In a welcome decision for finance companies writing Consumer
Credit Act 1974 (the Act)-regulated business, the Court of Appeal
has provided some clarification on the statutory meaning of
“credit”, how “the amount of credit” should be calculated and
whether interest can be applied to charges for credit.
The facts
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In Southern Pacific Personal Loans Ltd vs
Walker and another, the defendants entered into a fixed sum credit
agreement with the claimant finance company for the sum of £17,500.
That sum was stated in the agreement to be “the loan” and “the
amount of credit”.
A “broker administration fee” of £875 was added to
the £17,500 so that £18,375 was stated to be “the total amount
financed”. The loan was secured by a second charge on the
defendants’ property.
Following default in payment, a suspended
possession order was made in the claimant’s favour.
The defendants appealed on the basis that the
agreement was unenforceable as it did not correctly state “the
amount of credit” as required under the Act as it did not include
the broker administration fee.
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By GlobalDataFirst instance decision
At first instance the judge agreed with
the defendants, holding that the sum of £18,375 was “the amount of
credit”.
He held that despite the fact the £18,375 had not
been described as “the amount of credit”, it was treated as such as
interest was calculated on that total amount rather than just on
the £17,500. Further, he also held that the Act prohibited interest
on a charge for credit, as opposed to on the credit itself. He
discharged the charge. The lender appealed.
The Court of Appeal’s
view
In allowing the appeal, the Court of
Appeal held that section 9 of the Act (which provides the statutory
definition of “credit”) expressly provided that an item entering
into the total charge for credit, such as the broker administration
fee here, was not to be treated as credit, even if time to pay was
allowed.
The court held that interest is not a necessary
feature or indicator of credit. Interest is not mentioned anywhere
in sec-
tion 9.
If the legislature had intended to prohibit
interest on charges for credit, that prohibition would have been
expressly and clearly spelt out in the Act. It was not.
The fact that interest was charged, or re-payment
deferred, did not convert a charge for credit into credit.
The broker administration fee was an item entering
into the charge for credit and should not be treated as credit
under the Act.
The £18,375 was not the true “amount of
credit”.
The administration fee had been correctly excluded
from “the amount of credit” which was therefore correctly stated in
the agreement. The agreement was therefore clear and
enforceable.
Comment
Finance company lenders should be pleased
with this, the latest in a spate of consumer credit litigation
decisions to go their way.
Hopefully, it will further help to
discourage borrowers challenging consumer credit agreements in an
attempt to have them rendered unenforceable.
Greg Standing
The author is a partner in Wragge
& Co LLP’s Finance, Insolvency, Recoveries and Sales
team
