There has been an increase in claims management activity regarding complaints and claims alleging irresponsible lending. Martin Ward and Gary Orritt from Eversheds Sutherland investigate in more detail…

Such complaints and claims have largely been targeted at the high court short term credit market.  Such activity is only likely to increase following the handing down of the judgment in Michelle Kerrigan and 11 ors v Elevate Credit International Limited (t/a Sunny) (in administration) [2020] EWHC 2169 (Comm) (“Elevate”), the first of a number of similar claims brought against payday lenders involving allegations of irresponsible lending.

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In summary:

  • Over 300 claims were brought against Elevate, of which 12 were selected to proceed as test cases.
  • The claims alleged breach of statutory duty for breach of CONC, and an unfair relationship under s140A of the Consumer Credit Act 1974. Some of the test cases also included personal injury claims, but these were dismissed on the basis that no duty of care was found.
  • It was found that Elevate had not taken into account patterns of repeated borrowing and the potential adverse impact on the customers’ financial position. It was further found that there were no clear and effective policies and procedures in place for assessing creditworthiness.
  • As a result, there was a breach of statutory duty. However, the claimants would struggle to show that they had suffered any loss, as they may have been able to obtain a loan compliantly elsewhere.
  • This was less of an issue with the unfair relationship claim, as there was no duty to show a loss; just that the credit relationship was unfair. Breaches of CONC, along with other factors such as a high interest rate, made the relationship unfair.
  • Damages were not assessed, as by the time judgment was handed down Elevate was in administration. However, the court gave a steer that the way to remedy the unfairness would be to refund all interest paid on the loans.

Elevate demonstrates that unfair relationship claims continue to have a wide potential application with uncertain outcomes.  Such claims have generous limitation periods, and there is often the need to interpret pre-CONC rules from many years ago.  As a result, Elevate could have wider application in other lending markets, including motor finance.

Implications

In 2017, the FCA commenced a review as to practices within the industry, with the results published last year. One key finding was the FCA’s lack of satisfaction that all motor finance providers complying with its rules on creditworthiness, including relating to affordability.

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While the FCA was carrying out their motor finance review, it published PS18/19 in July 2018 focusing on the requirement for reasonable assessments to be made of a customer’s ability to repay affordably.

A creditworthiness assessment includes two types of risks:

  • the credit risk that the customer will not make repayments under the agreement by the due date; and
  • the affordability risk to the customer of not being able to make repayments under the agreement in accordance with CONC 5.2A.12R.

The affordability risk factors under CONC 5.2A.12R include consideration by a lender of a customer’s ability to make repayments:

  • As they fall due over the life of the agreement.
  • Out of income, income from savings or assets jointly held or where there is a clear indication that certain savings or assets will be used to make repayments.
  • Without the need for borrowing to meet the commitment.
  • Without failing to make other contractual or statutory payments due elsewhere.
  • Without there being a significant adverse impact on the customer’s financial situation.

Affordability and COVID-19

In April 2020, the FCA announced temporary targeted measures in April 2020 to tackle Covid-19, particularly around payment deferrals. On 15 July 2020, the FCA published updated guidance which included the need to consider ongoing affordability once payment deferrals or payment reductions had ended.

With particular focus on affordability, motor finance providers should:

  • Ensure that they understand the FCA’s affordability requirements, and not solely focus on ‘credit risk’ when making creditworthiness assessments.
  • Ensure that policies and procedures are kept continually up to date. Such policies should be clear and effective.
  • Consider, and keep customers informed as to, the implications of any temporary payment reductions or referrals. The consequences for consumers can be much wider than may be immediately obvious, and may, for instance, impact a customer who is separately seeking to take out a mortgage.
  • Remain alive to the potential for litigated claims or complaints to the FOS in this area. Unfair relationship claims based on irresponsible lending allegations could become prevalent in all areas of consumer finance.