High Court clarifies relevance of related regulated mortgage contracts in connection with unfair relationship claims under Consumer Credit Act

The High Court has provided clarification as to the interpretation of the Consumer Credit Act 1974 (CCA) in the context of the group action brought by customers of Northern Rock, whose mortgages and loans were acquired by TSB following the global financial crisis of 2008: Breeze & Ors v TSB Bank plc [2024] EWHC 2427 (Ch).

In a preliminary issues trial, the court considered how to assess whether a relationship is unfair under s.140A CCA in connection with a loan agreement, in circumstances where (it was assumed for the purpose of a preliminary issues trial) there is a regulated mortgage linked to the loan. The court confirmed that it is entitled to take into account any unfairness between the parties arising from the mortgage as well as the loan. However, it cannot make an order under s.140B(1) CCA in connection with the mortgage contract, as regulated mortgages are specifically excluded under s.140A(5) CCA.

This is an interesting decision for financial institutions which (consistent with prior case law) reinforces the breadth of the assessment the court will carry out under s.140A CCA when assessing unfair relationship claims, and clarifies the scope of the remedies available to the court under this regime where a 'linked' regulated mortgage contract is involved.

The decision is considered in further detail below.

Background

The claim was brought by various former Northern Rock customers whose mortgages and (in some cases) unsecured loans were transferred to TSB and operated under TSB's "Whistletree" mortgage brand in 2016.

The product entered into by the claimants was a mortgage loan alongside an unsecured loan offered at the same interest rate (on condition that the mortgage loan was continued). By taking both loans, some borrowers were able to borrow more than the assessed value of the property that was mortgaged. If a borrower repaid the mortgage (but not the loan), there was a step-up in the interest rate which the borrower would then pay under the loan.

The claimants allege that they are "mortgage prisoners" and therefore paying excessively high standard variable interest rates (SVR) on their mortgages and (for those that have them) loans. The claimants have brought three claims against TSB (only claimants who have both loans and mortgages bring claim (3)):

1. TSB breached express terms of their mortgage contracts in setting/varying the SVR based on a specific "Whistletree" SVR and not on TSB's own SVR.
2. TSB breached an implied term of the contract not to exercise its discretion to set/vary the interest rate improperly, capriciously, for an improper purpose or in a way no other reasonable lender would do by failing to take account of the borrower's expectations when setting the rate at the level it was set.
3. There was an unfair relationship under s.140A of the CCA arising out of the mortgages and the loans.

Decision

The present judgment relates to a trial of preliminary issues.

In respect of the express term claim at (1) above, the court found that there was no breach of contract by TSB using a specific Whistletree SVR. This claim is specific to the terms and conditions in issue and is not considered further in this blog post.

As to the implied term claim, the issue was whether or not the term at (2) above should be implied into the claimants' mortgage contracts. Prior to the hearing, the parties agreed that the power to set and vary the SVR under mortgages and loans was subject to a narrower version of the proposed implied term, following the decision in Paragon v Nash [2002] 1WLR 94. Interestingly, the form of implied term agreed by the parties and endorsed by the court in this case, excluded any suggestion that varying the rate should take account of the "context of the Parties' expectations" (which would have gone beyond previous authority). The question of whether there has been any breach of this implied term will be determined at a later stage of the proceedings.

The issue for the court in relation to claim (3) was the impact of an exemption at s.140A(5) CCA in respect of regulated mortgage contracts. Specifically, the court was asked to consider whether the exemption precludes an order being made under s.140B(1) in relation to a regulated mortgage contract (or quantified by reference to sums payable under such a regulated mortgage contract), where that regulated mortgage contract is not the "credit agreement" for the purposes of s.140A CCA, but is a "related agreement" to another credit agreement giving rise to the relationship between the borrower and the lender. We consider the unfair relationship issue below.

The CCA issue

The issue is summarised below:

• Under s.140B(1) CCA, the court has the broad power to make an order "in connection with" a credit agreement.
• However, s.140A(5) CCA provides that the court cannot make an order "in connection with" a credit agreement which is an exempt agreement by virtue of Article 60C(2) of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001.
• Regulated mortgage contracts entered into on or after 31 October 2004 are exempt agreements. Accordingly, it was common ground that they were caught by the s.140A(5) exclusion.
• However, the parties did not agree on the application of this exemption to the present case where a regulated mortgage was sold alongside an unsecured loan.  

The claimants' position was that they were seeking an order under s.140B(1) in connection with the loan (not the mortgage), and that the court was not prevented from taking the mortgage into account by virtue of s.140A(5) (as it was a linked transaction or a related agreement). TSB ultimately took the position that the relationship arising from the mortgage could be considered when assessing the fairness of the relationship arising from the loan and for the purposes for the preliminary issues trial it was assumed that they were related contracts, notwithstanding the operation of s.140A(5).

This left the court with two issues to consider.

1. Should any order for a remedy under s.140B(1) of the CCA exclude any unfairness that relates to the mortgage (ie unfair interest charged)?
   
   The court found that it was entitled to take into account the unfairness between the parties arising from the mortgage as well as the loan. It considered that such an order would still be in connection with the loan agreement (taken together with the mortgage). It was not sufficient to say that because the court took the unfairness arising from the mortgage into account, s.140A(5) was engaged. The mortgage was "at least" one stage removed from the order being made.
    
2. Should any order under s.140B(1) of the CCA exclude repayment of sums under or adjustments to the terms of the mortgage itself?
   
   The court found that it could not order repayment of sums under the mortgage (or reduce sums payable in future or make an order for any other remedy that has an effect on the regulated mortgage contract) as such an order would be precluded by s.140A(5).

In considering these arguments, the court commented that it was balancing the clear overall parliamentary intention that the unfair relationship regime was intended to give consumers greater protection than previous legislation (and not to be overly technical), and the specific purpose of the s.140A(5) regulated mortgage contract exclusion.