1st September, 2020

Andrew Clark obtain significant ruling on issues of principle relating to irresponsible lending and excessive interest rates

Andrew Clark was instructed by Barings Solicitors on behalf of claimants in a series of multi-claimant proceedings brought against various high-cost short-term lenders.  On 5th August 2020, HHJ Worster sitting as a Judge of the High Court in the Business and Property Courts in Birmingham handed down judgment in twelve sample claims against one such lender (Kerrigan v Elevate Credit International Limited [2020] EWHC 2169 (Comm)). The judgment followed a trial over 15 days between 2nd and 25th March 2020, during which Andrew Clark appeared for the 12 sample claimants and Miss Ruth Bala appeared for Elevate Credit International Ltd. The judgment addressed issues of principle, rather than addressing the facts of the individual claims.

Chapter 5 of the Consumer Credit sourcebook (“CONC”) issued by the Financial Conduct Authority (“FCA”) requires lenders to undertake creditworthiness assessments before making regulated loans to borrowers.  Andrew Clark’s primary contention on behalf of the sample claimants was that Elevate’s failure to take into account their history of repeated borrowing in making those assessments was a breach of the CONC rules.  Further, he contended that, in consequence, they had suffered loss comprising the interest and charges payable under the subject loans and a loss of credit, owing to the effect on their credit rating of both the subject loans and of subsequent reborrowing in order to repay them, which losses entitled them to damages under s.138D of the Financial Services and Markets Act 2000 (“FSMA 2000”).  Moreover, he contended that these matters gave rise to unfairness to the sample claimants as debtors in the debtor-creditor relationships arising from the credit agreements, in respect of which the court should make orders for repayment of interest and of capital paid under pursuant to s.140B(1)(a) of the Consumer Credit Act 1974 (as amended) (“CCA”). 

HHJ Worster accepted Andrew Clark’s submission that the requirement of CONC 5.2.1(2) that a firm carrying out a creditworthiness assessment must consider the potential for the commitments under the proposed credit agreement to adversely impact the customer’s financial situation required that a lender such as Elevate should take into account the information available to it regarding a loan applicant’s history of repeated borrowing, which Elevate’s system for undertaking creditworthiness assessments did not. 

Miss Bala argued that the information available to Elevate from credit reference agencies was in any event insufficient to enable it to obtain a sufficient picture of a loan applicant’s previous borrowing to take such borrowing into account.  In response, Andrew Clark argued that Elevate could have obtained more extensive data from the credit reference agencies if it wished and, in addition, it should have considered the information available to it from its previous dealings with loan applicants.  HHJ Worster rejected the argument that Elevate should have undertaken more extensive checks with credit reference agencies, in particular, because of considerations of proportionality, given the limited size of the loans, but he accepted that it should have considered its own data regarding its previous loans to applicants.  Hence, he concluded that Elevate had breached the requirements of CONC 5.2.1(2) R.  For the same reason, he found that it had failed to base its creditworthiness assessments on sufficient information as required by CONC 5.2.1(3) R, and had failed to establish and implement clear and effective policies and procedures to make a reasonable creditworthiness assessment as required by CONC 5.2.2(1) R. 

For the purpose of the damages claim under s.138D of the FSMA 2000, it was necessary for the sample claimants to prove that the contraventions of CONC caused them to suffer loss.  HHJ Worster considered their claims had significant problems with causation, albeit he indicated that the court would take a benevolent approach to the sample claimants’ case, given that the problem arose out of Elevate’s non-compliance with CONC.  He considered that a loan made following a non-compliant creditworthiness assessment might not cause a loss, because, in a particular case, it might provide the relevant claimant with the short-term finance needed to deal with an immediate financial crisis, without which he would have been in a worse financial position.  Further, he considered that, in addressing causation, the court was required to consider whether other lenders, who would have been approached by the sample claimants following a rejection of any loan application by Elevate, would have lent to them, albeit on the presumption that such other lenders would have complied with CONC.  Since the principal basis of Elevate’s liability was its failure to use data about its previous lending, he considered that there might be other lenders who could lend without breaching CONC, because they had no or little previous history of lending to the sample claimants.  Thus, the value of the sample claimants’ damages claims would have to be discounted to reflect the chance that such other lenders would grant them loans in circumstances not giving rise to a breach of CONC.  Further, the sample claimants would have to establish that there was a substantial chance that alternative CONC-compliant lending would not have followed from a rejection of their loan applications by Elevate. 

HHJ Worster addressed the losses of the sample claimants relevant to the FSMA claim.  He considered the interest paid under the relevant credit agreements to be an obvious loss.  Additionally, he accepted Andrew Clark’s submission that it was reasonably foreseeable that non-compliant lending would have the potential to cause further financial difficulties by adversely affecting the sample claimants’ credit rating.  He concluded that this was a recoverable loss, that such loss might be presumed, and that general damages for the effect on the sample claimants’ credit rating would be an appropriate remedy.  He considered that some evidence of the extent to which the credit ratings were affected would need to be available in order that the court might be satisfied that there was some significant change therein, but, inevitably, the assessment would be a broad-brush exercise.  In response to the submission, made by reference to previous authorities on general damages for loss of credit, that they might be in the region of £10,000, he commented that the obvious difference between those cases and those of the sample claimants was that the latter’s credit ratings were already tarnished, such that general damages would be unlikely to be near such figure.

One of the sample claimants, Mr Christopher Kuschel, brought an additional claim for damages for psychiatric injury suffered as a result of Elevate’s alleged negligence in undertaking the creditworthiness assessments.  The alleged injury was an aggravation of a pre-existing depressive condition.  Psychiatric evidence was provided by a joint report from Dr Michael Isaac, Consultant Psychiatrist, which included his view that Mr Kuschel’s repeated borrowing probably played the most important part in a range of factors contributing to the aggravation of his depression during the latter period of his borrowing. 

HHJ Worster heard submissions regarding the existence of a duty of care in such circumstances.  There was no case where a court had found that such a duty of care existed in such a situation or anything analogous thereto.  HHJ Worster considered that an extension of the law in order to cover the duty contended for by Mr Kuschel would not be an incremental change, but rather, a significant extension of the law of negligence, and that the lack of analogous cases and the gulf between the decided cases and the circumstances of Mr Kuschel’s case suggested that an extension was not required.   He considered the elements of the three-fold test in Caparo v Dickman [1990] 2 AC 605.  While he accepted that Elevate ought to have known of Mr Kuschel’s pre-existing depressive condition, because it should have asked a question about his vulnerability as part of its creditworthiness assessment (which he assumed would have been answered truthfully), he was not persuaded that the arguments as to foreseeability or proximity were sufficiently strong to justify an extension of the common law, and, in addition, he considered that it would not be fair, just and reasonable to impose a duty, given that the statutory cause of action under s.138D of FSMA 2000 was limited to financial loss. 

The sample claimants also brought a claim based on the unfair relationship provisions of ss.140A-140C of the CCA.  This claim was not confined to those loans made after 1st April 2014 when regulation was transferred to the FCA and CONC became operative, but rather, it encompassed loans made before that date, at which time the requirement of a creditworthiness assessment arose under s.55B of the CCA, for which there was no civil cause of action, and the relevant regulator was the Office of Fair Trading (“OFT!”).  The OFT issued guidance in respect of irresponsible lending (OFT 1107) under its duty pursuant to s.25A(1) of the CCA to give guidance on its approach to fitness to have a consumer credit licence.  HHJ Worster considered that the absence of any consideration of repeat borrowing in Elevate’s creditworthiness assessments in the period before 1st April 2014 was contrary to such guidance. 

HHJ Worster considered whether the relationships were unfair in the light of his finding of a breach of CONC (and of the OFT guidance).  He accepted that the court was not bound to adopt the line drawn by the FCA in drafting CONC, but he considered that the rules provided both a starting point for consideration of fairness, and a powerful factor in deciding whether individual relationships were fair.  Further, he considered that, given the burden of proof on the issue of fairness was on a defendant under s.140B(9), when the rules were breached substantively, it was likely to be difficult for a defendant to show that the relationship was fair.  He concluded that Elevate’s failure to consider the financial difficulties that repeat borrowing might cause to borrowers had an effect on the fairness of the debtor-creditor relationships, because the protection provided by a properly designed creditworthiness assessment was absent.  Hence, where a borrower was making repeated applications for credit, prima facie, the failure to comply with the rule led to unfairness in the relationships.  Further, he considered that Elevate would have a “very steep hill to climb” to demonstrate fairness in relation to those who borrowed most frequently from it.

As a secondary basis for a finding of unfairness, Andrew Clark contended that there was unfairness in those relationships pre-dating 2nd January 2015, owing to the interest rate charged by Elevate prior to the imposition by the FCA of a cost cap through the introduction of CONC 5A on that date.  (The rates charged prior to that date were 0.97% per day (with capital of 50% of the amount of credit), which equated to 29% per month.)  Miss Bala submitted that the rates were similar to those charged throughout the high cost short term credit industry.  Further, she contended that, in effect, the sample claimants were seeking to back-date CONC 5A.  HHJ Worster considered the FCA’s reasons for imposing the price cap and noted its comment in the relevant consultation paper (CP 14/10) that it was those marginally eligible for credit who were most at risk from higher interest rates.  He considered that, where borrowers were only marginally eligible for credit, the rate was of more particular significance to fairness, owing to the potential for consequent harm to them, which required assessment by the lender of an individual borrower’s circumstances to the extent that the information was available to the lender.  He determined that the pre-cap interest rates were excessive, given that the underlying issues of spiralling debt and of the potential effect on those who marginally qualified for credit were known and were affecting borrowers.   Therefore, he concluded that those who only marginally qualified for loans from Elevate had a good basis for an unfair relationship claim on the ground of the interest rate.

HHJ Worster then considered the question of appropriate relief in respect of the unfairness in the relationships.  He pointed out the distinction between causation for a damages claim and appropriate relief for an unfair relationship claim.  In particular, he considered that the link between the unfairness identified in the relationship and the relief given should not be analysed in the linear terms that arise when considering causation.  He considered this to be particularly significant given the difficulties on causation he identified with the breach of statutory duty claim.   He pointed out that in Plevin v Paragon Personal Finance Limited [2014] UKSC 61, the Supreme Court had not considered it necessary to identify the tipping point for unfairness arising from undisclosed commission, and considered that, by the application of the same approach, the fact that non-compliance deprived the sample claimants of the safeguard of a compliant assessment should be sufficient to render the relationship unfair and justify relief.

Because the central complaint was that Elevate should not have granted the loans, owing to its failure to make a CONC-compliant creditworthiness assessment, HHJ Worster considered that the repayment of interest and of any arrears of interest and charges was likely to be appropriate relief.  In respect of Andrew Clark’s arguments that repayments of capital should be ordered in order to compensate the sample claimants for the loss of their credit and to reflect the distress and anxiety caused to them, he considered that these were matters that would benefit from further argument in the context of the facts of particular cases.  Finally, he expressed the view that there might be merit in Andrew Clark’s argument that any award of interest to the sample claimants should be at rates comparable to those they had paid to Elevate, because they would have used the money to pay off other high cost loans borrowed at the same or similar rates, but, once again, he considered that the issue would best be explored in the context of particular cases. 

As will be apparent for the above summary, the judgment concluded without reaching final conclusions in relation to individual claims.  HHJ Worster explained that this was because of the appointment of administrators for Elevate, because issues had arisen in the course of the judgment that needed further exploration, and because that there was a pressing need to hand down a judgment dealing with as many of the general issues as possible.  The remaining issues of principle and the application of HHJ Worster’s conclusions to individual cases are likely to be explored in a further judgment by him, which will follow the trial of sample claims against another high-cost short-term lender fixed before him for December 2020.

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