As we reported in our Spring Banking Bulletin, the new and far reaching provisions on "unfair relationships" which will replace the existing extortionate credit bargain provisions are, for lenders, potentially the most worrying element of the new Consumer Credit Act 2006 ("the 2006 Act"). In this article we look more closely at the new unfairness test.

Background to the new test

Although the Consumer Credit Act 1974 ("the 1974 Act") allows the court to re-open a credit agreement in order to do justice between the parties where a bargain is found to have been extortionate at the time it was made few extortionate credit cases are known to have reached the courts and even fewer of them have been proven. The operation and effectiveness of the extortionate credit bargain provisions have been under scrutiny for some time and in 2003 the DTI in its White Paper: "Fair, Clear and Competitive: The Consumer Credit Market in the 21st Century" concluded that the extortionate credit bargain provisions should be replaced with a test which would make unfair agreements easier to challenge and which would ensure that account is taken of unfair practices.

The concept of fairness

The concept of fairness is not unfamiliar in the context of dealings with consumers. There is a layering of legal and regulatory obligations to act fairly, originating both at EU and national level. The Unfair Terms in Consumer Contract Regulations 1999 ("UTCCRs") apply to unfair terms in contracts concluded between a consumer and a seller or supplier, and firms also have a duty to act fairly under the Financial Services and Markets Act 2000 and the FSA's Principles for Business which underpin the FSA's Treating Customers Fairly Initiative. Fairness obligations also exist at industry level. Subscribers to the Banking Code promise to act "fairly and reasonably" in all dealings with consumers by meeting all the commitments and standards in the Code. Firms must have regard to each of these layers of obligation in order to be also to show that they are treating their customers fairly. In the future we will also have the Unfair Commercial Practices Directive which will prohibit unfair practices by businesses in their dealings with consumers.

The 2006 Act does not define an "unfair relationship" and so far, no guidance has been given on this specific concept, although the OFT has now published its consultation on draft guidance as to how the new unfair relationship provisions will interact with the OFT's power to take enforcement action under Part 8 of the Enterprise Act 2002 (See OFT 854con), as required by Section 22 of the 2006 Act. Part 8 of the Enterprise Act gives the OFT (and other enforcers) powers to accept undertakings from and, where appropriate, seek court orders against businesses which infringe their legal obligations. This does not provide redress for individual consumers or enable consumers to enforce their rights against a particular lender or trader.

The unfair relationships test

The new section 140A inserted by the 2006 Act allows the courts to make any of the wide ranging orders open to it under the new provisions if it determines that the relationship between the creditor and the debtor arising out of the agreement (or the agreement taken with any related agreement) is unfair because of one or more of the following:-

(a) any of the terms of the agreement or of any related agreement;
(b) the way in which the creditor has exercised or enforced any of his rights under the agreement or any related agreement;
(c) any other thing done (or not done) by, or on behalf of, the creditor (either before or after the making of the agreement or any related agreement)

The court may take into account all matters it considers relevant to this assessment, including matters relevant to the debtor and to the creditor.

It is clear from the formulation of this test that the fairness of contract terms is just a part of the wider test which examines the fairness of the lender's relationship with its customers. The test itself focuses on three aspects out of which an unfair relationship might arise; the first looks specifically at the terms of the agreement (or any related agreement) and the other two look at the actings of the creditor.

Contract terms

In considering the fairness of a term in a consumer credit agreement lenders might be guided by whether or not the term might be unfair under the UTCCRs. There have been a number of court decisions in relation to the UTCCRs and the OFT clearly anticipates that the courts' approach to unfairness in consumer credit relationships will be similar to unfairness in contract terms.

In terms of the UTCCRs a contract term, if not individually negotiated, will be unfair if contrary to the requirement of good faith, it causes a significant imbalance in the parties' rights and obligations under the contract to the detriment of the consumer. An indicative and non exhaustive list of terms which might be regarded as unfair is set out in Schedule 2 to the UTCCRs. One such example is a term which has the object or effect of requiring any consumer who fails to fulfil his obligation to pay a disproportionately high sum in compensation, which was the basis of the OFT's recent statement on credit card default fees.

But while there is likely to be a good degree of overlap between the unfair relationships test and the fairness test in the UTCCRs, if the contract term in question relates to a "core term" expressed in plain intelligible language, or to an individually negotiated term, it will not fall subject to the UTCCRs test but may nevertheless give rise to an unfair relationship. Pricing, for example, is a core term under the UTCCRs. While interest rate charged, or the rate or amount of other fees charged under the credit agreement may give rise to an unfair relationship because the rates or charges applicable are substantially higher than in credit agreements offered to similar borrowers in the market place, this is less likely to be the case where the borrower has been treated fairly and has freely entered into the agreement. On the other hand, excessive prices may be coupled with other unfair terms or business practices.

Exercise or enforcement of creditor's rights and/or any other thing done/not done by the creditor (before or after the making of the agreement/any related agreement)

These two aspects of the unfair relationships test give courts wide discretion to consider lenders' dealings with customers. Business practices and other actions by lenders in dealings with customers (both referred to as business practices for the purposes of this article) may breach the 1974 Act and regulations made under it or other consumer protection legislation. But the unfair relationships provisions look beyond the legality of lenders' business practices; the OFT has indicated that business practices can contribute to unfair relationships even where they do not amount to a breach of legislation.

Fairness in this context will most probably involve consideration of how transparent the lender has been in its dealings with the customer, whether or not full, clear and early disclosure of information has taken place and an explanation of the product terms and conditions and associated charges has been given to the customer. Guidance as to how fairness in relationships might be assessed might also be taken from the application of the FSA's general principles of treating customers fairly, particularly Principles 6 and 7, which require firms to have due regards to their customers and treat them fairly (Principle 6), and to pay due regard to the information needs of their clients and communicate information to them in a way which is clear, fair and not misleading (Principle 7).

Whether or not, or the extent to which, a lender has adhered to any relevant guidance or principles of best practice issued by trade associations or the ASA, and findings of the Financial Ombudsman Service might also be taken into consideration when assessing the fairness of a relationship.


What is made very clear in the OFT's draft guidance is that whether or not a relationship is unfair is a matter ultimately for the courts. However, with the new unfair relationships due to come into force in April next year (with a one year transitional period for existing agreements), lenders will be reviewing not only their agreements but also their operational procedures to ensure that, as far as possible, they are treating their customers fairly.