Payday lenders could be facing further legal action after the High Court delivered a verdict on repeat borrowing.
A test case for regulations covering irresponsible lending found that a payday loan form breached their obligations by allowing customers to repeatedly borrow money.
It found that such continuous borrowing can be an accurate indicator of financial health and that lenders’ failure to consider the financial difficulties of their customers could cause an unfair relationship.
The High Court decision in the test case Kerrigan v Elevate was that lender Elevate Credit International Limited – better known as Sunny – breached the requirements of the Consumer Credit Sourcebook by granting loans without adequate assessment of their borrowers’ circumstances.
The ruling was that Sunny failed to take their customers’ financial health into account, granting repeat borrowing when that should have been a warning sign as to the customers’ financial well-being. The loans are said to have had an adverse impact on their financial situation and their ability to make the repayments.
With regard to a claim of an ‘unfair relationship’ existing, based on repeat borrowing, the judge said there was a failure on Sunny’s part to consider the financial difficulties caused by repeat borrowing, which may be justification to call the relationship unfair under the Consumer Credit Act 1974.
The defendant allowed customers to repeatedly borrow money, with one of the 12 claimants in the case having taken out 51 loans and 119 debts in a year.
Sunny, which was placed into administration shortly before the judgement was handed down, had been lending at high interest rates and promised customers that the money loaned would hit their borrowers’ accounts within 15 minutes. They had also traded as 1 Month Loan and Quid.
Their business model was lending relatively small amounts but with great frequency and often permitting customers to have several loans open at one time, referred to as High-Cost Short-Term Credit (HCSTC).
Sunny had been upholding just 8% of the complaints they had received in 2019 but, when cases were referred to the Financial Ombudsman Service, they had agreed with the customer in more than three-quarters of cases. Sunny’s American parent company was, however, rejecting these FOS adjudications, claiming that greater clarity was needed from the UK regulators.
The case was brought by a sample of 12 claimants. These were selected from a group of 350 with the claimants’ lawyers selecting six and the defendants six.
The claimants – all of whom had borrowed money at least five times under regulated consumer credit agreements over various periods between 2014 and 2018 – alleged that Sunny’s credit assessments were inadequate, and that loans should not have been granted, given a lack of clear and effective policies.
In judgement, HHJ Worster said: “It is apparent… that the defendant did not take the fact or pattern of repeat borrowing into account when considering the potential for an adverse effect on the claimant’s financial situation.
“There was no attempt to consider whether there was a pattern of borrowing which indicated a cycle of debt, or whether the timing of loans – for example paying off of one loan very shortly before the application for another – indicated a reliance or increasing reliance on…credit.
“In simple terms there was no consideration of the longer-term impact of the borrowing on the customer.“