This article was originally published in the February 2015 edition of Motor Finance
When is an unregulated agreement a regulated agreement? No – this is not a joke – but an issue that the courts have been grappling with in an important case for the industry reported as NRAM plc v McAdam and others.
The claimant's predecessor, Northern Rock Building Society, had, between 1999 and March 2008, entered into a substantial number of unsecured credit agreements as part of a product called the "Together Mortgage".
This enabled borrowers to obtain a secured loan of up to 95% of their home's value and an additional fixed sum unsecured loan of up to 30% of the value of the home, capped at £30,000. The benefit to the borrowers was that for so long as the secured loan was outstanding, interest on the unsecured loan was charged at the same rate as was charged on the secured loan.
Any unsecured loans over the then CCA threshold sum of £25,000 were unregulated agreements to which the CCA did not apply. However, between 1999 and March 2008, the claimant used the same documentation for all credit agreements entered into, whether they were regulated or unregulated. This meant the unregulated agreements were documented (and treated) as if they were regulated by the CCA.
This included, from 1 October 2008, sending periodic statements as required by s77A CCA (s77A) for regulated agreements for fixed sum credit entered into both before and after that date. The claimant sent s77A statements in relation to both regulated and unregulated agreements.
However, the statements were deficient. They failed to comply with the prescribed requirements of s77A as they did not state the amount of credit originally provided to the borrowers in relation to regulated agreements. Failure to meet that requirement meant a borrower would not be liable to pay any interest or default sum in respect of the period of non-compliance.
The claimant made redress for this failure to its regulated agreement borrowers as required by re-crediting sums wrongly debited during the period of non-compliance. It did not do so in relation to its unregulated agreement borrowers on the basis that the agreements were unregulated and s77A did not apply.
The claimant brought test cases seeking a declaration as to whether the rights and remedies under the CCA (including s77A), or protections equivalent to such rights and remedies, were imported into the unregulated agreements, notwithstanding that they fell outside the statutory scheme. If they were, it could cost the claimant some £258 million.
It was common ground between the parties that they could not agree to convert a contract into a regulated agreement, nor clothe the court with jurisdiction to exercise powers, such as in relation to enforcement.
The High Court had to determine whether:
- the unregulated agreements had been held out to be regulated agreements and
- the provisions of, and remedies under, the CCA, or equivalent protections, were imported, into the unregulated agreements notwithstanding the agreements fell outside the statutory scheme.
The court found that the loan agreements, as well as the wider suite of pre-contractual and contractual documentation, repeatedly referred to the loan being regulated by the CCA and that the borrower would benefit from the rights available under the CCA and associated regulations.
On a proper construction of the pre-contractual and contractual documentation, the court found that the claimant had held out that both regulated and unregulated agreements would all be treated as if they were regulated agreements. The court also held there were no insuperable difficulties in not being able to apply entirely all the "paraphernalia" of a regulated agreement.
The defendants had been given the rights under, and benefits of, a regulated agreement (so far as capable of being applied to a non-regulated agreement), despite the agreements being unregulated, whether by the concept of incorporation or implication.
The court also found that there had been a shared assumption between the parties which was capable of giving rise to an estoppel by convention and/or a contractual estoppel, that so far as possible, the defendants would have the protection and rights conferred by the legislation. This also included subsequent amendments (indeed s77A had not been implemented at the date of these agreements) as any other interpretation was illogical when it was known that the legislation would often change.
The claimant was in breach of its obligations under the agreements for issuing statements that did not comply with s77A and in failing to repay or re-credit interest or default sums paid during the periods of non-compliance.
Things to consider
This was a test case for the claimant and based upon this decision, it can expect to make payment to a substantial number of other borrowers where the documentation was in the same format. The judgment suggests some 41,000 borrowers and the sum of £258 million.
It would also appear from the judgment, and it is generally widely known, that NRAM was not the only lender to use the same documentation for both regulated and unregulated agreements for simplicity. The judgment will have wide-reaching implications for those lenders who, as things stand, may have entered into unregulated agreements that are actually regulated.
The decision highlights the dangers of using general, standard documentation in relation to legal agreements. One size does not fit all.
The good news for finance companies is that we understand that NRAM is seeking leave to appeal. If any readers may be affected, do not hesitate to get in touch.