Update: consumer

Requests for disclosure of credit agreements

Attempts by debtors to avoid payment of sums owed to the providers of credit by alleging breaches of the Consumer Credit Act 1974 and other statutory provisions have had a hard time recently. Those pursuing these arguments may be buoyed therefore by the decision in Phoenix Recoveries (UK) Ltd Sarl v Devendra Kotecha [2011] EWCA Civ 105.

Mr Kotecha took advantage of a promotional offer of a credit card that was sent to him by Beneficial Bank as a result of his membership of the Institute of Directors. The card was duly issued. Beneficial Bank was then taken over by HFC Bank.

Some time later Kotecha made a request for a copy of the agreement that related to his credit card, pursuant to section 78 of the 1974 Act. This section requires a creditor to provide a copy of the agreement upon request and, under sub-section 6, until such a request is properly met the creditor cannot enforce the agreement.

HFC sent what it stated was an accurate copy of the agreement. In the case of Carey v HSBC [2009] EWHC 3417 (QB) it was stated that a creditor was entitled to reconstruct an agreement in the face of a request under section 78 and did not have to provide a copy of the actual agreement. Despite this, Kotecha disputed the documentation provided complied with duty of disclosure.

HFC issued a default notice against Kotecha and assigned the debt to Phoenix Recoveries. Kotecha defended the action in person based upon the alleged breach of section 78. At first instance, the county court found there was sufficient evidence that the agreement had been reconstructed appropriately for judgment to be entered against the defendant. Kotecha appealed.

On appeal counsel for Kotecha arguedthat the agreement had not been properly reconstructed. The creditor specified in the document was HFC and not Beneficial (which had originally issued the credit card) and there was doubt over the correct levels of interest. The Court of Appeal indicated that had the only issue been the identity of the creditor it would have been unlikely to find a lack of compliance.

The issue of the interest rate which was raised for the first time in the Court of Appeal was different. A copy of the leaflet which had formed part of the original promotional offer to Kotecha contained interest rates which were different to those that were given in evidence on behalf of the creditor. It was not clear which was the correct rate and for that reason the Court of Appeal allowed Kotecha's appeal, set aside the judgment and indicated that until the creditor's obligations under section 78 could be met the debt owed by Kotecha could not be enforced.

The decision of the Court of Appeal hardly opens the floodgates for challenges under section 78. There was a clear uncertainty about whether the information provided by the bank was correct. It does send a signal to creditors that the reconstruction of agreements following requests under section 78 has to bear some scrutiny. While there has been a degree of leeway given following Carey that leeway does have its limits.

Third time still unlucky for credit card customer

A case that went the other way, in the creditors favour, in the Court of Appeal was HSBC Bank v Brophy [2011] EWCA Civ 67. This was an appeal from an earlier appeal in the High Court by Mr Brophy.

Mr Brophy sent an application form for a credit card that was stated to be an agreement regulated by the 1974 Act and that it was subject to status. The agreement also indicated that Brophy's credit limit would be determined by the creditor from time to time and notified to him. The bank responded to Brophy's application by sending him a credit card.

It was argued on behalf of Brophy that his initial application could only amount to an 'invitation to treat' and not an offer (which the bank might accept) as only the bank could offer credit. Alternatively, it was an agreement to enter into a prospective agreement.

This is important because on the first interpretation the contract would be concluded by Brophy first using his credit card '“ acceptance by conduct which would be in breach of section 61 of the 1974 Act. That requires an agreement to be in the prescribed form containing all the terms etc. If it was an agreement to enter into a prospective agreement it would fall foul of section 59 of the 1974 Act which simply says that type of agreement is void.

The court found that Brophy was in fact making an offer to the bank to be bound by its terms and conditions as part of an application for credit. As such it was neither an invitation to treat nor an agreement to enter into an agreement and did not contravene the Act.

The other argument advanced on behalf of Brophy concerned the statement about the determination of the credit limit. The relevant regulations at the time the agreement was entered into were the Consumer Credit (Agreement) Regulations 1983. These included a requirement to either state the credit limit in a 'running-account credit' agreement or a statement of the manner in which the credit limit would be determined.

The court found that a very broad interpretation could be given to that requirement. A statement that the credit limit would be set at the bank's discretion was good enough. Brophy's further appeal was therefore dismissed.

PPI misselling

In the Manchester Mercantile Court, HHJ Wakeman QC '“ who has dealt with many of the consumer credit cases '“ considered the issue of payment protection misselling in Harrison v Black Horse Limited [2010] EWHC 3152 (QB). Mr and Mrs Harrison borrowed the sum of £46,000 from the bank and also took out payment protection insurance with a single premium of £11,500.

A standard assessment process was followed by the bank as part of the application which led them to recommend the PPI policy, and that being the only one sold. A number of factors might have suggested that the Harrisons were hard done by. It was accepted by the court that the cost of the PPI was very high. It also was noted that although the loan was repayable over 23 years the PPI would only provide cover for five years. In addition the bank was selling the policy on behalf of an insurance company and received a commission which amounted to £8,887.49 or 87 per cent of the total premium paid. The existence of that commission was not disclosed to the Harrisons when they took the policy out.

The judge criticised the bank for failing, as part of its pro forma assessment procedure, to consider whether in fact the Harrisons would want cover that would extend over the duration of the loan. This was part of the process of assessing 'demands and needs' of the customer, which was a part of the bank's duty in recommending a financial product. The judge also considered the non-disclosure of the commission which left the bank open to criticism.

However, on the facts of the Harrisons' case, HHJ Wakeman QC rejected their complaint. Essentially there was no evidence on which to conclude that had the bank acted differently the Harrisons would not have taken out the PPI policy. This might have been the case but the absence of evidence left the judge without a basis to reach that conclusion. While there may have been breaches of the bank's duties, the case failed on causation.

The case is interesting because the PPI policy sold to the Harrisons has many of the features which have offended many people. However, the failure of their case demonstrates that consumers do need to show not only that they have received a raw deal but that they would have acted differently had the rules been followed.

Pitfalls of cancellation notices

The road traffic accident industry continues to give rise to judicial guidance in the field of consumer credit thanks to the operation of credit hire agreements. In Guerrero v Nykoo (Swansea County Court, 25 October 2010) a challenge was made by the defendant in an RTA case to the claim for payment of credit hire charges.

Following an accident between the two parties, Mr Guerrero hired a replacement vehicle from Accident Exchange under the auspices of a credit hire agreement. Charges totalling £4,062 became the subject of litigation within the small claims track.

The defence claimed a breach of the Cancellation of Contracts Made in a Consumer's Home or Place of Work etc Regulations 2008. If Guerrero had no resulting obligation to pay the credit hire there was no basis for him to claim it as against the defendant. When the case came before the district judge he dismissed the claim on the basis of a breach of the regulations.

By the time the case came before a circuit judge in the county court, the case of Chen Wei v Cambridge Power and Light Ltd [2010] had dealt with most of the issues that had been raised regarding the 2008 regulations. The sole remaining issue related to the service of a notice of a right to cancel. Under the regulations where an agreement is entered into at a consumer's home it must contain a notice setting out a right to cancel. Under regulation 7(4) that notice needed to be incorporated into the same document.

The factual basis on which the court dealt with the issue in Guerrero's case was that the agreement and the notice of a right to cancel were separate documents. Furthermore it was noted that, while the notice referred to the agreement, the agreement made no reference to the notice. There was a lengthy consideration by the judge as to the meaning of 'incorporation' both in relation to this case and various other cases on the point.

The judge concluded that it was quite possible for the notice to be a separate document provided that the agreement contained a reference to the notice. In this case the absence of any reference in the agreement to the notice rendered the agreement unenforceable and the claim failed.

A significant concern on the part of the judge was that the absence of a reference in the agreement to the notice could mean an unscrupulous dealer could withhold the notice and the consumer would not be alerted to its absence. The correct approach was to interpret the regulations with the protection of the consumer in mind.

The legal profession's interest in the arguments that have arisen around the 2008 regulations in this case and Chen Wei should not merely be where they impact on the rights of their clients. Many solicitors see clients in their home and if the contract between solicitor and client is entered into during such a visit the regulations may apply and the appropriate notice (in the proper form) should be given. Failure to do so may lead to a subsequent challenge to the payment of costs by an unhappy client or in contentious matters by a paying party.

Super complaints and repenting sinners

Finally it is interesting to see that Which? has launched a so-called 'super complaint' in relation to charges levied when payments are made by credit or debit cards.

The issue is a familiar one '“ the amount charged does not reflect the cost to the business of transacting the payment particularly with the constant development of technology. This was effectively one of the main issues in the challenge to default bank charges '“ that the cost to the banks of dealing with a customer's default was significantly lower than the charge imposed. Perhaps we should rejoice at sinners repenting because in this instance the banks and credit card companies agree with Which? that the retailers imposing these charges should think again '“ on the basis that the charge made does not reflect the actual cost to the businesses.

Once Which? submits its complaint, the Office of Fair Trading will have 90 days to give a reasoned response. If the OFT considers there is merit in the complaint, that response can indicate a wide range of actions including further investigations. A salutary point is that the issue of payment protection insurance was the subject of a super complaint in 2005. As we await the outcome of the banks'judicial review of the FSA and the Financial Ombudsman's proposals for regulation of PPI selling, we anticipate that this particular issue may roll on for some time.