Unfair Relationships and Consumer Credit Legislation
Unfair relationships have been part of consumer credit legislation for well over a decade. During this time, case law has progressed with a varying judicial approach taken. So, what does unfairness look like now?
First, what is an unfair relationship?
The basis of unfair relationships – the legal framework
The provisions relating to unfair relationships can be found at sections 140A to D of the Consumer Credit Act 1974 (the ‘CCA’). These apply specifically to credit agreements, which are defined in section 140C as “any agreement between an individual (the ‘debtor’) and any other person (the ‘creditor’) by which the creditor provides the debtor with credit of any amount”.
This concept was introduced to replace the prior test of an ‘extortionate credit bargain’, which was widely considered to be of too narrow construction to properly assist in debtor/creditor disputes as it was too difficult for a debtor to show that relevant harm had taken place.
1. Determination of an unfair relationship
Section 140A enables the Court to award the debtor a remedy if the relationship between a creditor and debtor is unfair, based on:
a) the terms of the agreement or any related agreement;
b) the way in which the creditor has exercised or enforced their rights under that or any related agreement; and/or
c) anything else which was done or not done by, or on behalf of the creditor, irrespective of whether this was before or after the making of the agreement.
When determining whether a relationship is unfair, the Court must have regard to the relationship as a whole and to all matters relevant to the creditor and debtor.
2. Remedies
Section 140B(1) sets out the remedies which the Court may grant a debtor in connection with a determination of unfairness, which include:
a) repayment by the creditor of any sum paid by the debtor or surety under the agreement or any related agreement;
b) requiring the creditor to do or cease doing anything connected to the agreement or any related agreement;
c) reduce or discharge any sum payable by the debtor or surety by virtue of the agreement or any related agreement;
d) return any property provided by a surety which was provided as security;
e) set aside any duty imposed on a debtor or surety imposed by the agreement or any related agreement;
f) alter the terms of the agreement or any related agreement; and/or
g) direct accounts to be taken between any persons.
3. Burden of proof
Once a debtor alleges that an unfair relationship exists, it is for the creditor to prove that the relationship was not unfair. That is, the usual burden of proof is reversed.
The legal cases
First out of the blocks – Patel v Patel
Originally, it was thought that the point of unfairness (and hence the date when the cause of action accrues) was the date of the agreement. The limitation period would therefore be six years from the date of the agreement (if the claim is for a sum of money which has already been paid) or 12 years (if the action was based upon a speciality). However, in Patel v Patel the High Court decided otherwise.
The Court decided that the CCA would be flawed if it was only possible to seek an order under s140B for the 12 years following the date of a credit agreement, particularly where the length of time a creditor had waited to enforce the agreement was itself the source of unfairness. The Court’s view was that the provisions of s140 are concerned with whether the relationship between the parties is unfair, not whether the agreement itself is unfair. The Court therefore found that unfairness could be found at any point during the currency of the credit agreement (and indeed, for limitation purposes, up to six years after the agreement had ended).
This is important. It provides recognition that what the Court should be concerned with is the relationship between the creditor and the debtor, not the hard terms of any agreement. As a result, it should be remembered that what might be fair can become unfair, and vice versa. The Court could consider the relationship as a whole rather than it being fixed at a moment in time.
Subsequent case law
Subsequent case law determined further issues in relation to the CCA. For example, in 2009 in McGuffick v Royal Bank of Scotland the Court held that reporting to credit agencies and related activities (such as starting legal proceedings) would not amount to ‘enforcement’ action, and therefore did not make the relationship unfair.
In the same year in Khodari v Tamimi the Court decided that an agreement between two members of the same gambling club in which one loaned money to the other to spend on gambling (repayable on demand with a 10% fee payable) did not constitute an unfair relationship.
The Court found there was no coercion in the relationship and a 10% fee was reasonable on the basis that the agreement was, in effect, an unsecured credit agreement with a party based outside of the jurisdiction.
In Carey v HSBC Bank PLC, the defendant lender had failed to comply with a request by the debtor claimants to provide an executed copy of their credit agreement pursuant to s78(1) of the CCA.
The claimants contended that this breach gave rise to an unfair relationship between the parties as, in the event of default, s78(6) prohibits the creditor from enforcing the agreement. However, the Court decided that such a breach did not, by itself, make the relationship unfair.
Plevin v Paragon – key authority
Prior to Plevin v Paragon Personal Finance Limited, there remained a perception that the unfair relationship provisions were, largely speaking, interpreted in favour of lenders. Decisions had been ‘black letter law’ ones.
In Harrison v Black Horse Limited, the Court had rejected the argument that an undisclosed commission of 87% of the PPI premium gave rise to an unfair relationship. This was on the basis that the lender had not breached the Insurance Conduct of Business (ICOB) rules in failing to disclose the existence or amount of commission. As a result, and because the lender had not breached any regulatory requirements, it would be wrong for it to be penalised, regardless of whether the conduct may not look ‘fair’.
However, judicial treatment of what could amount to an unfair relationship was altered by the Supreme Court’s decision in Plevin.
Mrs Plevin’s claim also related to PPI. She claimed that the non-disclosure of commission payments with regard to her PPI premium made the relationship between her and her lender, Paragon, unfair. The case made its way to the Supreme Court, the highest judicial authority in the country.
The Supreme Court took a different view from that in Harrison. Its decision was that compliance with the ICOB rules was not by itself determinative of fairness. s140A was really concerned with whether the relationship between the debtor and creditor was unfair, not whether either party was in breach of any duty that may have existed.
The Court therefore decided that the relationship between Mrs Plevin and Paragon was unfair due to the “extreme inequality of knowledge and understanding” which was a “classic source of unfairness in any relationship between a creditor and a non-commercial debtor”.
In particular, the Court found that the size of the commission (71.8% of the PPI premium) was the source of the unfairness. Although Mrs Plevin was taken to have known that some commission would have been payable, the level of commission was found to be well over whatever the “tipping point” as to what fairness was judged to be. As a result of this, the relationship was found to be unfair, despite the fact that the lender in that case had not done anything that was by itself wrong by regulatory standards.
This decision was of real importance. It showed that the unfair relationship provisions could be used very widely by the Courts; and would enable judges to make decisions based on what looked to them as being ‘fair’.
Post-Plevin
Since this decision, the Courts have regularly considered the question of what amounts to an unfair relationship.
The year after Plevin, in McMullon v Secure The Bridge Limited the lender provided short term bridging finance to the debtor to reduce her credit card debt. However, applications for further loans were rejected on the basis of previous defaults in relation to loans taken from another lender who had links to the creditor.
The debtor stated that she would not have taken out the bridging loan if she had been aware that the lender would reject her future applications for further loans. However, the Court declined to find there was an unfair relationship. It was found that the debtor was aware of the lender links but decided to pursue the loan with the lender anyway.
In Brookman & Brookman v Welcome Financial Services Limited, the debtors had entered into three regulated credit agreements with the lender, each of which consolidated the previous agreement.
The debtors also took out PPI policies in relation to the first and second credit agreement, which were each paid for under the agreement. The result was that, despite each PPI policy being cancelled upon consolidation, the outstanding proportion of the PPI premium was also consolidated into the new loan, meaning that the debtors continued to pay the premiums despite the policies having been cancelled.
The lender also received 45% of the premium paid as commission, plus an additional sum pursuant to a profit share arrangement with the insurer, neither of which were disclosed to the debtors.
The Court determined that the non-disclosure of the commission payments gave rise to an unfair relationship. The high price of the premiums and the manner in which the agreements interacted to consolidate the outstanding premiums were also factors in this decision. The lender was therefore ordered to repay the sums which exceeded what monthly ‘pay as you go’ PPI would have cost on the basis that the debtors would still have taken out some form of PPI even if the commission had been disclosed to them.
In Nelmes v NRAM PLC, the Mr Nelmes owned a substantial portfolio of buy-to-let properties and instructed a broker to source a loan to refinance his existing mortgages and for the purchase and improvement of other properties to add to his portfolio.
The lender paid a procurement fee to the broker which was not disclosed. The relationship was found to be unfair, on the basis that Mr Nelmes had been deprived of the disinterested advice of the broker as the result of the undisclosed fee which had been paid to the broker.
As the broker was acting as the debtor’s agent, he was entitled to the broker’s undivided loyalty and disinterested advice, which he had been deprived of due to the lender’s actions. Accordingly, Mr Nelmes was entitled to damages from the broker or the lender and, accordingly, the lender was ordered to account to him for all the commission it had paid to the broker with interest from the date of payment.
In Holyoake v Candy the debtor took out three loans to purchase a property to develop, which included an unsecured personal loan of £12 million from one of the lenders. It was a term of the loan that the debtor would demonstrate to the lender that he was worth at least £120 million. Shortly afterwards, the lender alleged that the debtor was in default as a result of overstating his worth.
To attempt to stop threats of litigation, the debtor entered into supplemental agreements to reschedule the loan. However, he then defaulted on the further payments and sold the property to repay the monies owed, which totalled £37 million.
Although the lender was unable to provide an adequate explanation as to the calculation of extension fees and whether such fees were common in the industry, the Court held that they did not render the relationship unfair. In this case, the debtor was found to be a sophisticated user of financial services. Therefore, despite disingenuous conduct by the lender, the unfair relationship provisions of the CCA were found not to have intended to interfere with commercial negotiations between parties.
Finally, in Carney & Others v NM Rothchild & Sons Ltd the debtors took out loans to allow them to make investments aimed at reducing their exposure to the Spanish equivalent of inheritance tax.
The loan agreements all included exclusions as to the suitability of the product and that no advice had been provided. The investments subsequently underperformed and the debtors issued proceedings alleging that an unfair relationship had arisen as a result of misrepresentations made by the lender.
However, the Court found that no unfair relationship could be said to arise: the lender had not given any material advice and had not assumed an advisory role (the debtors had an IFA to advise in that respect). In such circumstances, no unfair relationship could be said to arise.
More recently, in Kerrigan & Others v Elevate Credit International Limited, the issue before the Court arose from the operation of a pay day lender. The pay day lender customers brought a variety of issues, which included whether Elevate had breached requirements to conduct proper credit worthiness assessments in the granting of the pay day loans. The claim was also brought under the unfair relationship provisions. Unlike in Plevin, the Court did decide that there had been breaches of the regulatory requirements, and this was seen as a starting point to consider unfairness. Where the relationship was found to be unfair, then the Court decided that this would in all probability generate some form of relief. However notably, the Court also made clear that where the customer had been dishonest in their credit applications to Elevate, then this may negate a finding of unfairness.
It should be noted that the level of sophistication of a debtor customer will impact how the Court decides to view a claim. Generally speaking, the case law trend has shown that the Courts are less willing to interfere in a relationship where the debtor customer is viewed as being sophisticated. This is no doubt because the Courts view such customers as well able to understand the decisions they are making and be more au fait with the wider commercial context of such. This is in contrast with how more vulnerable, or ‘unsophisticated’ customers are treated. In those cases, the Courts have been far more willing to extend protection from lender practices.
PPI & commissions generally
It is worth noting that the unfair relationship sword has been used for many of the undisclosed commission claims which have been brought to the Courts over the last decade. Whilst this started with PPI (such as Mrs Plevin’s claim), it is clear that the unfair relationship legislation has provided an important basis for consumer actions. The open-ended nature of what is, or is not, an ‘unfair’ relationship has proved important where there isn’t a specific regulatory or legal wrong to be complained of. Undisclosed commission claims have fallen very neatly into this category, and many claims which the Courts have had to deal with are under these provisions. That is important as it shows that there is a way in which the general nature of a relationship, or conduct or a course of dealing, can be judged on its probity.
A good example of this is the emerging case law regarding complaints made about the commissions paid between motor finance lenders and car dealers. Here, the general nature of unfair relationship claims is being utilised to allow the Courts to consider questions of what practices by lenders amount to unfairness within the lending relationship generally.
In Beckett v BMW Financial Services (GB) Limited, the Court was asked to consider whether commission arrangements between a lender and car dealer could make the credit agreement entered into by a customer unfair. Here, BMW had allowed the car dealer discretion in setting the rate of interest paid by the customer under the agreement, with the dealer pocketing the difference in interest as commission. This meant that the customer ended up paying a higher interest rate under the car finance agreement as a result of the way that BMW had decided to remunerate the dealer. The judge found that this practice amounted to an unfair relationship. She explained that the linking of interest to commission meant that the dealer was incentivised to get the customer to pay more in interest (and therefore a higher amount under the credit agreement) so that the dealer could earn more itself. The failure to disclose this meant that the customer was not able to make a properly informed decision about the credit agreement and made the relationship unfair. Using the wide discretion under the unfair relationship provisions, the judge also ordered that the customer should receive payment of the commissions along with the recalculation of the credit agreement so that she also received an amount equivalent to the overpaid monthly instalments which had been inflated because of the commission structure.
Where are we now?
Although the notion of unfair relationships is relatively new, it has resulted in a lot of court decisions.
Whilst the Courts seem to exercise caution regarding relationships which involve more sophisticated debtors, this is not the case more generally. It seems clear that the purpose behind the introduction of this new test has been met, in that it allows the Courts to make a decision based on fairness generally. This is important as it has allowed a far greater scrutiny of the individual relationship in question, under the wider notion of ‘fairness’. It has also meant, however, that there is far less certainty as to what decisions a Court will make. Perhaps this is an acceptable price to pay to allow the right decisions to be made.
