The “unfair relationship” concept in respect of credit agreements was introduced into the Consumer Credit Act 1974 (“CCA”) on 6 April 2007. Seven years later, this article reflects on how the provisions of the test have been interpreted and applied by the courts and how the law is likely to develop.
The unfair relationship provisions replaced the former extortionate credit bargain regime. Previously, the court had the power to reopen the credit agreement if it found a credit bargain was such that it required the debtor to make payments which were “grossly exorbitant” or otherwise “grossly contravene ordinary principles of fair dealing”. In practice, the courts were generally slow to intervene and these provisions were therefore rarely invoked and even more rarely produced a successful outcome for the debtor.
The Department for Trade and Industry proposed in its 2003 White Paper that it should be easier for consumers to challenge unfair agreements and that the definition of ‘extortionate’ should be widened to cover unfair practices both at the time of entering the credit agreement as well as any subsequent events that may have led to unfairness. These proposals formed the basis of the unfair relationship provisions in the CCA.
The unfair relationship test is set out in section 140A of the CCA. It permits the court to make an order under section 140B if it determines that the relationship between a creditor and debtor arising out of the agreement (or related agreement) is unfair to the debtor based on one or more of the following:
- Any of the terms of the agreement or of any related agreement;
- the way in which the creditor has exercised or enforced any of his rights under the agreement or any related agreement;
- any other thing done (or not done) by, or on behalf of, the creditor (either before or after making of the agreement or any related agreement).
Contrary to the normal position that ‘he who asserts must prove’, where the debtor alleges that the relationship is unfair, it is for the creditor to prove that it is not (section 140B(9) of the CCA). That said, HHJ Waksman in Carey v HSBC Bank plcheld that a mere assertion of a breach on the part of the creditor under the CCA (section 78 in this case) did not in itself give rise to an unfair relationship under section 140A.
The provisions apply to both regulated and unregulated credit agreements and section 140A gives the court a broad discretion to “have regard to all matters it thinks relevant”.
The discretion applied by the court has proved the unfair relationship regime to have wide reaching effect.
In Patel v Patel the High Court held that the relevant question is whether it is the relationship arising out of the credit agreement which is unfair, not whether the agreement itself was unfair. This case also set the precedent in respect of limitation, when the court looked at what the relevant date is at which the fairness or unfairness has to be determined. It was held that the relevant date is the date on which the debtor-creditor relationship ended. If the relationship is continuing, then the determination should be made at the time of the trial. This gave the court scope to look at the entirety of the debtor-creditor relationship when making a determination of its fairness.
Whereas the extortionate credit bargain regime was seldom used, there has been a raft of case law stemming from the unfair relationship provisions, largely involving mis-selling claims in respect of payment protection insurance (“PPI”). Debtors are quick to make a claim under section 140A alongside allegations of statutory breaches and negligence.
There have been few debtor friendly results, with the majority of decisions favouring the lender. In 2011, the Court of Appeal (“CA”) took a detailed look at the unfair relationship provisions and delivered its lender-friendly judgment in Harrison and Anor v Black Horse Limited. This key case provided much needed clarification on a number of PPI specific points as to what will (or will not) amount to a relationship being deemed unfair under section 140A. Crucially, the CA held that a failure to disclose details of commission did not in itself render a relationship unfair.
More recently, the CA has delivered judgment in the conjoined cases of Conlon v Black Horse Limited and Plevin v Paragon Personal Finance Limited. In Conlon the CA, whilst following the precedent set by Harrison, took the opportunity to express their discomfort with the earlier judgment, stating that to follow it led to a “dispiriting conclusion”. In Plevin, the CA considered the meaning of “on behalf of” in section 140A and opted for a wide interpretation, so that a creditor could be held liable for anyone on the creditor’s side of the transaction (albeit that this power is discretionary and does not necessarily mean that the creditor will “carry the can” for a broker’s conduct). In reaching their decision, the CA relied on the voluntary FISA and FLA codes, leaving trade associations in a difficult position when it comes to developing codes of practice as this outcome has shown that such codes can be taken into account by the courts when determining the fairness, or unfairness, of a relationship.
Permission to appeal to the Supreme Court has been granted for both cases.
The decision in Harrison provided a large degree of comfort to lenders. However, with the burden of proof reversed, claims are still hard to strike out, particularly PPI mis-selling claims which are very fact specific and reliant on witness evidence to prove that the relationship is fair. The CA’s decision in Plevin has caused concern amongst lenders and it appears likely that the Supreme Court will shortly have its opportunity to consider the unfair relationship provisions in detail in these conjoined cases. In the meantime, Harrison remains the leading case and lenders and debtors alike will eagerly await the judgment of the Supreme Court.
Compliance with the regulatory framework, has, to date, assisted creditors in defending unfair relationship claims. The Court in Harrison said that the ‘touchstone’ as to whether a relationship was unfair was “the standard imposed by the regulatory authorities pursuant to their statutory duties” and that they should “not resort to a visceral instinct that the relevant conduct is beyond the Pale.” The Court went on to refer to the Insurance: Conduct of Business Rules (“ICOB”) and whether those rules required disclosure of receipt of commission stating that it would be an “anomalous result if a lender was obliged to disclose receipt of a commission in order to escape a finding of unfairness under section 140A of the Act but not yet obliged to disclose it pursuant to the statutorily imposed regulatory framework under which it operates”.
However, the CA’s analysis did not consider the higher level principles (PRIN) contained in the FCA Handbook, many of which may be considered relevant to whether a relationship was unfair. Future courts may look to PRIN to assess compliance with the ‘spirit’ of the regulatory regime rather than compliance with detailed rules.
The regulatory landscape changed significantly on 1 April this year as regulation of consumer credit was transferred from the OFT to the FCA. Consumer credit businesses are now subject to the provisions of the Handbook and to the new Consumer Credit Sourcebook, known as ‘CONC’. While there is a ‘grace period’ in relation to certain aspects of CONC that does not apply to the many other aspects of the Handbook. In particular, the FCA will expect compliance with PRIN immediately.
The law of unfair relationship is unlikely to emerge unchanged from this regulatory shift. The change may come from the regulator, with an already established reputation for being pro-active, or it may come from the courts dealing with a new set of claimants bringing fresh proceedings for unfair relationships. Then there is the much anticipated decision of Supreme Court in Plevin and Conlon. What is undoubtedly called for is more certainty in this area of law.