Smith v Royal Bank of Scotland plc – a fresh wave of unfair relationship claims?

The recent Supreme Court decision in Smith and another v Royal Bank of Scotland plc [2023] UKSC 34 provides important guidance on the assessment of when a relationship will be regarded as “unfair” within the context of the Consumer Credit Act 1974 (“the 1974 Act”) and the time limit for applying to the court under section 140B of the 1974 Act. 

Whilst the Supreme Court was concerned with payments made under a payment protection insurance policy, the decision is of wider significance to property practitioners, particularly in the context of mortgages which may fall within the scope of the unfair relationship provisions where it is not a regulated mortgage contract. 

The key facts 

In summary: 

1. The claimants formerly held credit cards with the Royal Bank of Scotland plc (“the Bank”). In addition, the claimants had taken out payment protection insurance (“PPI”). 
2. Unbeknownst to the claimants at the time, the Bank had received large commissions in respect of the PPI policies entered into.
3. The First Claimant terminated her PPI policy in March 2006 and made her last payment under this policy in April 2006. However, her credit card agreement continued until 2015.
4. The Second Claimant terminated his PPI policy in March 2008 and made his last payment under the policy in the same month. His credit agreement continued until 2019.
5. Whilst the claims were brought over ten years after the PPI policies were terminated, the claims were brought within six years of termination of the underlying creditor agreements.
6. Both claimants only learnt of the commissions when they were repaid sums pursuant to the Financial Conduct Authority’s PPI mis-selling redress scheme.
7. The claimants sought an order against the Bank for repayment of sums which they paid in respect of their PPI policies.

The claimants were successful in the county court (both before the district judge and on appeal). However, they were unsuccessful in the Court of Appeal, which held that the claims were brought outside the limitation period prescribed by section 9, Limitation Act 1980.

The Supreme Court’s decision 

The Supreme Court concluded that a claim for a remedial order under section 140B of the 1974 Act can be made whilst the relevant credit relationship is continuing, and limitation begins to run when this relationship ends. In delivering judgment, Lord Leggatt commented as follows: 

1. Section 140A(1) is not concerned with the fairness of the agreement per se but whether the relationship that arises out of the agreement is unfair to the debtor. 
2. The question is whether the relationship is unfair at the time when the determination is made or, if the relationship has ended, whether the relationship was unfair at the point of termination. Where the relationship has ended, the determination can be made on that date or any later date.
3. In order to determine whether a relationship is unfair, the court must consider the whole history of the relationship, namely the assessment is broad and holistic.
4. The unfair relationships regime is designed to provide broad, flexible, discretionary powers rather than being focussed on technicalities and strict time limits.
5. Whilst section 140B provides the court with an extensive menu of options, ultimately any order of the court is designed to remove the cause of any unfairness if the relationship is still continuing and/or to reverse any damaging financial consequences to the debtor.
6. The relationship did not cease to be unfair because there were no more payments for PPI – the bank had not repaid any of the sums paid by the claimants and had not disclosed the amount of the commission. The relationships were therefore unfair at the point of termination.
7. The concern about the bank’s exposure to stale claims was alleviated by the fact that the court retained discretion to make whatever order it considers just pursuant to section 140B of the 1974 Act which may, in an appropriate case, include no order at all. 

Comment  

The Supreme Court’s decision is faithful to what the unfair relationships regime is designed to address, namely, to provide the court with the option of granting a remedy where a relationship is unfair (as opposed to just concentrating on the fairness of the transaction itself).  

Whilst (at first glance) the decision suggests that unfairness is determined by looking at the relationship at a particular point in time, this does not make the history of the relationship irrelevant. In fact, quite the opposite. In determining whether a relationship is unfair at point X, the court must consider the whole history of the relationship and assess whether the events that followed render the relationship unfair at the date of determination. For example, the Court of Appeal’s position was that the First Claimant’s relationship was only unfair until April 2006 because that was the date of her last payment. However, to reach that conclusion, you would have to disregard what has happened before, including the fact that the sums paid out were not returned. It follows that such an approach would have been inconsistent with section 140A(1) of the 1974 Act, from which the holistic approach is essentially derived. 

One of the concerns raised in argument was that a later limitation period would open the floodgates to stale claims. However, both Lords Leggatt and Hodge considered that there were in-built appropriate safeguards in the unfair relationships regime to prevent this from happening – under section 140B of the 1974 Act, the court retains a discretion as to what remedy (if any) would be “just” and the fact of there being a delay could impact on whether any remedial order is made. 

There is also, in my view, a further safeguard under section 140A of the 1974 Act; whilst section 140A(1)(c) refers to “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)”,  it is clear from the case law (for instance Deutsche Bank (Suisse) SA v Khan [2013] EWHC 482) that the debtor’s conduct is also likely to be considered in determining unfairness, and not just at the discretion stage. Further, it is clear from the case law on unfair relationships that the degree of sophistication or vulnerability of the borrower is a factor relevant to unfairness (see, for example, Greenlands Trading Limited & Another v Girolama Pontearso [2019] EWHC 278 (Ch)).  

So, will this decision generate a new wave of claims? I suspect not. 

Article by Priya Gopal