Although the Bible suggests that it is not a good idea to be a borrower (or indeed a lender!) the reality of modern life means that you would be very hard-pressed to live without borrowing money.  

Almost all house purchasers need a mortgage to borrow enough money to buy a home. Aside from property, most people need to obtain credit to purchase other big items such as a car or a home appliance. Today, 80-90% of new cars are bought on finance deals. 

In the relationship between a bank or other commercial lender and a retail customer, the former is undoubtedly in the strongest position.  It will typically dictate non-negotiable terms and, in general, it holds all the cards if the borrower does not pay.  Ordinary borrowers are thus very vulnerable: irresponsible lending is one of the fastest areas of financial complaints, according to the FOS’ most recent report.

What protection exists to assist in what might otherwise become a bullying relationship?

This imbalance of power between lenders and borrowers – and the seriousness of the consequences for those who are unable to meet financial obligations like loan repayments – means that there are rules regarding the nature of the relationship. 

The most important piece of legislation is Section 140A of the Consumer Credit Act 1974: this specifically prohibits “an unfair relationship”.  

What does this cover?  

In essence, the law deals with situations where the lender’s conduct was totally oppressive, if the lender has used an excessive rate of interest, or if the terms of the agreement were so onerous that they left the borrower with no reasonable chance of paying back the debt.

Section 140A would most commonly be used to defend a claim by a loan shark company that might be charging ludicrous rates of interest.  One might take the view that the rates charged by credit card companies are crazy but they are very careful to stay on the right side of the law to avoid this allegation. 

For a loan agreement to be considered oppressive, the borrower must also demonstrate that the loan caused them “undue hardship”. This might include financial difficulties, loss of business, or loss of property. 

The court will assess in each case the particular circumstances when determining if the loan caused undue hardship.

How do you complain about an unfair business practice when it comes to loans?

Putting aside the strict letter of the above law ,there is another route for complaining about unfair lending: to lodge a grievance with the Financial Services Ombudsman.  

The FOS will look for evidence of “unaffordable” or “irresponsible” lending. In their investigation they will ask questions like: Did the bank do everything it was required to do in terms of its own processes?  Did their customer lose out as a result?  

The Ombudsman has the power to overturn contractual terms by looking broadly at what is fair and reasonable in the circumstances. In considering what is fair and reasonable, the Ombudsman will consider a huge range of relevant laws and regulations, regulators’ rules, guidance and standards, codes of practice, and even what might be regarded as good industry practice at the time.  

For example, the Ombusman will look at The Office of Fair Trading’s “Irresponsible Lending Guidance” and the Financial Conduct Authority’s Consumer Credit Source Book – both of which demand an assessment of affordability which was proportionate – to determine if a prospective borrower would be able to repay their loan. 

The Ombudsman service is free but there are time limits so put your skates on if you wish to complain this way. 

In short, when it comes to retail borrowing we do not live in the Wild West.  You should obviously be careful and take good advice before entering into any loan agreement but if the deal is truly dreadful there may be avenues for a defence.