Update | Consumer: credit ratings agencies' duty of care

Credit rating agencies play an important role in the field of consumer credit. A whole section of the PPI litigation concerned the potential impact on successful claimants of their records remaining unchanged in relation to a debt which was outstanding but unenforceable. In that litigation the courts decided that the credit rating agencies were entitled to take the stance they did. They have not fared so well in Smeaton v Equifax Plc [2012] EWHC 2088 (QB), a complex case pursued doggedly by a litigant in person.

Under the Data Protection Act 1998 credit rating agencies are subject to the 4th data principle namely that all data is accurate and kept up to date. If that principle is breached compensation may be payable if the data holder - in this case the credit rating agency - cannot prove it took reasonable steps to ensure the accuracy of the data in question.

Mr Smeaton brought a claim against Equifax Plc, one of the main credit rating agencies, on the basis that they had incorrectly recorded him as being subject to a bankruptcy order between 2001 and 2002 when an order that had been made was the subject of a stay and between 2002 and 2006 when the order had been rescinded. During that time Mr Smeaton had applied for and been refused credit following checks made on his Equifax file. He relied both on breach of statutory duty under the Data Protection Act 1988 but also negligence.

The issues for the court were whether there had been a breach of the DPA, whether Equifax had taken all reasonable steps to ensure their records were correct, whether it owed any duty to Mr Smeaton in negligence, and whether Mr Smeaton could show that any breaches established against Equifax had caused him loss.

Bankruptcy order rescinded

The background to the bankruptcy order was complicated. In very simple terms an initial order was made following an application by a party with whom Mr Smeaton was in dispute generally. Mr Smeaton successfully applied for leave to appeal the order, at which point the order was stayed. Following further progress in related litigation all matters were settled between the parties to include an order that the bankruptcy order be rescinded and the petition be withdrawn. This left Mr Smeaton in the unusual position of never having been made bankrupt. There was a suggestion that there were no more than ten such rescissions in a year.

There was no doubt that the information held by Equifax was incorrect. However the company maintained that there was nothing more they could practically do to avoid the record incorrectly reflecting Mr Smeaton's bankruptcy. They stated that there were about 400,000 bankruptcies on their files at any one time.

At the time of the rescission of Mr Smeaton's order the removal of bankruptcy orders would only be made manually either as a result of a direct approach from a consumer or as a result of a consumer causing a notice to be put in the London Gazette.

It is notable that since 2008, Equifax has taken a subscription from the Insolvency Service to receive an electronic update of the entire Individual Insolvency Register.

Equifax also pointed out that there were a number of guides published advising consumers about the way in which they could get details of bankruptcies removed from the records of credit rating agencies. However those guides did not cover the unusual circumstances of the order being rescinded in Mr Smeaton's case.

Duty of care breached

The judge held that Equifax had not taken reasonable steps to maintain the accuracy of the record in relation to Mr Smeaton. In fact, in his view, Equifax had taken no steps. The judge considered that steps could have been taken to identify those limited cases where a bankruptcy order was rescinded and the petition withdrawn such that a person was treated as never having been subject to such an order. Furthermore the step taken in 2008 to subscribe to electronic updates could have been investigated and initiated sooner.

In relation to the issue of negligence, Equifax argued that it would be inappropriate to extent the class of cases to which negligence would apply to this. The judge particularly considered whether Equifax were right that they had never assumed any duty of care towards Mr Smeaton in relation to accurately maintaining the data they held on him.

Equifax argued that they had no dealings with Mr Smeaton until 2006 and he was therefore not in their consideration. The judge rejected this argument on the basis that Equifax by undertaking the business of a credit rating agency owed a duty to care towards all those whose information they stored on their system.

The practical effect of a finding of breach of statutory duty and a breach of the duty of care in negligence is limited but may have some impact on the level of damages.

In relation to causation, there was a careful consideration of the particular circumstances of Mr Smeaton applying for a business loan in 2006. Equifax sought to argue that it was impossible to say that the one erroneous entry on their register relating to the bankruptcy would be the difference between credit being granted or refused. In this case the judge held that the bankruptcy order did make that difference.

The court was only considering the issue of liability and causation. The question of damages was deferred to a later date.

Mr Smeaton's claim involved very unusual circumstances. The changes in technology mean that those circumstances could not be repeated in the same way. The decision is a significant one. Equifax tried to rely on a system of consumers taking steps to correct errors, often following an unsuccessful credit application. The judge held that the agency's obligation under the Data Protection Act 1988 was both an onerous one and a positive duty. It was not enough to sit back and let consumers do the work for them.

Payday loans

Those consumers with poor records with the credit rating agencies may find themselves using short term or 'payday' loan providers. Payday loans have been the subject of attention for some time. The OFT announced in February that they would investigate that part of the industry offering very short term loans to consumers at a high rate of interest. Interest rates have been known to exceed 4,000 per cent on an APR basis although the loans typically last for only a week or two.

As a result of the pressure, the trade body, the Consumer Finance Association, has launched a new code of practice. The code includes a commitment to clear language, a clear demonstration of the cost of the loan with an example of cost per £100 borrowed and a commitment to never encourage people to borrow more than they can afford.

The Department for Business, Innovation and Skills has welcomed a self-regulatory approach. Consumer bodies including Which? and debt counselling charities have expressed concern that the code does not go far enough to protect consumers. Users of short term loans are typically among the most vulnerable and there has been a call for affordability checks to be more robust and there to be rigorous enforcement of ?the code.

The code will be implemented by the end of November. If consumers are unhappy with the lender's behaviour they will need to follow internal complaints procedures with a possible referral to the Financial Ombudsman Service. It is no doubt the case that the FOS will take into account any possible breaches of the code of conduct.

PPI misselling

A recent case on PPI misselling raises an issue of negligence in the sale of the insurance but also deals with the question of limitation in PPI cases. The case of Ginn v Firstplus & Central Capital in Birmingham County Court (19/4/12) involved the sale of PPI policy to Mr and Mrs Gunn with an expectation that they would receive the majority of the PPI premium as 'cashback' when the policy was discharged.

The Gunns settled the policy early and found to their disappointment that only a small proportion of the premium was repaid to them.

The couple brought a claim against Firstplus as the lender and also Central Capital as the broker. The court rejected a suggestion that the brokers were in any way giving financial advice about which product to purchase and in that respect were therefore not negligent.

There had however been misleading advice about the nature of the 'cashback' payment. Although the full picture could have been ascertained by a thorough examination of the documents the court held that the shortfall in the information provided meant they had been negligent in the advice provided. However the critical issue then became one of limitation.

The loan was taken out in July 2004, the 'cashback' payment was made in December 2005 and the claim was issued in October 2010. The claimants' first argument that time did not run until the unsatisfactory 'cashback' payment was made. This was not accepted as the breaches were a lack of information in the lead up to the contract being concluded in 2004.

The claimants' then argued that there ?had been concealment relating to the amount of the commission paid to the broker. In the event of concealment the limitation period could be extended under section 32 of the Limitation Act 1980. The court rejected this argument on the basis that the second defendants had disclosed the existence of a commission even if they had not stated the amount.