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Author Jonathan Lewis Section 50 of the Consumer Rights Act 2015: should lenders be worried?

KEY POINTS that they do not apply to a to the ––Section 50 of the Consumer Rights Act 2015 (the CRA) introduced what has been described extent that it is for services of a banking, credit, as “a new, significant and quite complex provision”. It effectively makes anything that is said insurance, personal pension, investment or or written to a consumer and certain categories of information supplied by a trader to the payment nature. Those provisions are therefore consumer binding on the trader by the creation of new statutory terms of contract. not considered here. ––However, the scope for s 50 CRA to cause difficulties for lenders is limited by the definition Chapter 4 of the CRA was introduced to of a “consumer”, which excludes corporate entities and persons acting wholly or mainly within address long-standing concerns that existing their trade, business, craft or profession. law on service , then primarily found ––Lenders (in particular, their compliance teams) will have to ensure that they take practical in the Supply of Goods and Services Act 1982, steps, by training their staff and improving their internal recordkeeping, to ensure that was piecemeal and incomplete. To a large unwanted and unexpected statutory terms are not incorporated into their agreements. extent, Chapter 4 reflects the provisions of the 1982 Act but goes further and provides for Section 50 of the Consumer Rights Act 2015 effectively gives contractual force to anything the new special remedies of the right to repeat written or said by traders to consumers where the consumer takes that representation performance and the right to a price reduction. into account in making decisions about the contract. This article considers how this In July 2012, the Department for new provision fits into the landscape of in the financial sector and Business, Innovation and Skills (BIS) considers how lenders can manage its effect on their businesses. published a consultation paper entitled SECTION 50 OF THE CONSUMER RIGHTS ACT 2015: SHOULD LENDERS BE WORRIED? SECTION OF RIGHTS THE CONSUMER ACT50 2015: Consultation on Enhancing Consumer Confidence by Clarifying Consumer Law. SECTION 50 CRA when making any decision about the It described what would become s 50 as ‘a Section 50 CRA is found in Chapter 4 service after entering into the contract. statutory guarantee that a service will meet the ■(Services) of the Consumer Rights Act description given pre-contractually’. BIS did not 2015 (CRA). Chitty has described it as a ‘new, (2) Anything taken into account by the expect such a statutory guarantee to change significant and complex provision’.1 It came into consumer as mentioned in subsection the substance of the law (§6.83). Rather, it force for most contracts on 1 October 2015 (1)(a) or (b) is subject to- was considered that the guarantee would and applies to contracts entered into on or after make the law ‘clearer and more accessible for that date.2 (a) anything that qualified it and was said or both consumers and traders’ (§6.83). As of yet, there is very little by way of written to the consumer by the trader on reported cases providing guidance as to how the same occasion, and TO WHICH CONTRACTS DOES Chapter 4 is to be interpreted and applied. (b) any change to it that has been expressly SECTION 50 APPLY? Section 50 provides as follows: agreed between the consumer and the Section 48(1) CRA provides that Chapter trader (before entering into the contract 4 applies to ‘a contract for a trader to supply a ‘50 Information about the trader or service or later). service to a consumer’. Section 2(2) CRA defines to be binding a “trader” as a ‘a person acting for purposes (5) See section 54 for a consumer’s rights relating to that person’s trade, business, craft or (1) Every contract to supply a service is if the trader is in breach of a term that this profession, whether acting personally or through to be treated as including as a term of the section requires to be treated as included in another person acting in the trader’s name or on contract anything that is said or written to the a contract.’ the trader’s behalf’. It is clear that a professional consumer, by or on behalf of the trader, about lender would fall within the definition of the trader or the service, if- Sections 50(3) and (4) (omitted above) deal “trader” when conducting its business with its with information that is provided by the trader customers. It is important to note the agency (a) it is taken into account by the consumer in accordance with the Consumer Contracts provisions contained within that definition: when deciding to enter into the contract, (Information, Cancellation and Additional reference to the trader also includes reference or Charges) Regulations 2013.3 However, to a third party acting on the trader’s behalf. I (b) it is taken into account by the consumer regulation 6(1)(b) of those regulations provides will refer below to a hypothetical lender, which

472 September 2017 Butterworths Journal of International Banking and Financial Law SECTION 50 OF THE CONSUMER RIGHTS ACT 2015:50 ACT CONSUMER THE RIGHTS OF SECTION WORRIED? BE LENDERS SHOULD Feature

falls within the CRA definition of “trader” is acting for business purposes, it would be a statutory term of the contract provided as “L”. sensible to ask the borrower at the outset of one further condition is met: reliance, as Section 2(3) CRA defines a “consumer” the transaction and obtain details as to the discussed below. as an ‘individual acting for purposes that are purpose of the transaction. No doubt lenders wholly or mainly outside that individual’s trade, already take such steps as the nature of the THE REQUIREMENT OF RELIANCE business, craft or profession’. For the sake of loan is relevant to all sorts of other issues In its consultation paper, BIS suggested that simplicity, I will refer to “trade, business, that could arise (under other legislation only ‘important statements of the characteristics craft or profession” simply as “business” like that discussed below). There is now an of the services, including the price and time for below. While much academic commentary additional reason to ascertain the purpose of performance … would fall within this statutory stresses the breadth of this new definition the transaction at its outset and document it guarantee’. No such definition made it into of consumer and how it is broader that carefully accordingly. the CRA. However, this intention is partly its counterpart in European legislation, reflected in s 50 CRA in that only those matters the definition will no doubt exclude a vast TO WHICH STATEMENTS DOES written or said that the consumer ‘takes into swathe of borrowers. I will refer below to SECTION 50 APPLY? account, in other words, relies upon, in making an individual borrower who falls within the Section 50 only applies to anything that is a decision concerning the contract will become CRA definition of “consumer” as “B”. “written or said” to the consumer by or on terms of it. It will be noticed that s 50 avoids the In the first instance, a corporate entity will behalf of the trader. It follows therefore that distinction between terms which not fall within the definition of a “consumer”. a consumer will not be able, for the purposes are warranties (breach of which only gives rise Second, a person who borrows money mainly of s 50 CRA, to rely on the past conduct of a to an action to claim ) and terms which for the purposes of her business will be trader. In that limited sense, the provision is are conditions (where the innocent party can excluded. Whether or not this is the case is of narrower than the common law. However, elect to rescind the contract). course a question of fact. However, s 2(4) CRA it is broader than the common law in the Invariably the question of whether a makes it clear that the burden will fall squarely following more significant way. Section 50 borrower takes a particular statement into on L if L wishes to assert that B was borrowing arguably covers what the common law would account will unavoidably be a difficult question for purposes mainly relating to her business. treat as a representation of opinion (a “mere of fact. Hence, a court will have to make an If B sought a loan to refinance her personal puff”) or a representation as to a future fact. assessment of all the before it, most credit card debt, she would clearly be acting The traditional common law rule is that a importantly evidence from the borrower. It is as a consumer. However, if she sought finance must be a false statement important to note, however, that s 50 does not to purchase a buy-to-let property, the analysis of fact, past or present, as distinct from a require that any reliance has to be reasonable. would be more complicated. Unless she was statement of opinion, a statement of intention B might quite foolishly rely on an outlandish involved in a property business somehow, or a mere commendatory statement. However, statement from L and nonetheless receive the she again would probably be regarded as a under s 50 CRA, if L claimed to be the most protection of s 50. consumer.4 For an example of how a court goes customer-friendly lender in a particular The s 50 CRA test for incorporation about determining whether a borrower was industry sector, that representation could give of pre-contractual statements does seem acting as a consumer, as defined in the old law,5 rise to liability if untrue. to some extent to clarify the pre-existing see the Court of Appeal’s analysis in Evans v Section 50 only applies to anything written common law. It has always been the case that Cherry Tree Finance Limited.6 or said about the trader or about the service if a misrepresentation is to be actionable in The phrase “contact to provide a service” to be provided. This limitation is particularly the contractual context, it must have been a is not defined in the CRA. However, s 48 helpful for lenders. This is because, in selling factor inducing the claimant to enter into the CRA does provide that the definition does particular financial products, lenders often contract, although it need not be the sole factor not include a contract of employment or get themselves into trouble by making (Edgington v Fitzmaurice).7 apprenticeship (or in Scotland, a gratuitous representations about the future state of Under the common law, which will of contract). Section 48(5) empowers the the markets. However, s 50 will not apply, course apply where the CRA does not, one Secretary of State by order made by statutory for example, if L, in trying to sell a hedging has to distinguish between statements which instrument to provide that a provision of product to B, asserts that interest rates are had become incorporated into the contract Chapter 4 does not apply in relation to a service likely to rise imminently as this statement or constituted a and those of a description specified in the order. No such is not about it nor about the service that it is statements which were considered to be mere order has been made or proposed. selling. However, if L stated that there were representations. The test to be applied to In summary, it is likely that s 50 will be minimal costs to exiting the hedging product determine whether a particular matter written triggered when lenders, such as a banks, when this was untrue in that those costs varied or said prior to entering the contract was binding are dealing with their private clients. If the depending on extraneous factors and could be was to consider whether or not it was the lender has any doubts as to whether a person substantial, such a statement would become intention of the parties, viewed objectively, that

Butterworths Journal of International Banking and Financial Law September 2017 473 Feature

one party should be under contractual liability ensure that any qualifications are made in the rights under ss 54 to 56 ‘do not affect any rights that in respect of the truth of the statement (Heilbut same conversation or correspondence as the the contract provides for, if those are not inconsistent’ Symons & Co. v Buckleton).8 representation so qualified. (s 54(1)). Further, it is clear that ss 54 to 56 do In applying that common law test, the court Lenders, along with most sensible contracting not prevent a consumer from seeking remedies would take into account matters such as the parties, tend to include “entire agreement” clauses outside the CRA instead of or in addition to importance of the statement, the time which in their agreements, which provide that the CRA remedies provided that there is no double elapsed between the making of the statement written terms constitute the entire agreement and recovery (s 54(6)). The non-CRA remedies and the conclusion of the contract, whether expressly exclude any representation made prior which s 54(7) expressly preserves are: claiming the party making the statement was in a better to the agreement from being incorporated. It is far damages; repayment where has position to ascertain the truth than the party to from clear how effective such a clause would be in (partly) failed; ; an order for whom the statement was made and whether the the face of s 50 CRA. In many cases, the written “specific implement”; relying on the breach against statement was omitted from a subsequent more agreement would be presented to the borrower a claim by the trader under the contract; and formal contract in writing. after some key representations have already been exercising a right to treat the contract as at an end. At first sight, this appears to be a far more made to the borrower. Indeed, statements about If L makes a representation about the service difficult and cumbersome exercise than simply the nature of the lender and the service that it that it is to be providing which is incorporated by to ask whether a consumer took the matter into provides are by their very nature likely to be virtue of s 50 and that representation is untrue account in making certain decisions about the made at the outset of the relationship. Hence, the (L somehow breaches that term), s 54(3) affords contract. However, in reality, in determining “entire agreement” clause would not qualify the B two potential remedies: a right to require repeat whether B is being truthful in claiming to have offending representation as it was not made on performance and the right to a price reduction. taken a representation into account, a court is the same occasion (s 50(2)(a) does not apply). A However, if the representation B relied upon likely to have the very same factors in mind. lender would have to argue that such a clause is was about L and it was untrue, the only remedy Hence, the CRA test probably will not avoid ‘a change to it that has been expressly agreed between available to B under s 54 is a price reduction. a detailed inquiry into the facts in cases where the consumer and the trader’ (s 50(2)(b)). However, Neither of the two remedies provided by reliance is disputed. However, L and B are does the inclusion of a boilerplate clause in an s 54 CRA sit particularly comfortably within the SECTION 50 OF THE CONSUMER RIGHTS ACT 2015: SHOULD LENDERS BE WORRIED? SECTION OF RIGHTS THE CONSUMER ACT50 2015: more likely to understand the test that will be agreement that a borrower probably will not financial services sector. It is difficult to see when applied in such circumstances. Further, it might read in full result in “express agreement” for the it would be of much use to require a lender to be thought that the substance of the law has purposes of s 50? repeat its performance. Indeed, talk of repeating changed marginally in that it is perhaps easier It remains to be seen whether such an performance does not make much sense when for B to turn something said or written prior to argument would work. However, it does seem it comes to loans, and where repeat performance the contact into an actionable representation to circumvent the operation of s 50 in a way is not possible, it is not required (s 55(3)). The as she only needs to show some minor form of which runs counter to the policy of the CRA. remedy of a price reduction seems to be of greater reliance upon it. Lenders beware! Section 57 CRA is entitled ‘Liability that cannot relevance and value. be excluded or restricted’. Section 57(2) provides: Section 56 explains that the right to a price QUALIFYING REPRESENTATIONS/ ‘subject to section 50(2), a term of a contract to reduction is the right to require the trader PREVENTING RELIANCE supply services is not binding on the consumer to reduce the price to the consumer by an It is abundantly clear that lenders have to be to the extent that it would exclude the trader’s “appropriate amount” including the right to very careful in what they say to borrowers about liability arising under section 50’. Section 57(3) receive a refund for anything already paid above themselves or their services prior to entering a provides that consumers are not bound by any the reduced amount (s 56(1)). Further, the transaction. However, s 50(2) does afford lenders term seeking to restrict the trader’s liability if amount of the reduction may, where appropriate, some protection. While s 50(2) allows lenders it prevents the consumer from claiming the be the full amount of the price (s 56(2)). The to qualify their pre-contractual representations, contract price or other consideration paid by CRA does not give any guidance as to how the it seems, strictly speaking, from the wording the consumer under any aspect of s 50. One “appropriate amount” is to be determined. This is of s 50(2)(a), that if L wants to qualify some would think that this anti-avoidance measure no doubt because it would be difficult to establish representation that it makes to B, it has to do so might feature in a court’s approach to s 50(2)(b), general principles that are equally applicable to a on the “same occasion”. This is somewhat strange moving it towards a strict approach under which wide variety of services. in that it seems that a qualification introduced boilerplate entire agreement clauses are nullified. A right to a price reduction might arise in by L, say the day after the representation was the following situation. Suppose that, in order made, but weeks before B enters into the contract THE NEW WEAPON: RIGHT TO A to win B’s business, L tells her that its approval or it is performed, would not be effective for the PRICE REDUCTION of loans is faster than other lenders. This is purposes of s 50(2) CRA. Given that there is Section 50(5) refers to the remedies set out in s not actually true. L goes on to take quite some yet to be any authority on s 50 CRA, lenders 54. Section 54, which is entitled ‘Consumer’s rights time to approve the loan but B nonetheless goes ought to be particularly wary at this stage and to enforce terms about services’, makes clear that the ahead with it and draws down upon it. Even if

474 September 2017 Butterworths Journal of International Banking and Financial Law SECTION 50 OF THE CONSUMER RIGHTS ACT 2015:50 ACT CONSUMER THE RIGHTS OF SECTION WORRIED? BE LENDERS SHOULD Biog box Jonathan Lewis is a barrister at Henderson Chambers, 2 Harcourt Buildings, Temple, Feature London, EC4Y 9DB. He practises in , financial regulation and public law. Email: [email protected]

this delay has not caused B any financial loss Trading Regulations 2008 (as amended).9 about the lender. Where a lender has an because she did not actually need the money Indeed, lenders are very tightly regulated by ongoing relationship with a particular supplier very urgently, she nonetheless has a new remedy the Financial Conduct Authority (FCA) under or third party who introduces customers under the CRA if she took this representation the Financial Services and Markets Act 2000 to it, it will perhaps be necessary to obtain into account (despite not requiring any and regulations made thereunder as well as by some sort of contractual from the particular speed of approval) in taking out the the FCA’s various handbooks (notably COBS, supplier for losses arising out of any inaccurate loan: the right to a price reduction. B would ICOBS and CONC). Section 50 CRA does representations made by the supplier to the probably have paid some sort of fees, such as a nonetheless make its own contribution in that it borrower about the lender or its services. facility fee, to take out the loan. While it might might well apply in some circumstances where In the first few years of the operation of once have only been a matter of good customer loans are not otherwise regulated and provides a Chapter 4 of the CRA, while its boundaries care to offer a reduction in fees due to the new remedy (price reduction). are still being established by the courts, some making of an untrue statement which caused no litigants might try to take advantage of these financial loss (but perhaps some inconvenience CONCLUSION provisions by claiming minimal reliance on and anxiety), lenders now ought to be aware that While it seems that the introduction of s 50 mere puffs about a lender or its services and borrowers might well be legally entitled to such a CRA is unlikely to have any significant impact demanding a large price reduction. A lender reduction depending on the circumstances. on lending businesses, lenders ought nonetheless would be well advised to be in a position to to take steps to ensure that their staff are well produce to a customer immediately upon receipt WHAT DOES SECTION 50 REALLY trained as to the consequence of pre-contractual of such a complaint, clear internal notes of any ADD IN THE CONTEXT OF A representations that they make to customers. discussions that might have taken place to nip FINANCIAL TRANSACTION? There is now a heightened risk that “sales talk” any such threats in the bud. n Section 53(1) provides that nothing in Chapter 4 might have become actionable in a way that it affects any enactment or rule of law that imposes previously was not: the right to a price reduction. 1 Chitty on Contracts, 32nd edn, paragraph 38- a stricter duty on the trader. Rather, Chapter 4 Further, even once the contract is in force, 532. is subject to any other enactment which defines representations can lead to liability if relied upon 2 Art 3(c) of the Consumer Rights Act 2015 or restricts the rights, duties or liabilities arising by the borrower in making any decisions under (Commencement No 3, Transitional Provisions, in connection with a service of any description the contract. Savings and Consequential Amendments) (s 53(2)). These provisions are particularly It has for a number of years been the practice Order 2015 (SI 2015/1630). Art 6(1) provides important in the context of financial services, of financial institutions to record most telephone that it does not apply to any contract entered which have been regulated with increasing calls with customers. In mis-selling claims (such into before 1 October 2015 which would vigour since at least the introduction of the as for mis-sold hedging products), they have otherwise be covered by Pt 1 or 2 of the Act. Consumer Credit Act 1974 (the 1974 Act). often had to obtain transcripts of sales calls to The section came into force for consumer The 1974 Act introduced a number of determine what was actually said. This practice transport service contracts on 1 October 2016. remedies and tools to assist borrowers in will clearly become all the more important 3. SI 2013/3134. respect of loans regulated by that Act. Indeed, now. Further, many financial institutions such 4 This particular example is made all the more s 56 put in place a deeming provision whereby, as banks have their own internal electronic complex by operation of the Mortgage Credit when a representation is made by a credit noting systems in which conversations with Directive Order (SI 2015/910). broker or supplier in “antecedent negotiations” customers and internal communications are 5 The now revoked Unfair Terms in Consumer leading to the conclusion of a regulated recorded, usually by the customer relationship Contracts Regulations 1999 (SI 1999/2083). agreement, that representation is deemed to be manager, in summary form. Again, this practice 6 [2008] EWCA Civ 331. made in the of agent for the creditor, will take on a heightened importance going 7 [1885] 29 Ch. D. 459. rendering the creditor liable for it. Clearly forward. Transcripts and internal records of 8 [1913] AC 30. this deeming provision is driven by similar conversations are likely to be the most valuable 9 SI 2008/1277. policy considerations to s 50 CRA. Borrowers evidence in establishing what was said to a now have access to a wide variety of remedies borrower, when it was said and importantly, under s 140B of the 1974 Act where they can whether it was qualified in any way to prevent Further Reading: establish that any element of their relationship the customer relying upon it. Hence, compliance ––How fair are bank charges? [2008] 6 with the lender was “unfair” within the teams will need to ensure that staff are trained JIBFL 282. meaning of s 140A. to keep sufficiently detailed internal notes of ––Rethinking conduct regulation [2015] Since 1 October 2014, a consumer may conversations. 7 JIBFL 413. also have a right to a financial remedy for It will be less easy for lenders to protect ––The Consumer Rights Act 2015: untrue statements in accordance with Part 4A themselves in circumstances where borrowers clarity and confidence for consumers of the Consumer Protection from Unfair deal with suppliers who make representations and traders? [2016] 8 JIBFL 504.

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