High Court Judgment in Payday Lending Test Case ‘Kerrigan v Elevate’
The High Court has today handed down judgment in Kerrigan & 11 ors v Elevate Credit International Limited (t/a Sunny) (in administration)  EWHC 2169 (Comm). This is the payday lending test case litigation before HHJ Worster (sitting as a Judge of the High Court).
The High Court found that the Defendant (“D”) systemically breached the requirement under CONC chapter 5 to conduct an adequate creditworthiness assessment, principally by failing to consider whether the customer’s repeat borrowing from D meant that the cumulative effect of its loans adversely impacted the customer’s financial situation.
In response to the ‘unfair relationship’ claim based on repeat borrowing, D might be able to show in respect of the bottom cohort of Sample Cs (respectively with 5, 7 and 12 loans from D), that the relationship was fair under s140A, or that no relief was justified under s140B.
The Claimants (“Cs”)’ claim for breach of statutory duty by repeat lending pursuant to s138D of the Financial Services and Markets Act 2000 (“FSMA”) struggled on causation, as a discount had to be given for the fact that Cs would have applied elsewhere, and it might well not have been a breach for the third party lender to grant the loan (absent any history of repeat borrowing with that lender). These causation difficulties were somewhat mitigated in the ‘unfair relationships’ claim.
Interest rates of 29% per month prior to the FCA’s introduction of the cost cap on 2 January 2005 were excessive and this was a relevant factor to whether there was an ‘unfair relationship’; it was particularly relevant where the borrower was ‘marginally eligible’.
General damages could be granted under FSMA s138D for injury to credit rating, but again this claim struggled on causation.
The negligence claim for personal injury (aggravation of depression) was dismissed.
General Comments on Relationship between CONC and ‘Unfair Relationships’
Balancing Industry and Consumer Concerns
It is not for the Court to enforce the ‘consumer protection objective’ in FSMA s1C, but for the FCA to do so – here by means of the Consumer Credit Sourcebook module of the FCA Handbook (“CONC”). Judgment as to the ‘appropriate degree’ of consumer protection is for the FCA. Nonetheless, it is of assistance to understand the objectives of the FCA when interpreting CONC .
One of the statutory factors for the FCA in considering the appropriate degree of consumer protection is the general principle that consumers should take responsibility for their decisions; cites Lady Hale in OFT v Abbey National plc  UKSC 6 – consumer law aims to give the consumer an informed choice, rather than to protect him from making an unwise choice .
Relationship Between CONC and Unfair Relationships
This case differs from Plevin v Paragon Personal Finance Limited  1 W.L.R. 4222 on its facts, not least because the Judge concludes that there were breaches of the relevant regulatory framework .
: in Plevin “Lord Sumption draws attention to the wide terms in which the section [140A] is framed. But it [unfairness] is a concept which must be applied judicially and upon rational principles. In O’Neill v Phillips  BCC 600 [on the unfair prejudice provisions of the Companies Act 1985] the approach of the court focussed upon the operation of settled equitable principles … to restrain the exercise of legal rights. Here the underlying regulatory framework occupies a similar position.”
: “The question of the fairness of the relationship is a decision for the court in the individual case having taken account of the ‘wider range of considerations’ Lord Sumption refers to. But given the nature of the unfairness alleged in these cases, the rules are plainly of considerable relevance. They reflect the well-considered policies of the statutory body with responsibility for regulating the area, and … are designed to secure ‘an appropriate degree of protection for consumers’.”
: “The court is not bound to adopt the line drawn by the FCA in its drafting of CONC in this sort of case, but where the rules take account of the need to balance relevant matters of policy, at the lowest it provides a starting point for the consideration of fairness, and at the highest it is a powerful factor in deciding whether the individual relationship is fair or not.”
Repeat Lending Breaches of CONC Chapter 5
The Court considered the pre-November 2018 version of CONC chapter 5. CONC 5.2.1(2) R (on the scope of the creditworthiness assessment) requires the creditor to consider (a) the potential for commitments under the regulated credit agreement “to adversely impact the customer’s financial situation” and (b) the customer’s “ability … to make repayments as they fall due”.
Repeat Borrowing from D
The way in which CONC 5.2.1(2) R is framed recognises there is more to the question of adverse impact on the customer’s financial situation than his ability to make repayments as they fall due over the life of the loan. Otherwise, there would be no need to separate out (a) and (b) . Further, while 5.2.1(2) R refers to “the” regulated credit agreement, the impact of commitments under the loan applied for can only be properly assessed by reference to the customer’s other financial commitments .
A history of repeat high-cost short-term (“HCST”) borrowing is relevant to the creditworthiness assessment . It is a warning sign – D accepted that HCST credit was unsuitable for sustained borrowing over a longer period . Even without rolling over, it was apparent that money would be borrowed from one source to repay another, or that another loan would be taken shortly after repayment of the previous one . The need to continually borrow at these rates is an indication of financial difficulty, especially when the customer’s overall level of borrowing is not reducing .
In relation to existing customers, D’s application process relied heavily on their repayment record with D. The Judge accepted there was no benefit to D in lending to someone who would not be able to repay, but CONC required a consideration beyond that commercially driven approach .
D’s system failed to consider whether the applicant had a history of repeat borrowing; D could have interrogated its own database to see if the applicant had taken loans with D in the recent past and whether the amount of such loans was increasing . The difficult question for D was why it did not use data it had about loans it had previously made; D’s rules looked at other current credit commitments, but in the context of assessing ability to repay, rather than looking for patterns of repeat borrowing .
This constituted a breach of CONC 5.2.1 R (obligation to undertake adequate creditworthiness assessment). Alternatively, the same failings could be analysed as a breach of 5.3.2 R (requirement to establish and implement effective policies and procedures) .
Unfair Relationship based on Repeat Borrowing from D
The burden then shifts to D to establish that its breach of CONC does not render the relationship unfair . For these purposes, Cs could be divided into three cohorts, by reference to how many loans they had taken with D (at ):
- High: 30-51
- Medium: 18-24
- Low: 5, 7 and 12 (but 12 being over a 3yr period)
In respect of the bottom cohort, D might be able to demonstrate that the relationship was not unfair under s140A, or that no relief was justified under s140B . This would be difficult in respect of the middle cohort and a very steep hill to climb in respect of the top cohort .
Nonetheless, there may be cases where D could show that the pattern of borrowing had ended, e.g. due to a significant temporal gap between loans, such that there is no repeat lending breach for subsequent loans .
Repeat Borrowing from 3rd Party HCST Lenders
Prior to November 2017, HCST loans were not classified by the credit reference agencies (“CRAs”) as “payday loans” unless they had terms of one month or less. The back-reporting issue pre-November 2017 was not something D could have resolved on its own; reliance on a collective failure in the industry not to move more quickly is unattractive, but it is the reality .
No doubt there would be cases where having the additional CRA data re 3rd party HCST loans would have made the causative difference, but the proportionality of the system has to be considered in wider terms and on the basis of the position at the time; on balance the absence of D’s use of further CRA data can be justified on the basis of proportionality .
Causation Discount for Repeat Lending
D’s breach in failing to consider repeat borrowing attracted some unusual causation arguments. For instance, if D had properly declined to grant Loan 12 (due to repeat borrowing considerations), C would simply have approached a 3rd party HCST creditor – but that creditor would have instead granted Loan 1, without committing any breach. The issue was whether quantum on C’s repeat lending claim should be discounted to reflect this.
On the balance of probabilities, each C would have gone to a 3rd party HCST creditor if D had declined any application . That 3rd party HCST creditor may come to an unimpeachable decision to lend, as the information available to it is different ; Loan 12 from D could have been the first Loan from that 3rd party .
Cs’ claim for loss under FSMA should be discounted by the chance that a 3rd party HCST creditor would grant the relevant loan compliantly .
Unfair Relationships Claim
Cs may be unable to establish causation in their FSMA claim, but the breach of CONC is plainly relevant to ‘unfair relationships’ .
The terms of s140A do not impose a requirement of causation, in the sense that the debtor must show the breach caused loss .
: HHJ Platts’ decision on remedy in Plevin is a helpful illustration: “There is a link between (i) the failings of the creditor which lead to the unfairness in the relationship, (ii) the unfairness itself and (iii) the relief. It is not to be analysed in the sort of linear terms which arise when considering causation proper.”
: relief should approximate, as closely as possible, to the overall position which would have applied had the matters giving rise to the ‘unfairness’ not taken place [Comment: this suggests the Court should look at whether C would have obtained a Loan compliantly elsewhere.]
: if the relationship is unfair, it is likely some relief will be granted to remedy that; here one of the significant distinctions between the FSMA and ‘unfair relationship’ claims becomes apparent. : that particular difficulty [establishing causation of loss] “does not arise (at least not as acutely) in a claim under section 140A”.
: in Plevin the Supreme Court considered it unnecessary for the purposes of working out the remedy to identify the ‘tipping point’ for the size of an appropriate commission; the same approach may be taken here; it is sufficient to generate an ‘unfair relationship’ and “justify some relief” that the process was non-compliant. : this enables the Court to avoid causation problems; the Court exercises a discretion.
Other Breaches of CONC
In assessing creditworthiness, D should have taken account of undischarged CCJs, however small ().
On D’s decision not to use real-time CRA data (e.g. MODA), while it would obviously have been better to do so, D’s decision at the time was reasonable; the position may very well now be different .
Discrepancy between Declared and CRA Estimated Credit Commitments
Many applications revealed a large discrepancy between customer-inputted data and CRA estimated data re existing credit commitments. CONC 5.3.7 R provided that D should reject an application where it ought reasonably to suspect the applicant is being untruthful.
,  and : D breached 5.3.7 R by failing to consider whether a discrepancy in the individual case gave rise to a reasonable suspicion that the customer was being untruthful. : it would be unreasonable to read too much into some discrepancy – the customer may not know the precise figure and D’s process asks for brackets and takes midpoints; BUT there comes a point when a discrepancy can’t have an honest explanation and D ought reasonably to suspect the applicant is being untruthful.
Some customers inputted zeros for certain income and expenditure fields when completing their application.  and : D should not have relied on inputted zeros for items of expenditure when that could not have been the case, or was inconsistent with information on previous applications. : At times, big discrepancies might be explained by major changes in a customer’s life. : There were individual breaches of CONC 5.3.7 R, resulting from D’s failure to consider the input of multiple zeros.
Effect of Customer Dishonesty on Unfairness
: Where an applicant’s inputs were so far from the true position that they cannot be described as a “reasonable estimate”, that may amount to conduct that means the relationship is not ‘unfair’.
-: In one Sample Claim, C’s dishonesty was plainly a relevant factor to whether the relationship is unfair; had she provided honest information, D would have refused her applications and no relationship would have arisen; there was no ‘unfair relationship’, due to the seriousness of her dishonesty and its central relevance to the existence of the relationship.
Pre-January 2015 Loans: Interest Exceeding ‘Cost Cap’
On 2 January 2015 the FCA introduced an initial cost cap for HCST loans of 0.8% interest per day and a total cost cap of 100% of the principal. Prior to this date, D generally charged 0.97% interest per day (29% per month), with a cap of 150% of the principal.
The Judge agreed he should not simply back-date CONC ; however, the lack of a price cap pre-January 2015 cannot be determinative of whether there is an ‘unfair relationship’ .
: it is where Cs are ‘marginally eligible’ (as the FCA termed it in CP 14/10) that the rate is of particular significance to fairness; the issue of the rate is not black and white, but feeds into the overall question of fairness.
The absolute level of the rate (29% pm) is very high and that is a relevant factor [198(i)]. The market rate at the time for comparable products was a relevant factor [198(ii)]. The borrower’s awareness of the rate (its presentation) was another relevant factor; D did quite a good job here [198(iii)].
[198(iv)]: Whether the borrower is ‘marginally eligible’ is a relevant factor (it affects the potential for the borrower to suffer harm).
: D’s rate pre-cost cap was excessive. Borrowers who marginally qualified for loans have a good basis for an ‘unfair relationship’ claim; the interest rate is to be seen as part of the picture.
Additional Compensation for Injury to Credit Rating
: The Judge agreed that loss may be presumed and general damages are appropriate. Cs must adduce some evidence re the extent their credit rating was affected so the Court can be satisfied there was a significant change.
: The Judge regarded £8,000 (awarded in Durkin v DSG Retail Ltd and HFS Bank plc  GCCG 3651) as above the likely level of awards, as the credit-ratings of these Cs were already somewhat tarnished; awards are unlikely to be anywhere near £10,000 as sought.
However, the difficulty for Cs in seeking general damages under FSMA was that Cs must establish D should have declined their applications “and they would not have obtained the money elsewhere” . As such, the application of principles of causation may make ‘unfair relationships’ a more attractive vehicle for these claims .
However, general damages were not available under ‘unfair relationships’. Whether the Court should award the repayment of capital under s140B(1)(a) to recognise injury to credit rating is an issue which would benefit from further argument .
Claim in Negligence for Psychiatric Injury and Scope of Common Law Duties
: In respect of one C, Mr Kuschel, there was a claim in negligence for psychiatric injury (aggravation of pre-existing depression). : The Judge accepted anxiety caused by debt was a significant cause of C’s continued depression. At trial, C abandoned his FSMA claim for personal injury and pursued it in negligence only .
: on the face of it, this is a claim for pure psychiatric injury; the injury arises from decisions to lend C money; there is no decided case where the Court has found that a duty of care exists in this sort of situation or anything analogous.
In Green & Rowley v The Royal Bank of Scotland plc  EWCA Civ 1197, the Court had found a common law duty limited to a duty not to mis-state, and not co-extensive with the COB module of the FCA Handbook; however, had there been an advisory relationship then the extent of the common law duty would normally include compliance with COB. Green illustrates how far away C’s case is from decided authority .
A duty not to cause psychiatric harm would go beyond the CONC obligations; there would be nothing incremental about extending the law to cover this . There is neither the closeness of the relationship nor the reliance upon advice/representation that are seen in financial services cases where the Courts have found a duty of care exists .
First Stage of ‘Caparo’ Test (Foreseeability of Damage)
C said that D had constructive knowledge of his depression – the application process should have included a direct question about whether C had ever suffered from a psychiatric condition; the Judge accepted that such a question should have been included . Such a question would not breach equality legislation – it is a proportionate means of achieving a legitimate aim, provided D’s response to the answer was a genuine weighting of the borrower’s interests and not a blanket refusal to lend .
Nonetheless, the Judge was not persuaded that C’s arguments re foreseeability were sufficiently strong to justify an extension of the law .
Second Stage (Proximity)
This was more akin to a commercial relationship than a relationship of trust and confidence .
Third Stage (Fair, Just and Reasonable)
: “The only ‘gap’ is because the statutory regime has left one. That must have been deliberate”. : “the statutory regime has been put there to provide protection and regulation beyond that contemplated by the common law … What is being sought is a finding of a common law duty which goes beyond the statutory duty. It would not be fair just and reasonable to in effect extend the scope of the regulation by recognising the duty of care contended for.”
: “.. it is pre-eminently a matter for the regulator … The FCA is considering whether a general duty of care should be imposed by statute: see FS 19/2 … the FCA is better placed to evaluate and balance the competing public interests at play here.”
Other Comments on Causation and Quantum
[See above for the parts of the judgment on causation re the repeat lending claim.]
An additional consideration on causation is whether the grant of D’s Loan in fact benefited C. Some Loans may have helped Cs to resolve immediate and pressing financial problems; there may be cases where, without D’s Loan, Cs would have ended up in a worse financial position (, - and ).
In Brookman v Welcome Financial Services Ltd (HHJ Keyser QC, unrep, Cardiff county court, 6 November 2015) HHJ Keyser QC emphasises that the important question was whether the relationship was unfair, not whether on the balance of probabilities Cs would or would not have acted differently .
: Relief should not give C a windfall. : Here the interest of wrongfully granted Loans that caused loss should be repaid; repayment of the principal is not appropriate, as Cs had the benefit of the money.
: In some cases there might be a reasonably direct correlation between complaint and remedy – so in Plevin the commission was repaid, but the true cost of the insurance was not, as Mrs Plevin had had the benefit of the cover.
Compensatory Interest Rate
: Cs sought statutory interest at the contractual rate charged by D (29% per month); the Judge rejected Cs’ first rationale (that this was the rate C had to pay to borrow money) and said this approach should be restricted to commercial cases.
: Cs’ second argument was that Cs would have used the excess funds to repay other HCST loans – there may be more merit to that argument, but it would be better explored on the facts of a particular case.
Full judgment text available here: Kerrigan v Elevate
Summary by Ruth Bala, counsel for the creditor.