Unfair (banking/credit) Relationships - Relief under Sections 140A–140D of the Consumer Credit Act 1974

Wed, 02 Sep 2015

Under sections 140A-140D of the Consumer Credit Act 1974 credit transactions may be re-opened as a matter of judicial discretion.  These wide judicial powers were added to the Act in 2006 (and came into force on 6 April 2007) in substitution of the previous, more limited, “extortionate credit bargains” regime which had routinely failed to provide an effective remedy to borrowers and guarantors seeking to challenge the terms of their agreement with the lender. 

Section 140A applies to natural persons[1] and provides that the court may make an order under s.140B in connection with a credit agreement if it determines that the relationship between the lender and the borrower arising out of the agreement or the agreement taken with any related agreement is unfair to the borrower because of one or more of the matters in Section 140A(1)(a) – (c), which are:-

               (a) unfairness of any term of the agreement or any related agreement;

(b)       the way in which the lender has exercised or enforced his rights under the agreement or any related agreement

(b)       any other thing done (or not done) by, or on behalf of, the lender (either before or after the making of the agreement)[2];

Section 140A(2) provides that in deciding whether to make a determination the court must have regard to all matters it thinks relevant (including matters relating to the creditor and matters relating to the debtor). For the borrower this includes for example his/her characteristics, his/her sophistication or vulnerability, the facts he/she could reasonably be expected to know, the range of choices available to him/her and the degree to which the lender was or should have been aware of these matters.   The focus of the test of an unfair relationship is on the relationship as a whole, not merely on the terms of the agreement.  As such interactions between the lender and the borrower after the agreement has been concluded are relevant, and the entire history of their relationship may fall to be reviewed.  The Supreme Court recently ruled in Plevin v Paragon Personal Finance Ltd[3] that it was not necessary for the lender to have breached a duty to the borrower before the relationship could be found to be unfair as had previously been held by the Court of Appeal in the case of Harrison v Black Horse[4] (now overruled).

In other words, unfairness does not have to involve a breach of duty on the part of the lender at all.  This was demonstrated by the Supreme Court in Plevin where non-disclosure by the finance company of the amount of commission to the borrower in connection with a proposed PPI policy was held to render the relationship unfair, although the ICOB rules then in force did not impose any obligation on the finance company as insurance intermediary to disclose the amount of such commissions.  Accordingly the question arising under section 140A(1)(c) was not whether there was a legal duty to disclose the commissions, but whether unfairness arose from their non-disclosure, and whether such unfairness was due to something done or not done by the finance company.   

Section 140A applies a broad test of fairness to each particular creditor/debtor relationship, and the Act confers wide discretionary powers on the court.  Lord Sumption explained in Plevin that the Act was deliberately framed in very wide terms and with little guidance about the criteria for its application, so that it was not possible to state a precise or universal test for the application of Section 140A. In each case the outcome will depend on the court’s judgment on all the relevant facts. This judicial discretion is subject only to four general points by way of guidance which were highlighted in Plevin:-

(1)       What must be unfair is the relationship between the lender and the borrower.  Where the terms of the agreement themselves are not intrinsically unfair, unfairness is nevertheless often found in the one-sidedness of the relationship which effectively limits the borrower’s ability to choose;

(2)       The court is generally concerned with hardship to the borrower, but under Section 140A(2) matters relating to both the lender and the borrower are relevant, and the relationship may not necessarily be unfair as a result of features of the transaction operating harshly against the debtor where those same features protect a legitimate interest of the creditor;

(3)       The unfairness must arise from one of the three categories of cause listed in Section 140A(a)-(c) ;

(4)       The great majority of relationships between commercial lenders and private borrowers are likely to be characterised by large differences in financial knowledge and expertise.  That makes for an inherently unequal relationship.  But it cannot have been Parliament’s intention that the generality of such relationships should be liable to be reopened for that reason alone. Something else has to be shown which points to the lender exploiting that unequal relationship in such a way as to render it unfair

Sections 140A-D may provide a route to relief for borrowers who can point to facts which show that they have been unfairly treated by their lender, even where no breach of duty at common law or of the applicable regulatory regime can be made out. The unfairness is likely to consist of limiting the borrower’s ability to choose as a result of the lender’s action or inaction (e.g. by failure to make disclosure or provide information, by unfair manipulation or other conduct/omission impacting on the borrower’s ability to choose).  Once the (borrower) claimant asserts a claim for Section 140A unfairness, the burden of proof shifts to the lender, who is then required to prove that the relationship was not rendered unfair by what it did or failed to do.

If unfairness is established against the lender, the court has wide discretionary powers of granting relief to the successful borrower.  These include ordering the lender to refund monies paid by the borrower under the agreement and/or related agreement and to compensate the borrower’s (proven) losses and requiring the lender to do (or cease to do) anything specified in the order in connection with the agreement or any related agreement.[5]

It has been held that, generally, Section 140A claims are not suitable for determination by summary process (summary judgment or strike out). Furthermore a Section 140A claim can often be run in the alternative to a damages claim for regulatory breaches and/or at common law (such as negligence, breach of fiduciary duty, misrepresentation), and its inclusion should always be considered, if a claim appears sustainable on the facts.

Article written by Susanne Muth