will only be repealed if it can be replicated in a rule book which is proportionate for the different segments of the consumer credit market.
- A High level principles based approach may lack clarity and be unclear as to what is required of firms for the protection of consumers, whereas the prescriptive nature of an Act such as the CCA provides such certainty;
- This could lead to a fall in the current level of protection for consumers;
- The cost of compliance could put some smaller firms out of business or result in a higher cost to the consumer; and
- Could lead to a fall in the availability of credit.
The current timetable for change:
- Consultation by the Government in January 2013;
- Consultation by the FCA in autumn 2013;
- Detailed rule book to be published in March 2014?
- Proposed transition period to commence in April 2014?
- New regime to be fully implemented and in force from 2016.
Thank you very much for listening Ladies and Gentlemen.