Retail Banking Cases: 2010
Posted: Monday 21 February 2011
Douglas Napier v HFC Bank Ltd, trading as the GM Card A83/09
In this Scottish case a customer argued that his credit card agreement with a bank was unenforceable as it did not contain a term specifying the credit limit, one of the prescribed terms required by the Consumer Credit Act 1974 (the “CCA”). The agreement provided that “Your Credit Limit will be determined by us from time to time and notified to you”. The courts held that this clause provided a manner in which the credit limit would be determined and accordingly the agreement was enforceable. A similar approach was also adopted by the English courts – Patrick Brophy v HFC Bank Ltd [2010] EWHC 819 (QB).
Southern Pacific Securities 05-2 Plc (in substitution for Southern Pacific Personal Loans Limited) (Respondent) v Walker and another (Appellants) ([2010] UKSC 32)
The parties entered into a fixed sum credit agreement in 2005 whereby Southern Pacific Securities loaned Mr and Mrs Walker the sum of £17,500. In addition to the loan a “Broker Administration Fee” of £875 was advanced to Mr and Mrs Walker to enable them to pay for the arrangement of the loan. Interest was payable on the Broker Administration Fee at the same rate as on the loan of £17,500. The credit agreement set out the “Amount of Credit” as £17,500 and the “Total Amount Financed” as £18,375 being the total of the loan and the Broker Administration Fee.
The appeal to the Supreme Court concerned the meaning of “credit” and “charge for credit” in the CCA and, in particular, Section 9(4) of the CCA which states that an item entering into the “total charge for credit” shall not be treated as credit, even though time is allowed for its payment.
The Supreme Court unanimously dismissed the appeal. Although the Broker Administration Fee of £875 was advanced to the Walkers and repayable with interest, it was part of the total cost of, or charge for, credit and therefore could not be treated as part of the credit itself. The amount of credit was therefore correctly stated and the agreement was enforceable.
Carey v HSBC Bank plc [2009] EWHC 3417 (QB)
Under Sections 77 to 79 of the CCA, lenders must supply a “true copy” of the credit or loan agreement to the borrowers when requested.
The judgment clarified what constituted a true copy and held that “a creditor can satisfy its duty ....... by providing a reconstituted version of the executed agreement which may be from sources other than the actual signed agreement itself……. The fact that the creditor no longer has the original executed agreement is not therefore, itself a bar to compliance”.
The copy of the agreement must contain the name and address of the borrower as it was at the time it was signed. The creditor can supply the name and address from whatever source it has for those details. It does not have to take them from the executed agreement itself. If the agreement had been subsequently varied by the lender then the lender has to supply a copy of the original agreement as well as the varied terms.
The judgment also stated that if a creditor could not supply a copy of the agreement at all, then this prevents them from using the courts to pursue the debt until they can provide a copy of the agreement, and failure to provide a copy did not mean that there was an unfair relationship between the creditor and the debtor under Section 140A of the CCA.
The OFT subsequently issued guidance on the obligations of creditors under Sections 77 and 78 of the CCA in October 2010. It was concerned that debtors are being misled into thinking that the Sections could be used to get their debts written off. It was also concerned that some creditors appear not to understand the nature and extent of their obligations under the Sections.
The guidance is drafted in two parts. The first part is for the industry and consumer representatives. It contains technical guidance which clarifies the latest OFT and court understanding of the Sections. It outlines the OFT's view of the standards expected of the industry when dealing with requests for information from debtors and hirers under the Sections. It also outlines the business practices, associated with the enforcement of agreements when the Sections have not been complied with, which the OFT would consider unfair under section 25 of the CCA (that is, the "fitness test").
The second part of the guidance consists of a plain English version for consumers, and is designed to make them aware that they may be at risk if they try to use the Sections to avoid paying legitimately owed debts.
A draft copy of the OFT’s guidance was referred to in the Carey case.
Sternlight v Barclays Bank Plc [2010] EWHC 1865 (QB)
This was a test case where 5 cases were heard as being representative of up to one hundred similar cases brought on behalf of borrowers. In all 5 cases customers alleged that the banks had mis-stated the interest rates applied to them in their credit agreements, as the interest charged did not match the APR advertised, and therefore the agreements were unenforceable.
The court decided that the APR is not the driver in calculating the interest rate. The interest rate is part of the information to be provided as a requirement of the Consumer Credit Agreements Regulations and is the contractual rate between the parties. The APR was not a term of the agreement, and a mis-match between the APR and the stated rates of interest, had one occurred, did not make the agreement unenforceable.
Shah and another v HSBC Private Bank (UK) Limited [2010] EWCA Civ 31
Mr Shah sued HSBC for breaches of its duty by failing to act on Mr Shah’s instructions to process transactions whilst requests for consent under the Proceeds of Crime Act 2002 (“POCA”) were pending with the Serious Organised Crime Agency (“SOCA”).
In January 2009 HSBC were successful in obtaining summary judgment. The Court of Appeal allowed an appeal in February 2010 by Mr Shah on two grounds.
HSBC argued that it would have committed criminal offences under POCA had it complied with Mr Shah’s instructions whilst suspecting that the transactions constituted money laundering. Mr Shah argued that the suspicion was irrational, negligently self-induced and mistaken, and, having been generated by a computer, not capable of being held by a human being.
The court held it was for the bank to prove its suspicion at trial in order to justify not following Mr Shah’s instructions and that summary judgement should not have been awarded on the basis of a witness statement by a solicitor of the bank attesting to its suspicion. Suspicion is held where a party thinks that there is a possibility, which is more than fanciful, that the relevant facts exist. In those circumstances, the matter should be investigated at trial by making disclosure and calling witnesses in the ordinary way. The court accepted that there was no evidence that HSBC had delayed in making its suspicious activity reports (“SARs”) (they were all made within two days of HSBC receiving Mr Shah’s instructions), but confirmed that, in principle, undue delay in making a SAR could be a breach of a bank’s duty of care to its customers.
This decision means that banks may not be afforded protection against later civil action where they make a SAR. It also means that customers may be able to obtain disclosure of banks’ internal documents relating to money laundering disclosures, and put them to proof at trial of the suspicions that have been reported to SOCA. It highlights the need for regulated firms to have systems in place so that any suspicions that lead to the making of a SAR are well documented and the SAR is made promptly.
It remains to be seen whether any final judgment in relation to the two grounds that were successfully appealed by Mr Shah will provide guidance for regulated firms as to how they comply with their money laundering obligations whilst also meeting their duties to their customers/clients.
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