For lenders that (under regulated credit agreements) grant credit, significantly increase credit or set credit limits, the guidance is set out in CONC 2.10. This states firms "should consider the customer’s individual circumstances". Mental capacity is, however, given a fairly wide definition: it’s a person’s ability to make a decision. But firms should assume the customer has mental capacity when making that decision unless it knows, or is told by a person it reasonably believes should know (or reasonably suspect) that the customer lacks capacity. There’s further guidance suggesting when someone may have mental capacity limitations and what should be included in policies and procedures.
If a customer falls into arrears then lenders must consider CONC 7.10. The basic principle is that a lender must suspend attempts to recover a debt from a customer in two situations:
Where the lender has been told that the customer might not have mental capacity; or Where the lender understands or "ought reasonably to be aware" that the customer lacks mental capacity.
However, in either case, the lack of capacity must stop the borrower from making relevant financial decisions about the management of the debt and/or from engaging in the debt recovery process. Lenders can ask for evidence and don’t need to comply with these provisions where the customer gave prior consent (for example, if there’s a registered lasting power of attorney).
The Royal College of Psychiatrists issued some guidance in April 2014 (when CONC first came into force). This broadly provided 10 tips to lenders. Further guidance has been already been issued (and now provides 12 tips for lenders).
While the guidance is useful and provides some practical pointers, it will be interesting to see how the courts tackle allegations by borrowers that lenders have (for example) not complied with CONC 7.10.1R or there is an unfair relationship because of the way in which the debt was collected (in light of the customer’s situation).
Court of Appeal’s decision in Graves v Capital Home Loans Limited 
The Court of Appeal recently considered an allegation of unfairness under the unfair relationship provisions in Section 140A of the Consumer Credit Act 1974, and mental capacity.
Mr Graves entered into a buy to let mortgage and later defaulted. He didn’t live in the property so the relationship could be challenged as unfair under Section 140A. The Court of Appeal had to decide whether there was unfairness because of the way in which the lender exercised or enforced its rights in selling the property. For part of the time while he was in arrears, Mr Graves was hospitalised, and also sectioned under the Mental Health Act 1983.
Mr Graves complained there was unfairness because:
The lender did not arrange (in breach of the terms of the mortgage) for an independent mortgage arrears counsellor to visit him;
Of an alleged breach of Paragraph 7.3 of the Office of Fair Trading’s Irresponsible Lending Guidance because of the lender’s failure to negotiate (it required a full repayment or the property’s sale); and
Of alleged breaches of Paragraphs 3.1 and 6.2 of the Good Practice Awareness Guidelines for Consumers with Mental Health Problems and Debt published by the Money Advice Liaison Group in 2009 ( the MALG Guidance).
The court decided that:
The MALG Guidance was "substantially complied with" because the lender followed a procedure to discover the extent of Mr Graves’ mental health problems which allowed it "properly to assess his overall financial situation";
The lender’s decision to demand either full payment or the property’s sale was a "commercially justifiable decision having regard to the history of the mortgage loan and the repeated history of arrears" and the lender had "bent over backwards to accommodate Mr Graves". The "decision to play hardball, so to speak, in 2012 has to be looked at in that wider context";
The decision to sell was not taken "until some time after Mr Graves had left hospital and after his doctor had indicated that Mr Graves was fit to retake control of his financial affairs";
It would "have to be an exceptional case for the court to conclude that a mortgagee…acted unfairly in deciding to realise its security", but it may have been different if Mr Graves had "an unblemished record of payment up to his admission to hospital and [the lender] had chosen to exercise its power of sale solely on the basis of arrears which occurred when he was unable to manage his financial affairs"; and
The OFT’s Irresponsible Lending Guidance required lenders to "treat borrowers in default with understanding and due consideration". This did not mean "that the lender has to ignore the history of the account or the ability of the borrower to maintain it in order in the future".
The court therefore decided there was no unfairness.
Given the issues which mental capacity causes for lenders, the Court of Appeal’s decision in this case provides some useful guidance pointers (particularly where a borrower has temporary mental capacity limitations).
While it is not strictly binding (and the decision may not have been the same if the property had been the customer’s home), it is persuasive and may prove useful for lenders facing similar claims (particularly where, for example, a customer only lacks capacity for part of the time he or she is in arrears).
While mental capacity must be treated as serious, what Graves says is that mental capacity issues have to be viewed in the context of the customer’s default.
Motor finance providers can therefore take some comfort when considering their options.
However, they must remember that CONC 7.10.1R (unlike the position in the Graves case) requires a lender to (in certain circumstances) "suspend" its pursuit of the recovery of debt. Graves is not, therefore, a licence to do anything where there has been a history of arrears.
Russell Kelsall, is a partner at Squire Patton Boggs (UK) LLP