Many financial institutions have traditionally treated the smaller, yet sophisticated, borrower/investor as a commercial customer rather than a consumer which meant that the provisions of the Consumer Credit Act 1995 did not apply to that customer. However, the High Court has recently cast doubt on this approach and has decided that it is, at least arguable, that a customer who borrows to invest outside his business, profession or trade is in fact a consumer. This is despite the fact that such a customer may have been described at all times as a commercial customer and dealt with by commercial banking personnel.
It is a decision which will have significant implications for financial institutions as it could negatively impact on the enforceability of loan agreements and it is not clear whether it is possible to retrospectively remedy the situation.
It is expected that a significant number of borrowers will now seek to defend applications for summary judgment on a similar basis.
Given the decision, and pending further clarification from the courts, it is important that financial institutions, when lending money to borrower/investors, carefully consider whether the borrowers are in fact consumers and in doing so look at their occupation, the level of their borrowings and the nature of the investment.
Ulster Bank Ireland Limited v Healy – 28 February 2014
The Bank sought summary judgment for more than €600,000 against the defendant, an accountant, in respect of monies borrowed to purchase investment properties. The defendant sought leave to defend the proceedings claiming that he was a consumer for the purposes of the Consumer Credit Act 1995 ("the Act) and that the Bank had not complied with that Act.
The court considered the definition of consumer in the Act and found that for the defendant to be a consumer he must be acting outside his business, trade or profession. It recognised that individuals engage in property and other investments to provide for retirement but stated that this does not necessarily mean that their business, trade or profession is that of a professional investor or property investor and thus prevent them from being a consumer.
The Court had regard to the scale of the borrowings and the ventures engaged in by the defendant. It also considered the fact that the Bank had classified the defendant as a business customer who was served by a commercial manager but did not consider this to be determinative of the issue.
Accordingly, the Court held that it was arguable that the defendant was not "a consumer" and gave him leave to defend the summary proceedings pointing out:-
"This raises the possibility that Ulster Bank may have acted in contravention of the Consumer Credit Act when it extended the loans to Mr Healy by mis-classifying him as a non-consumer and treating him accordingly. As contravention of the Consumer Credit Act can lead in some instances to a loan agreement being unenforceable, or being enforceable on such basis as the Court considers fit to impose, the defence raised by Mr Healy in these proceedings that he is a "consumer" for the purposes of the Consumer Credit Act and has not been treated as such appears significant."