A test case for regulations governing irresponsible lending could open the way for further legal action against payday lenders, according to a solicitor acting for a group of claimants who had been encouraged to enter a ‘cycle of debt’.
In Kerrigan v Elevate, the High Court found that payday lender Elevate Credit International Limited – better known as Sunny – breached the requirements of the Consumer Credit Sourcebook by allowing customers to repeatedly borrow money.
The case was brought by a sample of 12 claimants selected from a group of 350. They alleged that Sunny’s creditworthiness assessment was inadequate; that loans should not have been granted at all in the absence of clear and effective policies; and that the company breached its statutory duty pursuant to a section of the Financial Services and Markets Act 2000.
Sunny, which entered administration shortly before the judgment was handed down, lent at high interest rates and promised that money would be in customers’ accounts within 15 minutes. In one case, a claimant took out 51 loans with the business, racking up a total of 119 debts in a year.
In judgment, 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.’
In response to the ‘unfair relationship’ claim based on repeat borrowing, the judge said the failure of the lender to consider the financial difficulties that repeat borrowing might cause an unfair relationship.
However, the negligence claim for personal injury (aggravation of depression) was dismissed.
It was reported in the Law Society Gazette that the judgment confirmed that where a consumer was making repeated applications for payday loans, lenders would be in breach of their obligations under the Consumer Credit Sourcebook for failing to conduct an adequate assessment which could then amount to an unfair relationship.
Payday lenders could face more legal action in the coming years, if they stayed in business. Over the last couple of years lenders have been raising concerns that their regulatory obligations are unclear, this judgment should assist in that clarification.
A case against another US-backed payday lender is due to be heard in the High Court in December 2020.