Kerrigan v Elevate Credit – an “unfair relationship”

The judgment in the Kerrigan & others v Elevate Credit International Ltd was published on 5 August 2020.

Elevate Credit International was a large UK payday lender, trading as Sunny.

Kerrigan and the other eleven claimants were Sunny customers who had made affordability complaints to Sunny through a claims company. The claims company brought the case and selected six claimants; Sunny selected the other six.

Here I am interested in the implications of this judgment for affordability complaints in general, not just against payday lenders.

Background on Sunny

Sunny’s payday lending model was unusual, often lending comparatively small amounts but very frequently, allowing customers to have several loans open at a time.

Since 2015 an increasing number of people have complained about unaffordable credit to payday lenders and other bad credit lenders.

I looked at Sunny’s affordability complaint problem in 2019 in Sunny concerned about lack of regulatory clarity – really? and again this year in Sunny goes into administration – what should customers do?

• Sunny had only been upholding 8% of complaints made to it.
• in the last half of 2019, FOS had agreed with the customer in 76% of Sunny cases.
• Sunny was rejecting many FOS adjudicator decisions.
• Sunny’s US parent had said it needed greater clarity from the UK regulators.

The FCA’s DISP rules say lenders should take FOS decisions in similar cases into account and aim to minimise the number of complaints referred to FOS. The low number of complaints Sunny was upholding and the high percentage upheld at FOS suggests that Sunny was not doing this.

The judgment

This is my overview, looking at the more general points made in the judgment, the Claims and the decisions on the Claims.

Anyone interested in affordability complaints and the high cost credit market should read the judgment in full. It went into detail on the regulatory background and Sunny’s processes for deciding to whether to make a loan. And there was some discussion of other matters which may be of relevance in an individual case, including the interest rates charged, damages for loss of credit rating and the level of compensatory interest awards.

Elevate’s legal counsel has given a summary of the judgment here: High Court Judgment in Payday Lending Test Case ‘Kerrigan v Elevate’.

Elevate Credit went into administration

The case was heard in March 2020. When Elevate Credit went into administration in June 2020 that would normally have been the end of the case, but the judge agreed to give a judgment saying:

the discussion of these sample claims may be of assistance to other parties to similar litigation. [1] 

No decision was reached on each of the individual Claims:

That is in part because of the appointment of Administrators to the Defendant, in part because there are issues which have arisen in the course of preparing this judgment which need further exploration, and in part because of the pressing need to hand down a judgment which deals with as many of the general issues as I can. That is not an entirely satisfactory situation, but I have concluded that it is the best way forward. [225]

An outline of the Claims

There were three types of claim:

• a  Financial Services and Markets Act 2000 (FSMA) section 138D claim for contravention of the Financial Conduct Authority (FCA)’s Consumer Credit Handbook (CONC) rules;
• a claim for damages in negligence for the psychiatric injury caused to one claimant by the loans; and
• a Consumer Credit Act 1974 (CCA) section 140 claim that the relationship between creditor and debtor arising from the loans was unfair to the debtor.

Three different regulatory periods were identified and analysed in the judgment. My summary of these is:

1. before April 2014 the relevant regulator was the Office of Fair Trading (OFT) which produced a report on Irresponsible Lending Guidance (ILG);
2. between April 2014 and start January 2015 the FCA was the relevant regulator. Its CONC rules to a large extent followed the ILG;
3. from January 2015 the FCA’s “price-cap” rules imposed additional requirements for payday loans.

The different Claimants had loans in different periods, but:

The unfair relationship provisions of ss.140A-C of the CCA 1974 applied throughout the three regulatory periods which cover the claims. The Claimants first line of attack in the second and third periods is the FSMA claim, but they argue that even if the FSMA claims fail, the relationship between the parties arising from the relevant credit agreements was unfair to them. [12]

The judgment summarised the Claimants’ case as follows:

The principal attack is upon the Defendant’s failure to take account of patterns of repeat borrowing in the course of conducting a creditworthiness assessment. [34]

The Defendant’s case was summarised as:

the formulation of its creditworthiness assessment was “reasonable and proportionate to the type of lending it advanced and the customers it served”. [39]

The FSMA s138D claim

The judgment was that the Defendant had failed to take repeat lending into account:

… Defendant did not take the fact or pattern of repeat borrowing into account when considering the potential for an adverse effect on the Claimant’s financial situation… In simple terms there was no consideration of the longer term impact of the borrowing on the customer. [128]

and that this breached the FCA’s CONC rules:

The fact that the Defendant did not use the information it had about previous Sunny loans, and constructed its creditworthiness assessment without consideration of the risks presented by repeat loans satisfies me that it breached the requirements of CONC 5.2.1. The same breach can be analysed as a failure to base its creditworthiness assessment on sufficient information per CONC 5.2.1(3), a failure to establish and implement clear and effective policies and procedures to make a reasonable creditworthiness assessment or a reasonable assessment as required by CONC 5.2.2R (1), and in the context of [the ILG], a failure to take reasonable steps to assess whether a prospective borrower is likely to be able to meet repayments in a sustainable manner. [129]

The judgment then looked at the need to establish causation:

This is a claim for breach of statutory duty. To succeed a claimant has to show that on the balance of probabilities damage was caused, both in fact and as a matter of law, by the Defendant’s breach of duty… The issue of causation is to be considered on the facts of each individual claim. If a breach has no causal link to the loss the claim fails. [132]

The Claimant’s attempt to argue that the breach was systemic and that all loans should be compensated as the Defendant did not have clear and effective policies was described as an apparently attractive short-cut through causation, which failed:

A failure to comply with the requirements of CONC for the making of a creditworthiness assessment does not make the assessment void, nor does it affect the legal validity of the loan as such. It enables the FCA and the Ombudsman to exercise certain powers, and in the context of the civil law the breach of a rule gives rise to a claim for breach of statutory duty. For a breach to be actionable a person must suffer loss “as a result” of the breach. [134]

The judgment then considered issues with establishing causation in an individual case and how to assess loss once causation has been established. The judgment didn’t reach a decision on each of the Claimants (except for one, see section below on Dishonesty):

Given the difficulties of the exercise and the fact of the administration of the Defendant, I have not attempted to work through the causation exercise on the facts of each claim. [145]

The claim for damages for psychiatric injury

The Claimant argued that:

in carrying out a statutory duty (here the creditworthiness assessment) a defendant may bring about a relationship which gives rise to a duty of care at common law. [170]

The judgment was that this would require a significant extension of the law of negligence and that this should not be made:

There is neither the closeness of relationship nor the reliance upon advice or representation that are seen  in cases where the courts have found that a duty of care exists in the context of the provision of some sort of financial service… The lack of analogous cases, and the gap between the decided cases and the circumstances of this one suggests that this is not a case where an extension of the law is required. [175]

and said:

Given that such a development in this area would build on the existing regulatory regime, it is a pre-eminently a matter for the regulator (certainly at the present time). The FCA is considering whether a general duty of care should be imposed by statute; see FS19/2. It is apparent that unsustainable lending to vulnerable people can cause them harm which goes beyond the financial, but the FCA is better placed to evaluate and balance the competing public interests at play here. [182]

The CCA s140 “unfair relationship” claim

The judgment started off by saying:

a failure by a creditor to undertake a proper creditworthiness assessment prior to entering into a regulated credit agreement would almost certainly affect the fairness of the relationship and so trigger the Court’s power to make appropriate orders under section 140B [11].

CONC breaches by the Defendant had been established as part of considering the FSMA claim and these were are likely to result in an unfair relationship:

I have concluded that the defendant was in breach of  CONC 5.2 in failing to take proper account of the potential for the commitments undertaken by these loans to have an adverse financial effect upon claimants…
where a borrower is making repeated applications for HCST credit from a lender, prima facie the failure to comply with the rules leads to an unfairness in the relationship.[208]

In an unfair relationship claim, the onus is on the lender to prove fairness. Whilst it is likely that a breach of the rules in CONC will be sufficient to render the relationships unfair, there will be cases where the lender can show that the failure to comply with the rules does not have that effect. That will be for the lender to demonstrate. [209]

The longer the repeat lending from Sunny, the more likely it is that it results in an unfair relationship. The Defendant had previously divided the Claimants into groups depending on the length of their borrowing:

• 5 claimants with 30-51 loans
• 4 claimants with 18-24 loans
• 3 claimants with 5-12 loans.

The judgment did not look at the individual Claims but said:

It may be that the repeat borrowing of the bottom group of 3 was at a level where the Defendant might be able to show that the relationship was fair (or that if it was unfair no relief was justified). In my view, that would be difficult in relation to the middle group, and a very steep hill to climb in relation to the top group. [209]

The causation complications that had applied to the FSMA claim don’t apply here:

The terms of section 140A(1) CCA do not impose a requirement of “causation” in the sense that the debtor must show that a breach caused a loss for an award of substantial damages to be made. The focus is on the unfairness of the relationship, and the court’s approach to the granting of relief is informed by that, rather than by a demonstration that a particular act caused a particular loss. [213]

It concluded that a refund of interest is likely to be the appropriate remedy;

If the lack of such an assessment rendered the relationship unfair then how is that unfairness remedied? The repayment of interest and any arrears of interest and charges in relation to that loan and subsequent loans (assuming the unfairness persists) is likely to be appropriate. The repayment of the money lent (prima facie) is not, because the claimants had the benefit of that money. [222]

Dishonesty – it cuts both ways

The FCA’s consumer protection objective in FSMA s1C(2)(d) sets out:

the general principle that consumers should take responsibility for their decisions.

One of the Defendant’s responses to the Claims was that:

Claimants were required to prove that they accurately declared their income and expenditure, and that if they did not they should be held responsible for their own negligence or dishonesty. [39]

The judgment noted that a common problem was:

the failure of claimants to return accurate answers to questions about their income and expenditure, despite the fact the application form requires customers to confirm that the information is true and accurate. There are examples of income levels being exaggerated, and in one case (Rebecca Adams) simply made up, and there are many examples of outgoings being underestimated, sometimes by a substantial amount. The question of the customer’s responsibility for conduct of that kind is relevant to the FSMA and the CCA claims. [41]

It concluded:

I was satisfied that most of these Claimants were doing their best to give honest answers most of the time, even if they turned out not to be accurate, sometimes by significant amounts… the process encourages speed, defaults to using brackets for the financial data it collects, and requires no supporting documents. The way the different types of expenditure were described in some of the fields also gave rise to an understandable confusion in some cases. What expenditure was being asked for was not always clear, even to those in court reading the rubric, with the benefit of time, and without the pressure of needing to get a loan. [206]

when considering the fairness of the relationship, the Defendant cannot complain about the sort of essentially honest errors which this rapid application process is bound to throw up. [207]

and

Whilst some of the Claimants used their money unwisely … and over-estimated their means, I would not regard that as conduct which affected the fairness of the relationship, nor should it deprive them of a remedy. The one exception to that is Mrs Adams. [211]

It also emphasised that:

The point cuts both ways. On the one hand the customer is asked to provide this information and to do so honestly and accurately. The customer knows (or ought to know) what their financial situation is, and that the Defendant will rely upon the information they provide. On the other hand, CONC 5.3.7R provides that there comes a point when the Defendant should not rely upon that information when it knows or ought reasonably to suspect that the customer has not been truthful. [52]

and it found situations where the Defendant should have suspected the application was not true:

The Defendant undertook a CRA search … and in a significant number of cases the results demonstrated a far higher level of expenditure than the customer had given… [the Defendant did not] consider whether the discrepancy in the individual case gave rise to a reasonable suspicion that the customer had not been truthful.
… customers entered zero for certain items of expenditure, when that could not have been the case, or was inconsistent with earlier information provided by customers on previous applications to the Defendant for loans. [54]

The implications for affordability complaints at FOS

The elephant in the courtroom

Mentioned just twice in the judgment (once when part of FSMA was quoted and once in passing), FOS was the elephant in the courtroom in Birmingham where this case was held.

In March 2020, Sunny customers who had had a FOS adjudicator decision in their favour were told by Sunny that Sunny wanted them put them on hold because of this court case. For example:

“we have temporarily paused communicating our decision on [adjuidcator decisions] as it is anticipated that there will be relevant new case law published within the next 4-6 weeks which may impact those adjudications…

We appreciate this may mean a short delay for some customers. However, we believe that it is in the best interests of our customers that this imminent case law is taken into consideration by both Elevate and FOS to ensure fair and consistent outcomes for all consumers.”

FOS has a duty to decide a complaint by reference to what is, in its opinion, fair and reasonable in all the circumstances of the case. It will consider the law and regulations; regulators’ rules, guidance and standards; codes of practice; and (where appropriate) what it considers to have been good industry practice.

That is a much broader remit than the court so, in any particular case, FOS could reach a different decision to a court.

However if the judgment had been different, say if had determined that Sunny had not broken CONC affordability assessment rules, that no unfair relationship was found, that high compensation for loss of credit rating was due, that Sunny’s negligence had harmed a claimant’s mental health, or many other theoretical permutations, FOS would no doubt now be considering whether and how it should change its approach to determining some complaints.

So I will look at how the actual judgment compares to the current FOS approach.

Payday loan relending cases

Looking at different aspects of FOS decisions in payday loan affordability cases where there was repeat lending:

In 2018 FOS set out what it considers to be the relevant legal and regulatory situation in two lead decisions about long series of loans: Lender A and Lender B. This is broadly the same as the History of Regulation section in the judgment [6-60]. Some of the points FOS did not mention (eg PRIN 2; the price cap) turned out not to be of much significance in the judgment.

FOS has set out the general issues it looks at in an affordability complaint here:

1. Did the lender complete reasonable and proportionate checks to satisfy itself that the borrower would be able to repay any credit in a sustainable way?
2. If reasonable and proportionate checks were completed was a fair lending decision made?
3. If reasonable and proportionate checks weren’t carried out, what would reasonable and proportionate checks more likely than not have shown?
4. Bearing in mind the circumstances, at the time of each application (or increase in credit), was there a point where the lender ought reasonably to have realised it was increasing the borrower’s indebtedness in a way that was unsustainable or otherwise harmful and so shouldn’t have provided further credit?
5. Did the lender act unfairly or unreasonably in some other way? [my numbering]

These appear to be broadly similar to many of the issues the judge considered:

(1) amounts to whether the Defendant complied with CONC 5.2.1;

(2) at several points in the judgment [eg 130] the judge queries whether the Defendant made the correct lending decision given the information it knew;

(3) reflects the need to ensure that the customer has actually suffered loss, because the right checks might have shown that there was no loss, which the judgment set out in various places, eg:
“Put another way, the loss is caused because the creditworthiness assessment undertaken failed to consider the potential for that loan to have an adverse impact on that borrower’s financial situation. It cannot be said that every loan made where there is no such clear and effective policy and procedure will cause loss to a borrower”. [50]

(4) is the general point that in a repeat lending case, where does the repeat lending become a problem that requires redress? Which again was addressed in various places in the judgment, eg:
But having been satisfied of a pattern by loan x, if lending continued without any significant gap, I doubt that a Court would require much persuading that there were further breaches of CONC causing loss. [132]

FOS describes the redress when an unaffordable lending complaint is upheld as follows:

If we think the borrower was unfairly provided with credit and they lost out as a result – we typically say the lender should refund the interest and charges their customer has paid, adding 8% simple interest. 

which is what the judgment says [222].

As the judgment did not reach conclusions on the individual claims, it isn’t possible to look at how they might have compared to what FOS might have decided. But the general points in the judgement seem to me to be close to the typical FOS approach.

Other relending cases

There is little in the judgment that is payday loan specific. The read across to other forms of high cost credit seems clear – if you break the FCA’s CONC creditworthiness assessment rules that is likely to result in an unfair relationship and for the borrower to get a refund of interest paid.

This appears to be reinforced by the FCA’s  Relending by high-cost lenders report, published the day after the Kerrigan judgment was handed down. This report covered not just payday lending but also: guarantor loans, high-cost unsecured loans aimed at subprime customers, home-collected credit, logbook loans and rent to own.

It found that:

For all high-cost lending business models in our sample, relending is a significant part of their business. Many firms, particularly those offering small value loans, do not make a profit on a customer’s first loan. Profitability in high-cost lending firms is therefore mainly driven by relending. For nearly all firms, profitability increases for subsequent loans, in many cases substantially.

and

our analysis of data provided by firms and our consumer research shows breaches of specific rules as well as breaches of our principles for business.

Other affordability cases

So what about one loan cases?

These were not discussed in Kerrigan, but the general approach in the judgment of a CONC breach being likely to give rise to an unfair relationship would still seem to apply.

FOS has set out that it considers more through “reasonable and proportionate checks” are needed, the lower a customer’s income, the higher the amount to be repaid and the longer the term of the loans or the greater the number of loans.  For large loans given to customers known to be in difficult financial circumstances, the FOS decision can be that the lender should have made more thorough checks on the first loan, including verifying income and expenses.

Where FOS does decide that more thorough checks should have been made on the first loan, two points occur to me. First much of the causation problems the judge noted in the FSMA claim may fall away – any other lender would have been expected to decline as well – so the possibility of a larger general damages award could arise. Secondly, thorough checks on the first loan would seem to largely eliminate dishonesty as a practical defence.

Speculation on wider unfair relationship claims

There is no reason why the breaches of CONC rules causing an unfair relationship should be confined to creditworthiness/affordability rules. And, as the judgment noted a breach of the rules is not the only thing that can give rise to unfairness [210].

So some ideas which illustrate how wide-ranging this could potentially be:

• CONC 7.3.10 says a firm may not pressure a client to pay a debt through borrowing. So if there is evidence that a firm has suggested a customer should make a payment using a credit card (see this example about an Amigo loan), then compensatory interest could reasonably be at the credit card interest rate;
•  very high interest rates eg for logbook loans could be regarded as excessive and give rise to an unfair relationship claim;
• a decision by a bank to impose higher overdraft rates on existing overdraft users who have a worse credit rating could be seen as unfair.

My conclusion

In my opinion the Kerrigan judgment appears well-aligned with the FOS approach – they start from considering the same laws and regulations, they ask much the same questions and the general approach to quantifying redress is the same.

There have been many suggestions over the last few years that FOS is effectively making-up rules or that the regulation is unclear. Here, for example, is a statement by a subprime lender  to the APPG on Alternative Lending in a report published this month:

[the alternative lending sector] is under siege from a Financial Ombudsman Service that is applying its own interpretation of FCA rules. 

I think lenders will struggle to find anything in the Kerrigan judgment or the FCA’s Relending Report that supports this view.

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