Update: consumer

The greatest amount of legal energy in consumer law is still being expended in litigation under the Consumer Credit Act 1974. In particular, the issues arising out of 'mis-selling' of financial products and the potential non-enforceability of loans are at the forefront. In the first few months of the year, the focus has been on banks' and other lenders' duty of disclosure.

Consumer protection and regulation is an important area of activity for the EU. In the coming year we are likely to see a number of significant developments which are previewed below.

Creditors' duties

Following on from the widely reported decision last autumn of the High Court in McGuffick v RBS [2010] 1 All ER 634, further clarification of creditors' duties has been issued. McGuffick was seen as a significant step as it was the first case arising out of a large number of claims which had been gathered together in Chester. The court found in favour of the creditors in that the restraint imposed by a breach of the duty of disclosure under section 77 of the Consumer Credit Act 1974 only related to the ability to enforce the loan through the courts. The debtor continued to have a liability to the creditor albeit one which was not capable of enforcement (unless and until the default under section 77 had been cured).

Importantly, this meant that in those circumstances creditors can still report the default to credit reference agencies.

Those advising debtors on cases founded on a breach of section 77 undoubtedly have a duty to make clients aware of the potentially adverse effect on their credit rating arising out of the decision in McGuffick. The practical effect of McGuffick is to ensure that debtors remain liable for money which they have borrowed. Additionally, an individual's previous default is a material consideration which lenders are entitled to take into account when deciding whether to advance credit to an individual. The judgment highlights that other lenders are entitled to be made aware of an individual's previous creditworthiness and to be made aware of a consumer's previous financial conduct.

The provision of information upon request by creditors has been considered further by the High Court in Carey v HSBC [2009] EWHC 3417 (QB). This related to requests made under section 78 for copies of credit card agreements. Section 78 contains similar obligations to those in section 77 which were considered in McGuffick. The court in Carey gave guidance as to how creditors should be expected to comply with the duty of disclosure under section 77/78. The issue of whether a breach of that duty had occurred gave rise to consideration of whether an unfair relationship had arisen.

The court held that creditors can comply with their obligation to provide a 'true copy' of the agreement by reconstituting the agreement. It is not necessary to provide a photocopy of the original agreement or a 'literal' copy. The creditor can draw on sources other than a copy of the original agreement to reconstitute it. Having said that, it is necessary for the agreement to be in a format that the debtor can understand what terms were agreed. It should also include the name and address of the debtor that appeared on the agreement, although again the creditor can draw on sources other than the original agreement to identify that information.

Where there has been a change in the terms of the agreement, as is often the case with credit cards, a copy of the original agreement must be provided in addition to the current terms and conditions. The court's view was that a debtor was entitled to see both sets of terms.

The debtors in Carey argued that if a creditor was in breach of its duty of disclosure under section 78 then by analogy it gave rise to an unfair relationship under section 140A of the Consumer Credit Act 1974. That section allows a court to reopen agreements which are deemed unfair. The debtors' point related to the uncertainty created by the failure to provide a copy of the agreement pursuant to section 78 and potential for enforcement to follow if that failure is corrected at some point in the future.

The adverse consequences of a report to credit reference agencies that was not hindered following the decision in McGuffick were also advanced. It was said that the debtor would face a dilemma as to whether they should stop paying the credit card debt or not as a result of the creditor's omission. The court rejected this argument and left it as a matter for the debtor to decide whether they should take the risk that follows from not paying.

The court in Carey advised that debtors should exercise caution before pursuing a claim for a declaration of non-enforceability under section 78. While the court had the power to grant such a declaration, it would be unwise to seek one immediately after the 12-day time limit set out in the Act had expired. In addition, the court would look at all the circumstances including what other relief was sought and what interest a debtor had in a declaration being made before granting it.

The reluctance of the court to reopen the agreement under section 140A on the basis of an unfair relationship may be the most enduring aspect of the decision. The concept of unfair relationship is becoming more important in the regulation of consumer credit agreements. The subjective nature of the test makes the outcome of any litigation on the point uncertain and makes it harder for the consumer to mount a challenge.

Issues around non-compliance with disclosure under section 77 or section 78 have been developed further by the High Court in Teasdale v HSBC [2010] EWHC 612 (QB). The same judge that dealt with Carey considered a number of applications by debtors who were looking to discontinue their claims for a declaration of non-enforceability to be awarded costs against the creditors. The argument was that the court should look at who had succeeded in the action and take an overall view on costs as to what was required in the interests of justice. In particular, a point was made that the creditors had not complied with their duty of disclosure '“ even by reference to the not too onerous definition set out in Carey '“ until after the issue of proceedings.

The court held that there was a presumption on discontinuance that the defendants were entitled to their costs. The application for costs did not succeed as there was more to the actions that had been commenced than simply obtaining compliance with the obligations of disclosure under section 78. Nothing in the defendants' conduct gave grounds for rebutting the normal costs presumption on discontinuance. Furthermore, the judge made clear that the fact the legal landscape had been changed by the decision in Carey was simply a risk that litigants such as the debtors in this case had to take.

Where does this leave the client who wants to challenge the enforceability of a loan or credit card agreement? The combined effect of McGuffick, Carey and Teasdale is that the consumer has a higher mountain to climb. However, the financial institutions are not entirely in the clear. What this trio of cases has dealt with is the many challenges that are being brought on a fairly technical basis, in particular in relation to the ability of creditors to enforce debts. Where there are more substantial defects, all of the consumer's rights still endure and the clarification that has taken place may at least allow parties to get to the heart of the issues between them more quickly.

There are also developments in this field away from the courts. The suspension of Cartel Client Review, one of the biggest claims management companies (CMCs) by the Ministry of Justice and the associated closure of Consumer Credit Litigation

Solicitors by the Solicitors Regulatory Authority (SRA) will play out further in the months to come. There is a suggestion by both the MoJ and the SRA that they are looking at further companies on this issue. At the same time, the Office of Fair Trading has been consulting on draft guidance on the whole issue of disclosure under sections 77-79 of CCA arising out of McGuffick and Carey.

Challenges under the Consumer Credit Act 1974 will continue. There has clearly been inappropriate activity in relation to lending by some creditors and this has caused consumers injustice. The credit sector will point to the activity of some consumer representatives as being equally inappropriate. It is the bewildered consumer who is being caught in the middle not knowing whether they have some right of redress or not.

Fraudulent car sale

The Court of Appeal has dealt with Kulkarni v Manor Credit (Davenham) Limited [2010] EWCA Civ 69, which concerned the fraudulent sale of a car subject to a hire purchase agreement. The critical issue was who bears the loss: the finance company or the innocent consumer. Mr Kulkarni agreed to purchase a car from a third party that in turn purchased a car of that description from Manor Credit under an HP agreement. The third party disappeared and Manor Credit recovered the car from Mr Kulkarni who sued them for conversion.

Following consideration of the finer points of some fairly technical aspects of the Hire Purchase Act 1964 and the Sale of Goods Act 1979, the Court of Appeal found in favour of Mr Kulkarni. The issue can be reduced to determining the point at which it was intended the car would pass to Mr Kulkarni and whether that was prior to the third party becoming a debtor under the HP agreement. If so, then Mr Kulkarni would bear the loss, if not it would fall to Manor Credit. The Court of Appeal found that in the circumstances of this case the critical issue was 'delivery' of the vehicle which was after the third party had become a debtor under the HP agreement.

The most obvious point arising from the judgment is the complexity of the law in issue. Manor Credit seized the initiative by recovering the vehicle. Many consumers in that situation may not have the means to understand the law or challenge the decision. The fact that the car involved in this instance was a Mercedes and the purchase price was £39,000 may be pertinent.

Other cases may well produce different results depending on the facts, but this case certainly has the feel of justice being achieved for the innocent consumer.

EU developments

On a statutory front, there are a number of upcoming developments in relation to regulations inspired by EU activity.

New regulations implementing the Consumer Credit Directive will be available as of 6 April 2010 from the OPSI website. Lenders have until the 31 January 2011 to comply. New duties include an obligation to provide an adequate explanation of the credit on offer to the consumer, checks on creditworthiness, information to debtors when debts are sold on and disclosure to consumers of fees and links by credit intermediaries.

The EU justice commissioner has signalled an intention to press on with implementation of a Consumer Rights Directive designed to harmonise consumer rights across the EU. The concern is that the effect could be a significant watering down of consumer rights in the UK which has rather more generous protection than other states.

Finally, the absence of holidays in the proposed Consumer Rights Directive and the resultant lobbying of the European

Commission has prompted a consultation (now closed) on a new Package Travel Directive. This would extend liability to everyone who organises holidays whether traditionally packaged or whether, as is increasingly the case, they are put together on a more ad hoc basis by the consumer. It is unlikely any changes will take effect before 2012.