It is estimated that around 40 million policies of payment protection insurance (“PPI”) have been sold in Britain in the last 6 years alone, making this the second biggest selling insurance product on the market. However, the way in which these products have been sold may have unintended and serious consequences for lenders when they seek to take enforcement action against their borrowers.

The Consumer Credit Act 2006 provides that the Court may examine whether an unfair relationship exists between a lender and a borrower. What constitutes an unfair relationship is not specified in the Act and therefore Parliament has left this question to the Courts. A recent County Court decision illustrates the potential implications for lenders if the Court decides that a relationship with a borrower is unfair.

The Facts

Ms Thorius took out a credit card with MBNA in 2002, which was emblazoned with the logo of Sunderland FC, her favourite football team. At the time of her application, MBNA strongly recommended that Ms Thorius should purchase a PPI policy to meet her monthly payments if she fell ill or was made redundant. However, she indicated in writing on the application form that she did not require PPI. Her request fell on deaf ears and a PPI policy was taken out in her name at a cost of £20 per month, which later increased to £30 per month. MBNA did not disclose to Ms Thorius that it would receive regular commission payments from the PPI insurer and neither did they supply Ms Thorius with a copy of the credit card agreement.  This would prove to be fatal.

Ms Thorius ran up a balance on her card but then lost her job and she attempted to make a claim under the PPI policy. Her claim was refused. As time passed, she was unable to meet her repayments but her credit limit was increased to allow for the spiraling balance on her account, which eventually grew to in excess of £8,000.  MBNA subsequently demanded repayment of the debt and took enforcement action.

After a 9 hour hearing at the Newcastle-upon-Tyne County Court, Deputy District Judge Jacqueline Smart decided that the PPI policy had been unfairly imposed by MBNA and, as a result of the way in which the PPI policy had been sold; that an unfair relationship existed between MBNA and Ms Thorius.  The Judge also took a dim view of the “secret commission” that MBNA had received from the PPI insurer.

MBNA were ordered to either repay the PPI premiums of £2,500 plus interest or the value of the commission it had received.  Further, as MBNA were unable to produce a copy of the original signed credit card agreement, the Court held that MBNA could not take enforcement action against Ms Thorius, which means that she will not have to repay the debt.

MBNA applied to the Court for permission to appeal but this was refused as MBNA had failed to locate a copy of the original credit card agreement. Bearing in mind the consequences of the Judgment, MBNA may now apply for permission to appeal direct from the Court of Appeal.


The way in which PPI policies have been sold in the past has recently come under close regulatory scrutiny. This Judgment reinforces the view that lenders may find themselves up against hard fought defences from borrowers on credit cards and loans.  Ms Thorius’ representatives have been keen to stress in the press that the Judgment could open the floodgate for similar claims against lenders where the PPI policy has been sold alongside a loan. However, although the Courts may choose to be guided by the Judgment, they are free to decide similar cases differently.  This will change if the Court of Appeal reviews and makes a decision on this case, which would then be binding on all lower courts in the same circumstances.

It is important to remember that it was MBNA’s reported failure to produce a copy of the original credit card agreement that was the primary influencing factor in this case. Lenders should take note of the Court’s power to prevent action being taken to collect a debt where they decide that an unfair relationship exists. The Court will examine the circumstances in each case before making their decision.  That is why it is important for lenders to treat these cases seriously and ensure that the best possible position is presented to the Courts at hearings.

The Financial Services Authority (FSA) has recently begun a review of the sale of PPI policies on other loans, including mortgages and proposes to introduce new rules to ensure that PPI complaints are handled properly and redress is paid where appropriate. Its Consultation Paper 09/23, The Assessment and Redress of PPI Complaints, was published last week and invites responses by 30 October. The FSA has set a short consultation period due to its recognition of the need to make a speedy determination on this issue. The FSA has recently directed lenders to re-open 185,000 previously rejected complaints about PPI and to assess whether their responses were fair. Clearly, this will be a live issue for the foreseeable future.

For further information please contact Georgina Squire or the Partner with whom you usually deal