Russell Kelsall, financial services regulation partner at TLT examines the legal relationship between point of sale finance and add-on purchases

For many consumers, point of sale finance allows them to acquire significant purchases by spreading the cost over time.
The latest information from the Finance & Leasing Association shows that the point of sale car finance sector reported new business up by 14% in March 2016 from last year.

But the unfair relationship provisions contained in the Consumer Credit Act 1974 (CCA) potentially pose risks for lenders where dealers sell ‘add-ons’ at the same time as selling a vehicle. This applies to all credit agreements in the motor finance market with an individual, sole trader or partnership of two or three partners.

Following the UK Supreme Court’s decision in Plevin v Paragon Personal Finance (1) Limited [2014] UKSC 61, the unfair relationship provisions remain a hot topic for the motor finance industry.

In Plevin, the court decided that an undisclosed commission of 71.8% of the premium payable for a single premium policy of payment protection insurance meant the relationship was unfair. This is because the lender had not told the customer the amount of the commission. The FCA is currently consulting on proposed rules for complaints which raise Plevin.

However, the unfair relationship provisions do not only apply to commissions. They are much wider than that. They allow the court to consider whether the relationship arising out of a credit agreement, not just a regulated credit agreement, is unfair to the customer because of:
– The terms of the agreement or any related agreement;
– The way in which the lender has exercised or enforced any of its rights under the agreement or any related agreement; or
– Any other thing done, or not done, by or on behalf of the lender either before or after entering into agreement or related agreement.

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It is clear that the agreement is the credit agreement between the customer and the lender. But the unfair relationship provisions also consider any "related agreement". While the provisions are fairly technical, there are no binding cases on what is a related agreement.

The issue is important for the motor finance market, where ‘add-on’ products are often sold to borrowers taking out finance.
But if a borrower buys a car seat at the same time as entering into the credit agreement, is the agreement to buy the car seat a related agreement? And if it is, does the borrower have a claim against the lender if there is anything wrong with the car seat under the unfair relationship provisions?

Link Financial Ltd v Wilson

The court recently considered the effect of unfairness in a related agreement in Link Financial Ltd v Wilson [2014] EWHC 252 (Ch). In Wilson, Mrs Wilson and her husband (the borrowers) acquired a timeshare in 2007 for £20,026. After taking into account an earlier arrangement, the balance the borrowers had to pay was just under £15,000. The borrowers applied for a fixed-sum loan from GE Money Consumer Lending Ltd (the lender) to pay it.

The timeshare’s terms said that if they did not pay a modest annual fee, the timeshare, which was due to last for 60 years, would be cancelled. After entering into the agreement, the borrowers stopped paying the lender and did not pay the annual fee. The timeshare was therefore cancelled and the lender sold the debt due to Link Financial Ltd, which sued the borrowers for the balance.

After considering all the evidence, the court concluded that the borrowers’ relationship with the lender and Link was unfair under the unfair relationship provisions.

There was nothing unfair about the terms of the credit agreement; instead the court said it was the terms of the related agreement (i.e. the timeshare agreement) which were unfair. This was because if the borrowers failed to pay the annual membership fee, and the timeshare’s terms said the timeshare would be cancelled and there would be no further responsibility to provide points. The supplier could keep all the purchase price for an asset which was supposed to exist for 60 years.

Implications for motor finance

In Wilson, the court did not decide whether the timeshare agreement was a related agreement. Instead, it was accepted by the parties that the timeshare agreement was a related agreement. Whether ‘add-ons’ are related agreements remains to be decided on another day. To be a related agreement for most motor finance transactions, it must be a "linked transaction", as defined in Section 19 of the CCA, which is often considered a complex set of provisions.

But it seems at the very least arguable that certain ‘add-ons’ are not linked transactions for the purposes of Section 19 of the CCA. If they are not linked transactions then they are unlikely to be related agreements. And if they are not related agreements, the court does not have the power under Section 140A of the CCA to consider their terms, or anything relating to them, under the unfair relationship provisions.

Taking the car seat example, is it really right that a customer, who needs finance to acquire a motor vehicle but pays for the car seat from his own funds, should have a right against a finance provider who had no involvement at all in the design, or sale, of the car seat?
The answer must surely be no. The customer is already covered by the Consumer Rights Act 2015 if the car seat is unsatisfactory. So there seems no policy reason why a motor finance lender should be exposed to further liability simply because at the time of entering into the finance agreement, the dealer sold a separate product to the customer.

There are, however, a number of cases working their way through the courts where borrowers are claiming a motor finance lender should be responsible for the alleged mis-selling of a monthly payment protection insurance policy. In those cases, the lender does not provide any credit to pay for the policy, and simply collects the premium at the same time as the monthly repayment.

Those borrowers argue that the lender should be responsible for the mis-selling because it was something done, or not done, on behalf the lender under Section 140A(1)(c) of the CCA. And they say it was done on the lender’s behalf because of the deemed agency provisions in Section 56(1)(b) of the CCA because the mis-selling was "in relation" to the vehicle to be financed.

But if that’s right, and surely it cannot be, it creates considerable practical problems for both dealers and motor finance providers.
Instead, the better view must be that anything solely relating to the vehicle falls into the deemed agency provisions, including negotiations on a part exchange. Anything relating to an ‘add-on’ must fall outside those provisions, meaning the only claim the customer has is against the seller of the ‘add-on’. Such an approach would ensure that a lender financing a specific product (like the lender did in Wilson) should undertake due diligence on that product and take the risk of mis-selling of that product. But it would stop a lender being exposed to a vast range of other potential claims over which it has absolutely no control.

No doubt the court will provide some guidance on this topic.