High Court takes a view on repeat borrowing as an indicator of financial health: Kerrigan v Elevate Credit International

A failure to consider the financial difficulties that repeat lending might cause a customer is likely to result in a breach of a consumer credit firm’s statutory obligations under the Consumer Credit Sourcebook (“CONC”) and have an effect subsequently on the fairness of the relationship between a creditor and debtor under the Consumer Credit Act 1974 (“CCA”).

The recent High Court decision in Kerrigan v Elevate Credit International Limited (t/a Sunny) (in administration) [2020] EWHC 2169 (Comm) has confirmed that repeat borrowing by a customer may be a warning sign in relation to a customer’s financial health. The High Court held that the defendant’s failure to take this into consideration when making its lending decisions resulted in a breach of its obligations under CONC 5.2, in particular, the obligation that a creditworthiness assessment consider both the potential for the commitments under the credit agreement to adversely impact the customer’s financial situation and the ability of the customer to make repayments as they fall due.

Whilst this decision, which looked at 12 sample cases, does not come to any final conclusions with respect to the individual claims, it does provide some helpful guidance for lenders as to how the courts are likely to apply the relevant regulations, when viewed against the background of the underlying consumer protection objective in the Financial Services and Markets Act 2000 (“FSMA”).

Key takeaways:

• A firm cannot always rely solely on the information provided by a customer applying for credit, or, in the case of an existing customer, on their repayment record alone. The regulations require an assessment which is proportionate but which goes beyond the mere commerciality of the loan (i.e. it would not be in a lender’s interest to lend to someone who could not repay the loan), which, in the cases considered by the Court, were typically for amounts between £100 and £950. Firms will be expected to use the information readily available to them to ensure that any credit extended will not adversely affect a customer’s financial situation.
• Repeat borrowing at high interest rates is a warning sign relevant to an assessment of creditworthiness.
• A borrower making a claim for a regulatory breach will still be required to prove causation, something which the High Court reflected may be harder to do in circumstances where it may be said that, following a robust creditworthiness assessment, the borrower would likely have applied elsewhere to a third party lender able to extend the credit.
• A breach of the CONC rules, which articulate the consumer protection objective, may lead to an unfairness in the relationship between the lender and customer. However, although important, a breach of the rules will not be the only factor considered when assessing fairness.
• Where a borrower is dishonest in the information they provided, to the extent it has a direct effect on the existence of the relationship, this may undermine any claim by the borrower that the relationship was unfair.
• While willing to agree that the lender’s systems had led to a breach of the regulations and – in some cases – an unfair relationship, the Court refused to recognise that the defendant had a duty to take reasonable care in undertaking its creditworthiness assessment not to cause a customer psychiatric injury, as was put forward by one claimant.

Our briefing provides more detail on the High Court’s decision.