Unfair relationships

The concept of unfair relationships was introduced with the Consumer Credit Act 2006. A debtor can challenge an agreement on the grounds that the relationship is unfair to the borrower.
Unfair relationships and the Consumer Credit Act

The provisions apply to credit agreements entered into after April 6th 2007 and to agreements made before this date unless the account was closed (consolidated or paid in full) before April 6th 2008. The court has new powers to re-open a closed account if it considers that there was an unfair relationship.

The provisions with regards to unfair relationships also apply to closed accounts where there is no amount outstanding as well as those subject to a judgment.
The unfair relationships argument can be useful to defend claims and repossession action.

Although the Consumer Credit Act does not define what constitutes an unfair relationship, it can refer to:

  • Unfair contract terms
  • The overall conduct of the creditor when exercising their rights under the agreement
  • The way in which agreements are negotiated and administered
  • Misleading advertising
  • Mis-selling credit products and ancillary products (such as insurance)
  • High pressure selling
  • Irresponsible lending
  • Failure to provide key information
A court may decide whether a term or practice is unfair on the basis of the borrower’s knowledge or experience, meaning that what is regarded as unfair in one case may not be regarded as such in a different case.

S.140 of the Consumer Credit Act 2006 deals with unfair relationships.

140 Unfair relationships between creditors and debtors

(1) The court may make an order under section 140B in connection with a credit agreement if it determines that the relationship between the creditor and the debtor arising out of the agreement (or the agreement taken with any related agreement) is unfair to the debtor because of one or more of the following—

(a) any of the terms of the agreement or of any related agreement;

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

(c) any other thing done (or not done) by, or on behalf of, the creditor (either before or after the making of the agreement or any related agreement).

(2) In deciding whether to make a determination under this section the court shall have regard to all matters it thinks relevant (including matters relating to the creditor and matters relating to the debtor).

(3) For the purposes of this section the court shall (except to the extent that it is not appropriate to do so) treat anything done (or not done) by, or on behalf of, or in relation to, an associate or a former associate of the creditor as if done (or not done) by, or on behalf of, or in relation to, the creditor.

(4) A determination may be made under this section in relation to a relationship notwithstanding that the relationship may have ended.

(5) An order under section 140B shall not be made in connection with a credit agreement which is an exempt agreement by virtue of section 16(6C).

The view of the Supreme Court
court1In Plevin v Paragon Personal Finance Ltd the Supreme Court has clarified various aspects of the law of Unfair Relationships under ss.140A-140C of the Consumer Credit Act. In November 2014, the Supreme Court ruled  that a failure to disclose to a client a large commission payment on a single premium PPI policy made the relationship between a lender and the borrower unfair under s.140A of the Consumer Credit Act 1974.

The following situations could be regarded as indicative of an unfair relationship:

  • Requiring borrowers to sign new agreements replacing pre-April 2007 unenforceable agreements;
  • Threatening to enforce irredeemably unenforceable agreements (pre-April 2007 agreements without all the prescribed terms);
  • Irresponsible lending including failing to assess a borrower’s ability to pay and churning;
  • Use of orders for sale to enforce unsecured debts secured with a post-judgment charging order;
  • Misleading borrowers about their rights;
  • Not allowing borrowers enough time to read all the terms of the agreement and/or seek independent advice if appropriate and applying unreasonable pressure to sign the agreement;
  • Mis-selling insurance products such as PPI and misleading borrowers into thinking their purchase is mandatory;
  • Failing to disclose details of the commission paid by insurers to lenders or brokers for PPI;
  • Compounding interest and charges.
Payment protection insurance (PPI) and similar products

PPIPayment protection insurance is intended to cover your loan repayments or credit card minimum payments in case of sickness or unemployment. Most policies only cover repayments for a set period of time, usually a year and they are conditional. This means you may not be covered if you are unable to work due to an illness arising from a preexisting condition and will only cover you for redundancy but not if you leave your job voluntarily (resign) or are sacked for alleged gross misconduct. In cases of unfair dismissal, the insurers may ask for a transcript from the Employment Tribunal which would make claiming on the policy impractical due to the time it takes for a claim to be heard.

Insurance was administered differently for various credit products. With revolving credit such as credit cards, the premiums were added monthly to the card balance and were a certain percentage of the amount outstanding on the card. For loans, insurance was often paid for as a single premium which was included as part of the amount borrowed and interest charged on it. Mortgage insurance was often charged as a fixed monthly amount which was completely separate from the mortgage.

In many cases, the lender or broker made it a condition of the loan to take out single premium insurance, which could have made the whole agreement unenforceable if taken out before April 6th 2007 (provided it was a regulated agreement). If a debtor can establish that the insurance was mandatory to be approved for the loan, a court could well find that there was an unfair relationship and the court can take into account any failure to disclose the commission paid by insurance companies to those who sold the policies.

When insurance has been mis-sold, the first step would be to complain to the lender itself before taking it to the Ombudsman. With defaulted accounts, any redress is likely to be offset from the amount outstanding rather than being paid back to the debtor, however, in some cases where the debt has been assigned in absolute (sold), redress has been paid directly to the debtor.

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