The Bank-Customer Relationship

Question 1

What Regimes of Law govern the Bank-Customer Relationship?

Answer 1

A contractual debtor-creditor relationship,* which is governed by statute and, under minor exceptions, equity.

Foley v Hill (1848) 2 HLC 28.

Question 2

What is the Bank’s Mandate?

Answer 2

The authority for the Bank to act in particular way, as derives from its contract with the Customer. Ultra Vires acts are not binding on the Customer.

Question 3

When does the Bank-Customer Relationship begin?

Answer 3

When the Bank agrees to open an account for the Customer,* which it shall do on the Customer’s instruction.**

Ladbroke v Todd [1914] 30 TLR 433; Woods v Martins Bank [1958] 3 All ER 166

The FCA’s Banking Conduct of Business and the Lending Code suggest proper conduct be owed even to non-accountholders, as well as impose further duties alongside FSMA 2000 and other legislations.

Question 4

Do Customers have a Right to a Bank Account?

Answer 4

Yes.

The Payment Accounts Regulations 2015.

Question 5

Once deposited, does the Customer’s money continue to belong to him?

Answer 5

No. At that point, the Bank owns the money, and the Customer only possesses a claim against the Bank for the relevant sum.

Foley v Hill (1848) 2 HLC 28.

Question 6

Is the Money deposited in a Bank subject to a Trust in favor of the Customer?

Answer 6

No.

Joachimson v SBC [1921] 3 KB 110.

Question 7

In Retail Banking, what Services does the Bank provide the Customer?

Answer 7

Primarily, Banks provide Customers with:

• Current and Savings Accounts;
• Credit;
• Investment advice; and
• Proprietary trading services.

More sophisticated customers may have access to the Bank’s fee-earning businesses, i.e. M&A, IPOs, Underwriting, etc.

Question 8

Under its Contract with the Customer, what are the Bank’s Core Obligations to the Customer?

Answer 8

To honor payments and repay credited sums, naturally under the relevant terms and conditions.

Question 9

What happens if a Bank Dishonors a Payment without Just Reason?

Answer 9

It is liable to pay damages for breach of contract,* and potentially for defamation,** although this is harder.

*Kpohraror v Woolwich Building Society [1996] 4 AER 119; **Jayson v Midland Bank [1968] 1 WLR 956

Damages may be nominal or substantive, depending on the case.

Question 10

When will a bank be taken to have Just Reason for Dishonoring a Payment?

Answer 10

If the Customer:

• Is Dead.
• Gives ambiguous instructions.
• Lacks funds or access to overdraft.
• Countermands a set of earlier instructions.
• Delivers out-of-date payment instructions (6 months).
• Account subject to a Third Party Debt Order or Freezing Order.
• Has petitioned for bankruptcy, insolvency, or voluntary liquidation (§127 – IA 1986).
• Gives the Bank reasonable grounds to believe the instructions are without authority, i.e. fraudulent.*
• Is under suspicion for a possible crime and would therefore cause the Bank to breach §328 POCA 2002.

*Lipkin Gorman v Karpnale [1991] 2 AC 548

Question 11

Does the Bank owe the Customer a Duty of Care?

Answer 11

Yes, both in contract* and in tort.** It must foremost strictly adhere to the Customer’s Mandate, amongst other things.

*CRA 2015 – §49; **Henderson v Merrett [1994] UKHL 5.

The Bank-Customer relationship is an Agent-Principal relationship. The FCA Principles impose further duties on the Bank.

Question 12

Does the Customer owe the Bank a Duty of Care?

Answer 12

Yes. It must foremost issue clear and unambiguous instructions* and inform the bank of real or potential fraudulent activity on its account(s), amongst other things.

*Midland Bank v Seymour [1955] 2 Lloyd’s Rep. 147

Question 13

Is the Bank the Customer’s Fiduciary?

Answer 13

Almost certainly not.* Only when the Bank assumes a duty of trust, confidence, and loyalty to the Customer will it become a Fiduciary.**

*Wright v HSBC [2006] EWHC 1473; **Bristol and West Building Society v Mothew [1998] EWCA Civ 533.

Material to demonstrating a Fiduciary Duty is mutual understanding of a relinquishment of self-interest or the exercise of unilateral powers which can expose another to vulnerability.

Question 14

What are the Three Tests for Ascertaining the Existence of a Fiduciary Duty of Care?

Answer 14

Evincing:

• A mutual understanding of a relinquishment of self-interest and promise to act only on behalf of another;
• The exercise of unilateral powers which can expose another to vulnerability; or
• The provision of advice in a confidential relationship which, when relied upon, results in the Defendant realizing some gain.

Scavarelli v Bank of Montreal [2004] OTC. 36 (SC), utilized in Lloyds v Bundy [1975] EWCA 8.

It is critical to emphasize the abnormality of cases like Bundy.

Question 15

Can a Fiduciary Duty arise when a Bank provies a Customer with Investment Advice?

Answer 15

Extremely exceptionally.

Woods v Martins Bank [1959] 1 QB 55; Commonwealth Bank of Australia v Smith [1991] FCA 481.

Frankly, unless such an Arrangement was specifically requested by the Customer and sanctioned by the Bank, then there’s virtually no chance.

Question 16

Do Banks generally owe a Duty of Care to advise on the Merits of a Transaction?

Answer 16

No, but if one is assumed, it must be carried out with reasonable care and skill.”

Thornbridge Ltd. v Barclays Bank [2015] EWHC 3430, referencing Hedley Byrne.

Question 17

Is the mere Giving of Advice sufficient to give rise to an Advisory Duty of Care?

Answer 17

No. The Bank must go beyond the, “normal recommendations…given in the daily interactions,” between it and its Customers, and speak of a particular product or service on offer, not just generally.

Thornbridge Ltd. v Barclays Bank [2015] EWHC 3430.

Question 18

How does the FCA distinguished between Advice and Information?

Answer 18

Advice, “requires an element of opinion,” on the Advisor’s part, whereas Information, “involves statements of fact or figures.”

FCA PERG – 8.28.1G

“In general terms, simply giving information without making any comment or value judgment on its relevance to decisions which an investor may make is not advice.”

FCA PERG – 8.28.2G.

Question 19

Can the Bank contractually Disclaim a Fiduciary Duty?

Answer 19

Yes.

Henderson v Merrett [1994] UKHL 5; IFE v Goldman Sachs [2006] EWHC 2887 (Comm).

Question 20

When should a Banker act upon a Suspicion of Fraud?

Answer 20

“[When] a reasonable and honest Banker, aware of the facts, would have concluded that there was a serious or real possibility, albeit not a probability, that its customer was being defrauded.”

Selangor Rubber v Craddock (No 3) [1968] 1 WLR 1555.

Question 21

Does the Bank have a Duty to Explain the Nature and Effect of a Security to a Customer?

Answer 21

Yes.

Cornish v Midland Bank [1985] 3 All ER.

Question 22

What are a Bank’s potential Liabilities in Tort?

Answer 22

See Legal Aspects: Syndicated Lending.

Question 23

Does a Bank owe a Duty of Care when providing Investment Advice?

Answer 23

Yes,* although not if the investment was independently appraised and the Customer relied thereon.**

*Woods v Martins Bank [1958] 3 All ER 166; **Investors Compensation Scheme v West Bromwich Building Society [1999] UKHL 28.

Question 24

Having assumed an Advisory Duty, what denotes the Bank’s Duty of Care?

Answer 24

An obligation to act with the skill and care to be expected of a reasonably competent financial adviser,* with reference to the extent of responsibility assumed by the Bank.**

*Matrix Securities v Theodore Goddard [1998] PNLR 290; **Property Alliance Group v RBS [2018] EWCA Civ 355

Therefore, the boundaries of any given advisory duty may vary greatly based on the circumstances.

Question 25

What should a Bank do if it receives Ambiguous Instructions?

Answer 25

If the ambiguity is minor, it may adopt a reasonable meaning, but if it is major, it should seek further clarification.

European Asian Bank v Punjab and Sind Bank (No. 2) [1983] 1 WLR 642.

Question 26

What happens if the Bank acts on Instructions it knows to be Dishonest, or is Reckless to the fact?

Answer 26

It will be liable for the Customer’s loss as a result of it so acting, the test of reasonableness applying.

Barclays Bank v Quincecare [1988] FLR 166.

Question 27

What is a Penalty Clause?

Answer 27

A clause which imposes a cost on a breach of contract which is out all proportion to the legitimate commercial interests of the aggreived.

Question 28

Are Penalty Clauses Enforceable?

Answer 28

No. This rule also applies to provisions governing the withholding of payments and the transfer of property on breach of contract.

Cavendish Square Holdings v Makdessi [2015] UKSC 67.

Question 29

If an Issue between the Bank and Customer is unresolved, what recourse does the Customer have?

Answer 29

The Courts or the Ombudsman. Only breaches of the FCA Rules, rather than Principles, are pursuable in court,* and parallel pursuit is prohibited.

*FSMA 2000 – §138D.

Question 30

If the Bank receives a complaint from a Customer, must it attempt to Resolve it?

Answer 30

Yes.

FCA DISP – 1.1.1.

Question 31

On what Grounds does the Ombudsman decide Disputes?

Answer 31

Fairness and reasonabless given the particular circumstances,* on which it may elect to award compensation.**

*FSMA 2000 – §228(2); **FSMA 2000 – §229.

Question 32

What is the Advantage of the Ombudsman over the Courts?

Answer 32

Its approach empahsizes speed and accessability, and its informal non-adversarial style helps maintain contractual relationships post-dispute.

Question 33

What are the Categories of Eligible Complianat for the Ombudsman?

Answer 33

• Consumers.
• SMEs.
• Charities.
• Trustees of Trusts.

An SME is an enterprise with fewer than 50 employees, and less than £6.5m and £5m in annual turnover and balance sheet assets, respectively.

Question 34

Are the Findings of the Ombudsman Binding on the Respondent?

Answer 34

Yes, but only if the Complainant accepts the findings.* A Respondent’s only other recourse is judicial review, but this is quite unlikely to work due to the Court’s reluctance to interfere.**

*FSMA 2000 – §228(5); R (Heather Moor & Edgecomb Ltd.) v Financial Ombudsman Service [2008] Bus LR 1486.

Question 35

Are the Findings of the Ombudsman binding on the Court?

Answer 35

Yes, under the principle of res judicata, i.e. the notion that one judicial body’s decision on a matter already judged binds another.

Clark v In Focus Asset Management Ltd. [2014] EWCA Civ 118.

Question 36

In the Bank-Customer relationship, what does the notion of ‘Unfariness’ pertain to?

Answer 36

Contract terms and consumer notices, both of which are non-binding if found to be unfair.

CRA 2015 – §62(1)-(2).

Question 37

How must Contract Terms in an Agreement for Banking Services be written?

Answer 37

Legibly and in plain and intelligble language,* with the test being whether an average consumer would understand the terms and their implications.**

*CRA 2015 – §68(2); **Kásler v OTP Jelzálogbank Zrt [2014] WLR (D) 180.

A consumer is defined as a natural person who is acting wholly or mainly outside that individual’s trade, business, craft or profession.

CRA 2015 – §2(3).

Question 38

Do Considerations of Unfairness apply to Core Provisions?

Answer 38

No.

CRA 2015 – §64(1).

A core provision is, “the definition of the main subject matter of the contract… [or] the adequacy of the price and remuneration, on the one hand, as against the services or goods supplies in exchange, on the other.”

Question 39

If ever you need a list of Exemplary Unfair Terms, where should You go?

Answer 39

Schedule 2, Part 1 of the Consumer Rights Act 2015.

Question 40

When will a Term be deemed Unfair?

Answer 40

When it contravenes, “the requirement of good faith, causing a significant imbalance in the parties’ rights and obligations arising under the contract, to the detriment of the consumer.”

CRA 2015 – §62(4).

An examination for unfairness involves judging the relevant context against the above standard.

CRA 2015 – §62(5).

Question 41

In what way does the Consumer Credit Act 2006’s Examination of Fairness differ from the CRA 2015?

Answer 41

It considers terms of contract in addition to how they are enforced and the Bank’s condcut in its determination of unfairness.

CCA 2006 – §140A, §140B, and §20 (amongst others).

Question 42

How does the Court construe the Concept of Fairness?

Answer 42

• The factual matrix
• The Borrower’s characteristics, e.g. sophistication and temperment.
• The Borrower’s knowledge, both real and constructive.
• The Bank’s conduct in light of the Borrower’s characteristics and knowledge.

Plevin v Paragon Personal Finance [2014] UKSC 61.

Question 43

Can the Bank Exclude its potential Liabilities in Tort?

Answer 43

See Legal Aspects: Syndicated Lending.

Specifically, see the Cards on UCTA 1977, and note that §3 will apply.

Question 44

What are the Codes which govern the Banking Sector?

Answer 44

• The FCA Handbook.
• The Standards of Lending Practice.

Question 45

Can a Bank close an Account at Will?

Answer 45

Yes, but it must give sufficient notice of its intention.

Subject to Tip-Off offences.

Question 46

What is a Dormant Account?

Answer 46

An account that has been untouched for at least 15 years.

Question 47

Is a Bank allowed to use the Funds in a Dormant Bank Account?

Answer 47

Yes, but only to channel them to RFL so that they may be put towards good causes. Customers can reclaim the funds at any point.

Dormant Bank and Building Society Accounts Act 2008.

‘RFL’ stands for Reclaim Fund Ltd.

Question 48

What happens if the Bank makes an Unauthorized Payment?

Answer 48

It must return the funds without undue delay unless it has reasonable suspicions of fraudulent activity.

FCA, BCOBS – 5.1.11.

Any charges or interest must also be refunded,

Question 49

When can the Bank refuse to refund an Unauthorized Payment?

Answer 49

• If it can prove the Customer either authorized the transaction or was at fault, whether through fraud or negligence; or
• If the Customer delayed in notifying the Bank (13 months).

FCA, BCOBS – 5.1.12.

The customer may have to pay up to the first £35 of an unauthorised transaction if their card has been lost, stolen, or misappropriated, unless this was not detectable by the customer, or the bank, its agents, or staff were at fault.

FCA, BCOBS – 5.1.12.

Question 50

Does the Bank have a Right of Set-Off?

Answer 50

Yes. However, it should exercise it cautiously, giving the Customer fair notice and refraining if the funds are necessary for essential expenses.

FCA, BCOBS – 5.1.3A.

Question 51

What is Misselling?

Answer 51

The deliberate, reckless, or negligent sale of products or services in circumstances where the contract is either misrepresented or the product or service is unsuitable for the Customer’s needs, ultimately leading to a suffered loss.

Wikipedia.

Question 52

What is the Cause of Misselling?

Answer 52

Information asymmetry in conjunction with perverse incentives.

Banks understand their financial products and the risk associated therewith better than their Customers. Profit incentivizes them to target those Customers who have neither the time, inclination, nor ability to comprehend these products in their proper context, realities which lead such Customers to place their trust and faith in their Banks.

Question 53

Who is Responsible for Curbing Misselling?

Answer 53

The FCA, as Misselling falls within its greater Conduct of Business remit.

FSMA 2000 – Part 1A, Chapter 1C.

Question 54

What are the Licensing Requirements for Providers of Financial Services?

Answer 54

All financial services providers must be licensed by the FCA if they are to carry out regulated activities,* on pain of criminal liability.**

*FSMA 2000 – §19; **FSMA 2000 – §26(1).

A full list of regulated activities can be found here.*

*FSMA 2000 (Carrying on Regulated Activities by way of Business) Order, SI 2001/1177.

Question 55

When Enforcing a Breach, what must the FCA demonstrate?

Answer 55

• Elements of the relevant offence.
• Remoteness.
• Causation.
• Damage.

FSMA 2000 – §130D.

Question 56

What is the Test for Causation?

Answer 56

The ‘But For’ Test.

Saville v Central Capital Plc. [2014] EWCA Civ 337.

Question 57

What are some of the Unique Considerations that go into Examining whether the Bank owes a Customer a Duty of Care?

Answer 57

• Any supporting regulatory schemes relevant to the financial product or service in question.
• Independent review by a skilled person on behalf of the Customer.*
• Conflicts of interest.

CGL Group Ltd, v Royal Bank of Scotland [2017] EWCA Civ 1073; *FSMA 2000 – §166.

Question 58

How do the Bank’s Common-Law and Statutory Duties of Care towards the Customer differ?

Answer 58

The Statutory Duty extends beyond mere reasonable care and skill, incorporating elements of honesty and fairness.

Green v Royal Bank of Scotland [2013] EWCA Civ 1197.

Question 59

What is a Consumer Redress Scheme?

Answer 59

A systematic review of sector-wide compliance with regulations on a particular product or activity, with the ability to compensate Customers for any losses suffered.

FSMA 2000 – §404.

Affected individuals are not obliged to accept redress under the Scheme, and may resort to either the Court or the Ombudsman.

Question 60

§404 is regarded by Banks as a Serious Threat. How do Banks go about Mitigating the possibility of its use?

Answer 60

If the threat looms, Banks may elect to launch a voluntary scheme (with FCA approval) to address relevant concerns.

Question 61

From the Bank’s standpoint, what are the Advantages of a Consumer Redress Scheme as compared to a Class Action?

Answer 61

• Positive PR, in the context of voluntary schemes.
• Fewer legal costs.
• Faster resolution.
• More satisfactory resolution from a Customer standpoint, since
  
  • Fewer Customers may otherwise participate under a Class Action given its very involved nature.
  • No need for any claim management firms who would otherwise take a large cut.

Question 62

Within the FCA’s Handbook is the Conduct of Business Sourcebook, a highly important source of Bank Duties. What are its most relevant Rules with respect to Misselling?

Answer 62

• 2.1.1.
• 2.1.2.
• 2.2.1.
• 4.2.1.
• 4.5.2.
• 9.2.1.
• 9.2.2.
• 10.3.
• 14.3.2.

Question 63

What is a Financial Promotion?

Answer 63

“An invitation or inducement to engage in investment activity that is communicated in the course of business.”

FCA Handbook Glossary.

This includes mortgages.

Question 64

What does COBS 2.1.1 state?

Answer 64

“A firm must act honestly, fairly and professionally in accordance with the best interests of its client.” This Rule disapplies where other regulatory and contractual obligations are insufficient to win a case.*

ED&F Man Commodity Advisers v Fluxo-Cane Overseas [2010] EWHC 212.

This is otherwise known as the Client’s Best Interest Rule.

Question 65

What does COBS 2.1.2 state?

Answer 65

“A firm must not… seek to… exclude or restrict or… rely on any exclusion or restriction of any duty or liability it may have to a Client under the regulatory system.”

Question 66

What does COBS 2.2.1 state?

Answer 66

To its Clients, a Firm must provide appropriate and comprehensible information regarding its:

• Business and services;
• Costs and associated charges; and
• Proposed investments and strategies, and guidance thereon.

So as to allow the Client to reasonably comprehend the nature of and risk involved in any product or service and to make an informed decision thereabout.

Question 67

What does COBS 4.2.1 state?

Answer 67

“A firm must ensure that a communication or a financial promotion is fair, clear and not misleading.”

Question 68

What does COBS 4.5.2 state?

Answer 68

A firm must ensure that communications and promotional material:

• Is accurate, giving a fair and prominent indication of relevant risks when citing the potential benefits of a product or service;
• Prominently displays relevant risks on presentation material.
• Is sufficient and understandable from the standpoint of whomever it is intended for or will likely receive it;
• Does not disguise, diminish or obscure important items, statements or warnings;
• Is up-to-date and relevant to the communications channel used;
• Performs comparisons meaningfully and fairly (if used).

Question 69

What does COBS 9.2.1 state?

Answer 69

“A firm must take reasonable steps to ensure that a personal recommendation, or a decision to trade, is suitable for its Client,” and in doing so, “obtain the necessary information regarding the Client’s:

• knowledge and experience in the investment field relevant to the specific type of designated investment or service;
• financial situation; and
• investment objective.”

Question 70

What does COBS 9.2.2 state?

Answer 70

A Firm must obtain sufficient information from the Client to understand the essential facts about him and have reasonable grounds for believing that its recommendation:

• Meets his investment objectives;
• Does not incur an unsustainable financial risk, as delineated by his investment objectives; and
• Is comprehensible to him from a risk-management standpoint, given his experience and knowledge.

Question 71

What does COBS 10.3 state?

Answer 71

• According to received information, the Firm must warn the Client if it believes if it believes a product or service is inappropriate for him.
• If Client non-cooperation results in insufficient or no information received, the Firm must warn the Client of its decision’s implications, i.e. no determination of appropriateness.
• If the Client nevertheless wishes to continue, the Firm may elect to refuse if the circumstances so warrant.

Question 72

What does COBS 14.3.2 state?

Answer 72

The Firm must provide the Client with a description of a product or service which explains its nature and risks, as a designated investment, in sufficient detail to enable the making of an informed decision.

Question 73

What is the Core Philosophy of the Consumer Credit Act 1974?

Answer 73

Freedom through information: to encourage competition amongst Banks by mandating detailed disclosure obligations, thereby reducing information asymmetries and empowering Customers.

An ideal premised on the notion that consumer ignorance was a primary source of market failures in banking.

Question 74

How does the CCA 1974 define ‘Credit’?

Answer 74

“A cash loan, and any other form of financial accommodation.”

CCA 1974 – §9.

Question 75

What is a Consumer Credit Agreement under the CCA 1974?

Answer 75

An agreement between a natural person, sole trader, or partnership of less than four people and a Creditor in which the latter provides the former with credit of any amount.

CCA 1974 – §8 and §189.

Similar definitions can be found in the The Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) (No.2) Order 2013 (RAO), specifically under Articles 60B(3) and 64L(1).

Question 76

When will Credit be deemed to have been Extended?

Answer 76

When the Debtor is granted the contractual right to defer paying a debt, which would otherwise fall due, to a later date.

Dimond v Lovell [2002] 1 AC 384.

Question 77

What is the Difference between Running-Account and Fixed-Sum Credit?

Answer 77

The same distinction as between a Revolving and Term Loan Facility: the former may be cyclically drawn down and paid up, while the latter is for a pre-determined sum.

CCA 1974 – §10.

Question 78

What is the Difference between Restricted-Use Credit Agreements (RUCAs) and Unrestricted-Use Credit Agreements (URUCAs)?

Answer 78

The former are pursuant to a pre-specified purpose, and the credit extended thereby can only be used therefore, while the latter are not.

CCA 1974 – §11.

Question 79

What are the Three Types of Debtor-Creditor-Supplier Agreements?

Answer 79

• RUCAs to finance a transaction between the Debtor and Creditor, in which case the latter is also the Supplier.
• RUCAs to finance a transaction between the Debtor and a Supplier, with whom the Creditor has or shall have an arrangement of some sort.
• URUCAs made under pre-existing arrangements between the Creditor and Supplier that the finance will be used to fund a deal between the Debtor and Supplier.

CCA 1974 – §11 and §12.

Question 80

What are the Three Types of Debtor-Creditor-Agreements?

Answer 80

• RUCAs to finance a transaction between the Debtor and Creditor, with whom the Creditor does not or shall not have an arrangement.
• RUCAs to finance an existing indebtedness of the Debtor.
• URUCAs made under no pre-existing arrangements between the Creditor and Supplier other than the knowledge that the Debtor will use finance to fund a transaction between it and the Supplier.

CCA 1974 – §11-§13.

Question 81

What Agreements are Exempt under either the CCA 1974 or the RAO?

Answer 81

Any agreement falling without §8 is unregulated by the CCA 1974, e.g. agreements with LLCs, whereas agreements falling without Art. 60C-60H are unregulated by the RAO.

Question 82

What is the Effect of entering into a Credit Agreement with an Unauthorized Lender?

Answer 82

The contract is unenforcable, the Debtor is entitled to recover damages and any transferred property, and the Creditor is criminally liable.

FSMA 2000 – §380-§382.

Question 83

Consumer Credit is regulated by the FCA. Which of its Sourcebooks apply to this area?

Answer 83

The Consumer Credit Sourcebook (CONC).

Question 84

What are the Three Core Characteristics of a CONC-Compliant Financial Promotion?

Answer 84

Fairness, Clarity, and Forthrightness. Pursuant to these traits, the Creditor must ensure that its Promotion is:

• Clearly identifiable as an advertisment;
• Accurate;
• Fair and balanced in its representation of rewards and risks;
• Fair and balanced in any comparisons it makes;
• Presented in an understandable fashion from the standpoint of the target demographic or those who will likely receive it; and
• Not disguising, omitting, diminishing, or obscuring any important information, statements or warnings.

FCA, CONC – 3.3. Mirrored by FCA, MCOB – 3A.2-3A.3.

Question 85

What is the Representative Example Requisite?

Answer 85

All Financial Promotions which indicate an amount relating to the cost of credit must include a very detailed example which illustrates the cost’s implications.

FCA, CONC – 3.5.3 - 3.5.5. Mirrored by FCA, MCOB – 3A.5.

Question 86

When must a Financial Promotion include APR?

Answer 86

If the Promotion states, implies, or includes that:

• Credit is available to individuals who might otherwise consider their access to credit restricted;
• Its product compares favorably to the credit, whether express or implied, of another person, product or service;
• Discounts or other incentives to apply for credit or enter into an agreement therefor.

FCA, CONC – 3.5.7.

Question 87

If Anciliary Services form a part of the Credit Agreement, must they be Disclosed in the Financial Promotion?

Answer 87

Yes.

FCA, CONC – 3.5.7(2)

Question 88

Can Phrases like ‘Interest Free’ or ‘No Deposit’ be Bandied about freely?

Answer 88

No. This extends to the use of ‘weekly equivalents’* or other tools which attempt to diminish the product’s cost.

FCA, CONC – 3.5.10; *FCA, CONC – 3.5.11 and 3.5.12.

Question 89

What Pre-Contract Information must be Given to Customers?

Answer 89

Key commercial information, e.g. features and cost, and legal aspects, e.g. rights and obligations.

Consumer Credit (Disclosure of Information) Regulations 2010 – Reg 3(2), Reg 8, and Sch. 1.

This information must be in the form of the Standard European Consumer Credit Information Sheet (SECCI), and any other relevant information, e.g. marketing material, must be provided separately.

Question 90

When must Pre-Contract Information be Delivered to the Customer?

Answer 90

In good time before the agreement.

Question 91

In addition to the Disclosures mandated by the Consumer Credit Regulations 2010, what does CONC mandate?

Answer 91

• Adequate explanation of the product’s various elements sufficient to allow the Customer to determine its suitability for its needs.
• Notice that where pre-contract information has been handed in-person, the Customer is able to take it away and consider before agreeing.
• Opportunity for the Customer to ask questions and have them answered satisfactorily.
• Advice on the further information the Customer can seek.

FCA, CONC – 4.2.5-4.2.7 and 4.2.13. Mirrored by FCA, MCOB – 4.4A, 5A.1.2, and 5A.4.1.

Does not apply to credit agreements that are either secured on land, exceed £60,260.00, or allow overdrawing of a current account.

Question 92

Under Principle 9 of the FCA’s Principles for Business, what must the Bank do when giving Advice to its Customers?

Answer 92

Take reasonable care to ensure that its advice is suitable, all things considered, for any Customer who is entitled to rely upon it.

Mirrored by FCA, MCOB – 4.7A.2.

CONC 4.8.2 and 4.8.4 are also relevant in this context, prohibiting the unfair encouragement, incentivization, or inducement of Customers using high-pressure sales tacitcs or for higher-than-requested amounts.

Question 93

What constitutes Suitable Advice?

Answer 93

Advice that is appropriate to the Customer’s needs and circumstances.

FCA, MCOB – 4.7A.5(1)-(3).

Relevant factors may be found in FCA, MCOB – 4.7A.6.

Question 94

What is the Penalty for Failing to Comply with the Pre-Contract Requirements?

Answer 94

The debt may be unenforcable and regulatory intervention may be warranted.

CCA 1974 – §55; FCA, CONC – 4.2.3.

Question 95

Is a Creditworthiness Assessment necessary?

Answer 95

Yes.

FCA, CONC – 5.2A. Mirrored by FCA, MCOB – 11.5, 11.6.

Question 96

What are the Implications of Non-Advised Products for Banks?

Answer 96

Such products must not be used to target vulnerable Customers.

Vulnerability may be by dint of indebtedness, poor credit rating, financial illiteracy, age, health, or any other condition which may impact suitability.

Question 97

Is the Creditor Liable for any Misrepresentations or Breaches of Contract by the Supplier?

Answer 97

Yes, so long as the transaction falls under §12(b)-(c). The liability is joint and several.

CCA 1974 – §75.

For applicable price range, see §75(3)(b). For exemptions, see §75(3)(b).

Question 98

For §75 to Obtain, must the Creditor and Supplier have had a Direct Contractual Relationship?

Answer 98

No. An indirect relationship, for example through membership in a credit card scheme, may be sufficient.

OFT v Lloyds TSB Bank [2006] EWCA Civ 268.

Question 99

Does §75 Obtain even if the Debtor committed a Breach of Contract, e.g. exceeding credit, in executing the transaction?

Answer 99

Yes.

CCA 1974 – §75(4).

§75 also applies to foreign transactions.

Question 100

What are the Differences between §75 and §75A?

Answer 100

§75A only applies:

• To breach of contract claims;
• When the agreement was exclusively for funding the purchase of a good or service.
• If the cash value of the good or service exceeds £30,000.
• If the Debtor is unable to obtain satisfaction from the Supplier.*

§75A does not apply to:

• Facilities in excess of £60,260.
• Facilities created wholly or predominantly for business purposes.

*CCA 1974 – §75A(2).

Question 101

What Updates did the CCA 2006 make?

Answer 101

• Removal of £25,000 limit on all consumer credit, except for business-related credit.
• Deregulation of transactions with natural high-net worth Customers, i.e. £100,000 salary or £250,000 net assets.
• New definition of ‘Individual’: “sole trader, a small partnership (3 partners or less), or an unincorporated association.”
• Retroactive introduction of the concept of unfair relationships, which applies to all consumer lending transactions.
• Retroactive introduction of Unfair Relationships, a concept which applies to all consumer, i.e. non-corporate, credit agreements.

Question 102

On what Grounds may a Relationship between a Debtor and Creditor be deemed Unfair?

Answer 102

On the grounds that an inequity arises from:

• Any relevant terms or conditions;
• the way in which the Creditor has exercised its rights; or
• any other thing done (or not done) by, or on behalf of, the Creditor (either before or after the making of the agreement or any related agreement).

CCA 2006 – §140A.

Question 103

What must the Court primarily consider in its Determination of §140A?

Answer 103

“All matters it thinks relevant, including matters relating to the Creditor and matters relating to the Debtor.”

CCA 2006 – §14A(2).

Question 104

For Claims under §140A, with whom does the Burden of Proof lie?

Answer 104

It is for the Creditor to establish that the relationship is or was fair,* so long as the Debtor has reasonable grounds for alledging unfairness.**

*CCA 2006 – §140B(9); **Carey v HSBC Bank [2009] EWHC 3417

Question 105

What are the Court’s Powers pursuant to the Finding of an Unfair Relationship?

Answer 105

Under §140B, it may:

• Require the Creditor, or related party, to repay any sum paid by the Debtor or by a surety by virtue of the agreement or any related agreement;
• Require the Creditor, or related party, to do or not to do (or to cease doing) anything so specified in connection with the agreement or any related agreement;
• Reduce or discharge any sum payable by the Debtor or by a surety by virtue of the agreement or any related agreement;
• Direct the return to a surety of any property provided by him for the purposes of a security;
• Otherwise set aside any duty imposed on the Debtor or on a surety by virtue of the agreement or any related agreement; and/or
• Alter the terms of the agreement or of any related agreement.

Question 106

Can an Assessment of an Unfair Relationship be Reopened?

Answer 106

Yes.

CCA 2006 – §140A(4).

Question 107

What is a Mortgage?

Answer 107

A loan contract wherein the debt provided by the Lender is secured by way of mortgage over the Borrower’s land, which at least 40% of must be used as a dwelling.

FSMA, RAO – Art. 61.

Unregulated mortgage contracts include investment property loans, bridging loans, and buy-to-let loans. For more, see Art. 61A.

Question 108

With respect to the Provision of Advice, in addition to Principle 9 of the FCA’s Principles for Business, what does the Mortgage Conduct of Business Handbook (MCOB) stipulate?

Answer 108

A mortgage provider must act honestly, fairly and professionally in accordance with the best interest of its Customer. The information and advice provided must be given in durable medium.

FCA, MCOB – 2.5A.

This mirrors COBS 2.1.1 and the Client’s Best Interests Rule therein. A ‘durable medium’ is any instrument which enables the Customer to store information addressed personally to him in a way accessible for future reference.

Question 109

Are Mortgage Brokers Regulated in the same fashion as Mortgage Lenders, even though they are mere Intermediaries?

Answer 109

Yes.

Question 110

What, other than Regulated Mortgage Contracts, does MCOB’s regulations on Financial Promotions and Communiations extend to?

Answer 110

Home finance transactions, which include home purchase plans, home reversion plans, or regulated sale-and-rent-back agreements.

FCA Handbook Glossary.

Question 111

What are the Rules on Cold Calling Customers regarding a Mortgage?

Answer 111

They are prohibited unless a pre-existing relationship between the Lender and Customer exists, such that the latter envisages receiving such financial promotions.

FCA, MCOB – 3A.3.5R.

Question 112

If a Cold Call is not Prohibited, what are the Rules of Engagement?

Answer 112

The Caller must:

• Identify themselves and the firm they represent;
• Make the purpose of call clear from the outset;
• Confirm that the Recipient wishes them to proceed, and terminate if the answer is ‘no’ (a follow-up may be requested);
• Recognize and respect the Recipient’s right to end the call at any time, as well as refuse follow-up;
• Refrain from calling at an unsocial hour or on an unlisted phone number, unless previously agreed.

FCA, MCOB – 3A.4.1R.

Question 113

Does the Borrower have the right to know the Commission paid to a Mortgage Broker by one, or more, Lenders?

Answer 113

Yes.

FCA, MCOB – 4A.1.5.

Question 114

If a Mortgagee wishes to Increase its Borrowing, what must the Broker do first?

Answer 114

Inform the Customer that it may:

• Request a further advance from the Lender, unless it knows it will refuse;
• Enter into a second charge regulated mortgage contract, where the firm would offer services in relation to a new first charge regulated mortgage contract;
• Enter into a new first charge regulated mortgage contract, where the firm would offer services in relation to a second charge regulated mortgage contract; or
• Enter into an unsecured credit agreement.

FCA, MCOB – 4.4A8A.

Question 115

When will a Lender or Broker be taken to have provided Advice to a Mortgagee?

Answer 115

If the sale involves spoken or other interactive dialogue between it and the Mortgagee.

FCA, MCOB – 4.2.1G(2).

Question 116

Will a Broker or Lender be taken to have provided Advice in an Execution-Only Sale?

Answer 116

If there was no interactive communication between it and the Mortgage, and the latter was warned about the implications of proceeding without advice, or has rejected any advice, then no.

Execution-only sales can never be provided to certain vulnerable customers, e.g. for customers for equity release transactions, debt consolidation, and customers who are exercising a statutory ‘right to buy’, all of whom are given advice in every case.

Question 117

What are the Characteristics of an Execution-Only Sale?

Answer 117

The Customer must, unprompted, specify all the major elements of the contract, including the:

• Lender;
• Amount;
• Rate of interest, and whether it is fixed or variable;
• Maturity; and
• Repayment obligations, i.e. interest-only or otherwise.

FCA, MCOB – 4.8A.14.

Question 118

Is the Broker or Lender subject to Official Record-Keeping Requirements?

Answer 118

Yes.

FCA, MCOB – 4.7A.25.

Question 119

Before making a Mortgage Application, what must the Customer be provided with?

Answer 119

An illustration, which concisely encapsulates the nature and main elements of the transaction.

FCA, MCOB – Annex 1, 6.4.4, 6A.3.9.

Question 120

Once a Mortgage Offer has been made, how long does the Customer have to respond?

Answer 120

He has a reflection period of at least seven days, during which time the Broker or Lender is bound by the Offer’s terms. He may accept whenever.

FCA, MCOB – 6A.3.4R.

Question 121

Before entering into a Mortgage Agreement, what must a Broker or Lender avail regarding the Customer’s finances?

Answer 121

That they are sufficient to afford the contract.

FCA, MCOB – 11.6.2R.

Question 122

What Chapter and Subsection of MCOB Regulates Remuneration, Commissions, and Inducements?

Answer 122

MCOB 2.3.