Background
On 6 April 2007, sections 140A to D of the Consumer Credit Act 1974 (the 1974 Act) came into force pursuant to the Consumer Credit Act 2006 (the 2006 Act). These replaced the old “extortionate credit bargain” provisions and, in brief, confer powers on the court to grant relief in connection with a credit agreement if it determines that the relationship between creditor and debtor arising from that agreement is unfair to the debtor.
Key transitional provisions limiting the power of the court to grant relief under the 1974 Act (contained in Schedule 3 to the 2006 Act) include:
- A transitional period of one year from 6 April 2007 (the date of commencement) (paragraph 14(4)).
- The court cannot grant relief in connection with a credit agreement which became a ‘completed agreement’ (that is, one in respect of which no further sums are due) before 6 April 2008 (the expiry of the transitional period) (paragraph 14(2)).
- References to a ‘related agreement’ in section 140B shall not include such agreements that were made before 6 April 2007 and ceased to have any operation before 6 April 2008 (paragraph 16(4) to (5)).
In Smith and another v Royal Bank of Scotland plc, the claimants were both former customers of the Royal Bank of Scotland (RBS), who sought compensation in respect of PPI agreements entered into at the same time as credit card agreements. In the first case, the credit and PPI agreements were made in 2000. The PPI policy was terminated in March 2006 (that is, before sections 140A to D came into force) and the credit agreement was terminated in 2015. In the second case, the credit and PPI agreements were made in 1998. The PPI policy terminated in March 2008 (that is, after sections 140A to D came into force, but before the transitional period came to an end), and the credit agreement terminated in 2019.
In each claim, the court found for the claimant at first instance, and those conclusions were upheld on the first appeal brought by the RBS. The matter came before the Court of Appeal by way of second appeal on the following grounds:
- The effect of the transitional provisions, properly applied, is that the claimants had no cause of action at all.
- In any event, the claims were time-barred by section 9 of the Limitation Act 1980 (the 1980 Act).
(1) What effect did the transitional provisions have on the causes of action?
RBS’s case was that the transitional provisions precluded the court from determining that there was an unfair relationship if the alleged unfairness arose from a related agreement (such as a PPI agreement) that ended before the expiry of the transitional period.
Birss LJ (with whom Coulson and Macur LJJ agreed) first considered the legislation as a whole and the policy behind it. He agreed with the analysis in Scotland v British Credit Trust, concluding that, in assessing the fairness of the relationship between the debtor and the creditor, the court is entitled to take all relevant matters into account whenever they took place, including a related agreement such as the PPI agreement even if that PPI agreement itself had come to an end before the point in time that the unfairness of the relationship is being assessed (paragraph 45, judgment).
Birss LJ considered that the transitional arrangements made no difference to this analysis. Section 140A(1) provides that the relationship to be considered is the one arising not only out of the credit agreement but also “the agreement taken with any related agreement” (paragraph 46, judgment). He held that the qualification in paragraph 16(2) of Schedule 3 to the 2006 Act in respect of related agreements that ceased to operate before the end of the transitional period only applied to section 140B. As there was no comparable qualification for section 140A; reference to a ‘related agreement’ therefore included any such agreements that ceased to operate before 6 April 2008.
Accordingly, the trial judge had been entitled, in determining whether there had been an unfair credit relationship within the meaning of section 140A, to take into account PPI agreements that had already come to an end before the expiry of the transitional period.
(2) Were the claims time-barred?
It was common ground that claims under section 140A were subject to a six-year limitation period under section 9 of the 1980 Act.
The issue was the date on which the cause of action accrued (the date at which “all the facts necessary to be proved to make that claim can be pleaded“) (paragraph 53, judgment).
As a preliminary point, Birss LJ considered that, as long as the relevant date on which unfairness was found remained within the limitation period, the claim was not time-barred. However, given that a relationship is “something which continues over time“, Birss LJ considered that the fact that unfairness had occurred in the past would not always be relevant to assessing whether the relationship is unfair subsequently (paragraph 54, judgment). Furthermore, Birss LJ could see nothing in the 1974 Act which meant that once a credit relationship was unfair for some reason it was always unfair: “the fact that a relationship was unfair yesterday is not same fact as the relationship being unfair today. The facts necessary to make a claim for the unfairness on that given date cannot be said to have occurred until that given date” (paragraph 54, judgment).
Thus, the critical question was, in the words of Leggatt QC (as he was then) in Patel v Patel: “what is the relevant date at which the fairness or otherwise of the relationship has to be determined?” (Paragraph 55, judgment.)
It was common ground that, following Plevin v Paragon Personal Finance Ltd, the parties’ relationships were unfair whilst the claimants were making payments under the PPI policies. However, the claimants had ceased making PPI payments in March 2006 and 2008. The issue was whether unfairness persisted beyond those dates.
At first instance, the trial judge considered that the unfairness persisted beyond the date when the PPI agreement was terminated, and that the relationship remained unfair when the credit card agreement was terminated. This was because there remained an extreme inequality of knowledge between the parties regarding the commissions associated with the PPI policy.
Birss LJ, however, considered this a misapplication of the law stated in Plevin: rather, the unfairness derives “not simply from being deprived of information on its own, but from the customer being kept in ignorance, of what was a material fact, at the point in time that they were deciding whether to enter into the PPI agreement” (paragraph 67, judgment). This meant that the relationship was unfair up until the last PPI policy repayment. However, once all sums due had been paid and no liability remained, the fact that RBS continued to leave the claimants in ignorance of the commission did not justify the conclusion the trial judge reached; especially given that the credit agreement, absent the PPI agreement, was not itself unfair. The claimants had failed to allege or prove, that any economic effect or consequence of the PPI agreement persisted after April 2006 or existed in 2015.
Birss LJ therefore considered that the relationships ceased to be unfair when the claimants ceased making PPI payments. This is when time started to run on a claim under section 140A for the purposes of limitation.
Accordingly, the court allowed the appeal on the grounds that both claims were time-barred by section 9 of the 1980 Act. In the first claimant’s case, Birss LJ also expressed the provisional view that, “since the unfair relationship ended before the coming into force of [sections 140A to 140C], an action for what was an unfair relationship in 2006 does not come within the 1974 Act at all” (paragraph 70, judgment) (although the appeal was not argued on this basis).
Conclusions and comment
This case is a victory for banks facing numerous claims in the county courts arising from historic PPI policies. The strength of this victory is tempered, however, by the possibility that the limitation period is postponed by section 32 of the 1980 Act, following Canada Square Operations Ltd v Potter (which did not arise in this case). It seems likely that, in practice, this current wave of historic PPI claims will continue, now relying on Canada Square Operations instead of Patel.
It would seem, at first blush, that this decision has laid rest the argument that the transitional provisions prevent a claim to recover premiums paid under a PPI agreement that came to an end before 6 April 2008 where the credit agreement continued after that date. However, in this case, it had been “critical to the court’s power to order repayment” that the judge at first-instance had made a finding of fact that the premiums “were also made by virtue of the credit agreement itself” (paragraph 47, judgment). The Court of Appeal made clear that “if the relevant payments had only been paid by virtue of the related agreement itself, then the court could not have ordered their repayment under s140B”.
