Rosling King LLP’s Consumer Credit Group recently acted for Southern Pacific Securities (“SPS”) in this test case before the Supreme Court concerning the interpretation of the Consumer Credit Act 1974 (“the Act”).  This is the first occasion upon which the key concept of credit has been considered by the Supreme Court. SPS successfully opposed the borrowers’ appeal.

Background

On 26 March 2005, Mr and Mrs Walker (“the Borrowers”) entered into a secured loan agreement with SPPL (“the Agreement”).  The loan was for a fixed sum of £17,500 and the Agreement was regulated under the Act.  The Agreement displayed the amount of credit as £17,500.  At the time they entered into the Agreement, the Borrowers paid a broker administration fee (“the Broker Fee”) in the sum of £875 to a mortgage broker responsible for arranging their loan with SPPL. The Broker Fee was paid by SPPL on their behalf and interest was charged on it for the term of the loan.

The Original Appeal

The Borrowers’ appeal was heard by HHJ Halbert sitting in the Chester County Court on 27 April 2009.  They alleged that the Agreement was unenforceable on the basis that the amount of credit, as defined by the Act, was inaccurately stated in the Agreement. The Consumer Credit (Agreements) Regulations 1983 provide that a regulated credit agreement must contain certain prescribed terms, one of which is the amount of credit supplied by a lender.  If these terms are absent or incorrectly stated in an agreement entered into prior to April 2007, it is rendered unenforceable. Judge Halbert accepted the Borrowers’ arguments and decided that the Agreement was unenforceable.  SPPL disagreed and appealed to the Court of Appeal.

Court of Appeal

SPPL challenged the Borrowers’ purposive interpretation of Section 9(4) and their suggestion that the Act prohibited the charging of interest on anything other than credit.  SPPL contended that Section 9 was purely a definition section, which defined credit for the purposes of the Act, and that interest was not a necessary feature of credit.  SPPL were successful in their appeal and the original Order for Possession was reinstated.

The Borrowers’ appeal before the Supreme Court
 
The Supreme Court granted permission and signalled the first test case in this area of the law at the highest level. The appeal was heard by Lord Hope, Lord Walker, Lord Brown, Lord Mance and Lord Clarke, who delivered the leading judgment.

The Borrowers argued that the Broker Fee was part of the true credit supplied by SPPL as time had been allowed for its payment and asserted that Section 9(4) effectively prohibited a lender from charging interest on anything other than credit. They suggested that the Agreement distorted truth in lending and that SPPL (now SPS) had sought to circumvent the legislation. The Borrowers maintained that interest is a necessary feature of credit and that to charge interest on the Broker Fee would be to treat it as credit in breach of Section 9(4). In addition, the Borrowers submitted that the interest on the Broker’s Fee was not catered for in the statutory scheme and that, as it could not be properly described as credit or a charge for credit, it could not lawfully exist and was therefore prohibited. Clearly, this proposition could have had serious consequences for many lenders.

In response, SPS argued that the word “credit” has a special statutory meaning and that in order to determine the amount of credit in a regulated agreement; one had first to strip out the items that were not credit, which included the Broker Fee and any interest charged on it. Further, SPS contended that interest on a charge formed part of “other charges” under the TCC Regulations 1980 and that interest on the Broker Fee was therefore catered for as part of the statutory scheme.  It followed, they said, that the Borrowers’ argument was flawed and that the Agreement was fully enforceable.

The Decision

The Supreme Court rejected the Borrowers’ arguments.  The Court decided that the Borrowers’ purposive interpretation of Section 9(4) of the Act, which underpinned their case, was at odds with previous cases, including the previous leading Court of Appeal case in this area (Wilson –v- First County Trust) and ran contrary to the plain meaning of the statute. Lord Clarke drew a distinction between the meaning of credit for the purposes of the Act and what might be understood in common parlance to be credit. The Court agreed with the arguments put forward by SPS, confirmed that the Borrowers’ loan agreement complied with the Act and the Regulations and endorsed the unanimous Judgment of the Court of Appeal.

Comment

The Supreme Court’s Judgment in this case will affect thousands of loans and is very positive news for lenders.  The Borrowers’ argument here has been echoed in many other claims. There can now be no doubt regarding the meaning of credit in the Consumer Credit Act 1974; this decision represents a definitive authority on the point. The Judgment may be regarded as symptomatic of a shift by the Courts towards the commercial reality of the borrower/lender relationship.  It should help discourage the use of legislation designed as a shield to protect consumers from being used as a sword by borrowers who are seeking to avoid repaying their debts.

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