6. Unfair relationships
The Consumer Credit Act (CCA 2006) amended the Consumer Credit Act 1974 (CCA 1974) to introduce the concept of an ‘unfair relationship’. It relates to credit agreements entered into after 6 April 2007 or agreements which had not been repaid by a client before that date.1ss19-22 and Sch 3 paras 14-17 CCA 2006 It provides greater protection to clients to redress unfairness in consumer credit agreements between a lender and a client (borrower). These provisions are in addition to the Financial Ombudsman Service’s jurisdiction. They apply to regulated and non-regulated agreements, including exempt agreements, regardless of the amount of credit involved (except if the agreement is exempt because it is a regulated mortgage contract). The CCA 2006 does not define an unfair relationship. It sets out, in general terms, factors that may give rise to an unfair relationship. These include:
•where the terms of the agreement or related agreement are deemed to be unfair to the borrower of the loan;
•how the creditor has exercised or enforced their rights under an agreement – eg, seeking to issue legal proceedings and recover the debt due;
•anything done (or not done) by, or on a lender’s behalf, in respect to the loan agreement or a related agreement – eg, to the loan agreement itself, or an insurance policy running alongside it.
The provisions also relate to all second charge lending as long as the relevant agreement was entered into before 21 March 2016. Any second charge lending after 21 March 2016 is governed by the Financial Conduct Authority’s Mortgages and Home Finance: conduct of business sourcebook (MCOB) regime and the provisions do not apply. ‘Second charge lending’ is when a client takes out a loan secured against their property when they already have a mortgage (the first charge).
In some cases, unfair contract terms may be sufficient in themselves to give rise to an unfair relationship, but the court can also look at:
•how agreements are introduced and negotiated; and
•how agreements are administered; and
•any other aspect of the relationship it considers relevant.
Both actions and omissions can be unfair. This includes actions or omissions on behalf of the creditor or suppliers (who are deemed agents of the creditor) and debt collectors. These include:
•pre-contract business practices such as misleading advertisements, mis-selling products, high-pressure selling techniques, and irresponsible lending;
•post-contract actions, such as demanding money the borrower has not agreed to pay and aggressive debt collection practices;
•failing to provide key information in a clear and timely manner or to disclose material facts.
The court must take into account all matters it thinks relevant, including those relating to the individual client and creditor. This means that a term or practice may not be unfair in a particular case because of the client’s knowledge or experience, but may be unfair in another client’s case if they are more vulnerable or susceptible to exploitation. There is also an expectation that clients will act honestly in providing accurate and full information to enable the creditor to assess risk.
Powers available to the courts include:
•making the lender/creditor repay the client some or all of the value of the loan;
•ordering the lender/creditor to release the client from all or a portion of the remaining balance of the loan;
•ordering the lender/creditor to release their claim on the property offered by the client as collateral;
•releasing the client from having to pay any penalties that may have resulted from the unfair relationship;
•changing the terms of the agreement or any related agreement, such as an insurance policy to protect payment required under the loan to make the terms fair to the client.
The unfair relationships provisions may be especially useful for clients facing court proceedings for enforcement of a debt or repossession, or where the restrictions on the ombudsman’s jurisdiction mean that a client has no option but to resort to the unfair relationship provisions to challenge the creditor or defend the court action. However, they should be viewed as a remedy of last resort. Debt advisers should get specialist advice if considering using these provisions.