Borrowers 0 – Lenders 3

There have been three judgments dealing with Consumer Credit Act test cases that lenders need to be aware of. Dealing with allegations of payment protection insurance premium mis-selling, mis-statement of APR rates and breach of the Insurance Conduct of Buisness Rules, the judgments are all in favour of the lenders.

These judgments are the latest in a line of robust judgments which should help curtail a number of claims being brought by borrowers, often encouraged by claims management companies. Wragge & Co's experts review and comment upon the cases.

Black Horse Ltd v Speak - PPI policy not a condition of the loan

Sternlight v Barclays Bank Plc - no mis-statement of interest rates 

Harrison v Black Horse Ltd - compliance with the Insurance Conduct of Business Rules ensures relationship with borrower is not unfair.

PPI policy not a condition of the loan

The High Court decision in Black Horse Ltd v Speak will benefit lenders facing payment protection insurance (PPI) premium mis-selling claims and, as a High Court decision, will bind the County Court judges who hear most of these claims.

Facts

Pursuant to the terms of a loan agreement dated October 2006, the lender advanced the sum of £7,012.39 for the benefit of the borrowers. The loan comprised a cash advance of £5,000 and a payment protection insurance (PPI) premium of £2,012.39. The lender issued proceedings for non-payment in March 2009 and the borrowers brought a defence and counterclaim that the loan was unenforceable on the basis that:

1. PPI was a requirement of the loan
2. if PPI was not in fact a requirement of the loan, the lender misrepresented that it was
3. the lender had breached Insurance Conduct of Business rules (ICOB)
4. the lender's conduct in relation to the sale of the PPI was such as to render the agreement an unfair relationship.

Decision

The case came before His Honour Judge Waksman QC sitting in the Manchester District Registry of the High Court. The matter was heard as a test case, representative of many PPI cases.

In preferring the witness evidence of the lender, the court found that on the facts the PPI was not compulsory. The lender had not breached ICOB as it had made an assessment of the borrowers' demands and needs. Accordingly, the agreement was not an unfair relationship and judgment was awarded for the lender.

Comment

This is a victory for lenders. For the first time, lenders have a High Court decision which is binding on County Courts where most of the PPI cases are heard. The lender's internal processes were such that they ensured compliance with regulatory obligations. As such the PPI was credit and not a charge for credit. It followed that the agreement was not unfair.

It is the judge's obiter (i.e. non-binding) comment that has aroused the most interest in this case. In response to the total charge for credit (TCC) allegation, the judge went on to consider, obiter, a point raised by the lender that even if PPI was, on the facts, part of the TCC, it would have properly applied s9(4) of the Consumer Credit Act 1974 (the Act) because in splitting up the amount of credit for the cash loan and the PPI, the PPI would not form part of the credit. The judge would have dismissed this argument had the lender needed to rely on it because the loan was a single agreement such that the amount of credit was the sum total of the cash loan and the PPI.

The judge's comments, with respect, cannot be correct. The subject agreement was not a single agreement, it was a multiple agreement, placing parts of the agreement within different categories under the Act, i.e. a debtor-creditor agreement (the cash loan) and a debtor-creditor-supplier agreement (the PPI loan). PPI cannot stand alone as it supports the repayment obligations of the loan. However, in this case, the two agreements were separated so that the single document was a multiple agreement.

Accordingly, and in compliance with s 61(1) of the Act, all of the prescribed terms as set out in the Consumer Credit (Agreements) Regulations 1983 were embodied within the different parts of the agreement. The consumer knew exactly the cost of the different parts of the contract which he had entered into. If the court had found on the facts that the PPI was compulsory and therefore a charge for credit instead of credit itself, the cash loan would still have survived as all of the prescribed terms for that category of the agreement were embodied in the agreement.

The flaw in the judge's comments is that where the borrower has taken out PPI, every agreement in these terms would be unenforceable because either (1) the agreement does not correctly state the prescribed term because it has two prescribed terms, or (2) PPI must have been a charge for credit and therefore compulsory/mis-represented.

In considering that the amount of credit was not correctly stated because it had been split up, had the judge's conclusion that this was a single agreement been correct, the judge would have been mandated to make a finding of irredeemable unenforceability (it being a pre April 2007 loan) and it could not then have given judgment for the lender.

No mis-statement of interest rates

Sternlight v Barclays Bank Plc was another case heard before His Honour Judge Waksman QC sitting in the Manchester District Registry of the High Court, together with four similar matters. The cases were heard as test cases on the issue of alleged mis-statement of interest rates, and were representative of up to 100 like cases brought by ATM solicitors on behalf of borrowers.

The issue

All five cases concerned credit card agreements where the customers alleged that 'the APR stated in the agreement should be regarded as the primary figure and the monthly interest rate should be calculated from, and correspond to, the APR as near as may be...'. If the customers were right, the interest rate shown in the agreement would be mis-stated. The effect of mis-stating the interest rate, being a prescribed term as set out in the Consumer Credit (Agreements) Regulations 1983 (the Regulations), would be that, for agreements entered into after 6 April 2007, the agreements would be unenforceable without permission of the court and for those agreements which pre-dated 6 April 2007, they would be wholly unenforceable.

The customers alleged that the interest rate was calculated by reference to the APR.

The court's findings

The court found that this was not the case. The APR was not the driver in calculating the interest rate. The interest rate, being a term prescribed by the Regulations, in contrast to the APR, being information to be provided as a requirement of the Regulations, was a contractual rate agreed between the parties.

The court referred to the recent judgment in Brooks v Northern Rock and HHJ Tetlow's view that such an argument was 'looking through the wrong end of the telescope'.

Comment

This is an important case for lenders currently dealing with an industry of credit checkers relying on computerised systems to determine if an agreement is properly executed by containing all of the prescribed terms. There will nearly always be a mis-match between the APR and the interest rate since the APR is only relevant in advance of, or at the time of, entering into the contract and is calculated from the monthly instalments and interest rate agreed between the parties, not the other way around. This High Court decision is binding on County Courts who should see a dramatic fall in the number of cases being issued.

Compliance with the Insurance Conduct of Business Rules ensures relationship with borrower is not unfair

In Harrison v Black Horse Ltd, the court found that where there is no pressure or coercion on a borrower, compliance by the lender with the Insurance Conduct of Business Rule Book issued by the Financial Services Authority will lead to a finding of no unfair relationship.

Facts

Pursuant to a loan agreement dated in 2006, the lender advanced the sum of £70,200 for the benefit of the borrowers which comprised a cash advance of £60,000 and a payment protection insurance (PPI) policy of £10,200.

The borrowers alleged that the PPI was sold in such a way as to contravene the Insurance Conduct of Business Rules (ICOB) and that the inclusion of the PPI with the loan amounted to an unfair relationship within the meaning of s140A of the Consumer Credit Act 1974 by reference to the cost and terms of the policy.

ICOB

Lenders will be acutely aware of the frequency with which borrowers raise arguments based upon breach of ICOB. In this case, the borrowers argued that ICOB 4.3 require that any recommendation be objectively suitable for the borrowers and that the lender must seek information about the borrowers' circumstances so as to identify their requirements taking into account existing insurance and the sufficiency of cover provided by the policy. They argued that the demands and needs questionnaire had limited questions and did not meet the obligation to ask appropriate questions. As a result the lender did not take reasonable steps to see if what it was recommending was suitable for the demands and needs of the borrowers.

The lender maintained that ICOB 4.3 requires an adequate assessment of suitability and its demands and needs questionnaire was created specially to meet compliance with ICOB 4.3 and the questions in the form amounted to "taking reasonable steps" as required by the rules.

The court's findings

The court found on the facts that the lender's procedures (through filling in the demands and needs questionnaire and a very specific and carefully designed script and questionnaire) ensured that they had conducted a proper assessment of the borrowers' demands and needs.

Having regard to the complaints made by the borrowers about the terms of the PPI, the court found that their complaint was that the terms were unfair and not that the relationship between the parties was unfair. In that regard, the court found that the borrowers had a choice whether to take PPI – it was not compulsory. The lender had demonstrated that they had complied with ICOB, bringing to the attention of the borrowers all matters that they were obliged to bring to their attention pursuant to ICOB.

The lender relied on its compliance with ICOB as proof that the relationship was not unfair. The court accepted that position, agreeing that compliance with ICOB meant that the relationship was not unfair.

Comment

This judgment came a few weeks before Black Horse ltd v Speak where, again, the court found that the relationship was not unfair. This judgment sets clear guidance of what is and what is not unfair. Any lender compliant with procedural requirements such as ICOB can take comfort here.

Further comfort can be taken from the fact that the lender successfully defended the PPI claim even though its sales representative, who dealt with the borrowers, did not give oral evidence at trial. Despite hearing evidence from the borrowers, the evidence the lender produced on its standard systems and processes was preferred. A lender that is unable to rely on the evidence of a relevant sales representative may still defeat a PPI claim, even where misrepresentation is alleged, by adducing relevant evidence of its systems and processes at trial.