Many a professional negligence lawyer has had enquiries about whether a bank can be held liable for their irresponsible lending. Picture the case: a young 18 year old in his first job wanting a £5,000 loan but, once the credit scoring goes through, the bank says he can have a £15,000 loan if he wants to. If he opts for the larger loan is the bank then liable when the young lad gets into financial difficulty? When his credit scoring hits rock bottom, should the bank set aside the agreement?
This is a very difficult question to answer.
Much depends on the conversation that took place between the bank and its customer. What did the bank say? If the conversation relayed above is as simple as it suggests – “I want £5,000”. “You can have £15,000 if you want” – then there is no liability. It has long been established in law that the bank does not act in an advisory capacity and so it owes no duty of care to the customer to establish whether or not they can afford the loan. To use the old adage ‘caveat emptor’ – let the buyer beware.
But what if the conversation goes beyond that? What if the bank starts giving advice? And I don’t mean the kind of chat that gives the customer different options about available loans. I mean something that goes beyond that which amounts to specific advice to the customer? It is only in that instance, as established in the 1959 case of Woods –v- Martins Bank Ltd, that the bank then owes a duty of care to give reasonable advice to the customer.
This seems very stark given the times that we live in, especially given the bevy of Personal Protection Insurance and Interest Rate Swap cases that are being fought over. Is it really a case of caveat emptor when the customer agrees to take PPI out to protect himself against the possibility of unforeseeable redundancy or inability to pay? Or to take out a hedge fund to protect himself against potential interest rate rises?
The Office of Fair Trading has taken the view since March 2010 in its ‘Irresponsible Lending – OFT Guidance for Creditors’ that a bank should:
“make a reasonable assessment of whether a borrower can afford to meet the repayments in a sustainable manner”
“borrowers should not be targeted with credit products that are clearly unsuitable for them”.
But in those cases, the only sanction – if the offence is great enough – is for the OFT to remove the bank’s licence to give credit and/or a fine of up to £50,000. There is no remedy for the individual customer. In particular, the OFT does not have the power to revoke the credit agreement.
The Financial Ombudsman Service (FOS) does have that power, but its power is entirely discretionary. By law, the bank needs to establish the customer’s financial position before making a loan, but it is only under FSA guidelines that they need to assess the customer’s ability to meet their potential repayments. So long as the product is not grossly ludicrous for the customer’s needs and the bank can show that no advice was given and the credit scoring assessment was undertaken, the FOS is unlikely to make a finding against the bank.
Take for example, the illustration on the FOS website of a 20 year old university student who obtained a £2,500 loan to purchase a motorbike, even though the bank was aware he was off for a gap year before going back to university and would not be able to keep up repayments. “Ill-judged and irresponsible” lending? The FOS did not think so, but it did uphold the complaint of a young, single man with learning difficulties who took out a £4,000 loan to start up his own business as a handyman and fell into difficulties when his business failed.
As a brief aside, Parliament has been looking at the possibility of enacting a statute to make it a legal requirement for lenders to lend responsibly although, despite various Committee discussions, nothing has yet come of it.
So ultimately, it will be difficult to overturn a credit arrangement in law unless it can be shown that the situation was misrepresented or it was an unfair contract. If it was an irresponsible loan, the law will not look too kindly on a claim but the FOS may, subject to the circumstances, provide some sort of redress.
But don’t hold your breath!
Emma Slade is a solicitor specialising in professional negligence claims, especially those of a financial nature. If you think you may have a valid professional negligence claim and would like a free initial legal assessment, contact Emma on 0808 139 1595 or email her at [email protected]