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High Court hands down judgment in first irresponsible lending/affordability test case

  • United Kingdom
  • Financial services disputes and investigations
  • Litigation and dispute management



On 5 August 2020, judgment was handed down in Michelle Kerrigan and 11 ors v Elevate Credit International Limited (t/a Sunny) (in administration) [2020] EWHC 2169 (Comm), which is the first of a number of similar claims involving allegations of irresponsible lending against payday lenders to have proceeded to trial.  Twelve claimants were selected from a much larger claimant group to bring test claims against Elevate Credit International Limited, better known as Sunny.

Before judgment was handed down, Sunny entered into administration.  Given Sunny’s administration and issues that arose in the course of preparing the judgment, HHJ Worster did not reach a final determination on causation and quantum of the twelve individual claims.  However, the judgment does provide useful guidance as to how the courts might handle irresponsible lending allegations brought as unfair relationship claims under s140A of the Consumer Credit Act 1974 (“s140A”), which is likely to be followed in the county courts.

Sunny was a payday lender, lending small amounts to consumers over a short period of time at high interest rates.  Sunny’s loan application process was online and quick. A customer would usually be in receipt of funds within 15 minutes of approval. The online application included an affordability assessment, creditworthiness assessment and a commercial risk evaluation.  The relevant loans were taken out by the twelve claimants between 2014 and 2018.

Breach of statutory duty claim

A claim was brought for breach of statutory duty pursuant to section 138D of the Financial Services and Markets Act 2000 (“FSMA”), following alleged breaches of the Consumer Credit Sourcebook (“CONC”).

CONC 5.2 (until 1 November 2018) required a firm to undertake a creditworthiness assessment before entering into a regulated credit agreement with a customer.  That creditworthiness assessment should have included factors such as a customer’s financial history and existing financial commitments.  It also required that a firm should have clear and effective policies and procedures in order to undertake a reasonable creditworthiness assessment.

Prior to the introduction of CONC in April 2014, the claimants relied on the OFT’s guidance on irresponsible lending, which contained similar provisions.

The claimants alleged Sunny’s creditworthiness assessment was inadequate as it failed to take into account patterns of repeat borrowing and the potential adverse impact any loan would have on the claimants’ financial situation.  Further, it was argued that loans should not have been granted at all in the absence of clear and effective policies and procedures, which were necessary to make a reasonable creditworthiness assessment.

The court found that Sunny had failed to consider the claimants’ history of repeat borrowing and the potential for an adverse effect on the claimants’ financial situation as a result.  Further, it was found that Sunny had failed to adopt clear and effective policies in respect of its creditworthiness assessments. 

All of the claimants had taken out a number of loans with Sunny. Some had taken out in excess of 50 loans.  Whilst Sunny did not have access to sufficient credit reference agency data to enable it to obtain a full picture of the claimants’ credit history, it could have considered its own data.  From that data, it could have assessed whether the claimants’ borrowing was increasing and whether there was a dependency on payday loans.  The Judge considered that there had been a failure to complete adequate creditworthiness assessments in breach of CONC and the OFT’s prior irresponsible lending guidance. 

On causation, it was submitted that the loss would have been suffered in any event as it was highly likely the claimants would have approached another payday lender, resulting in another loan which would have had a similar effect.  As such, HHJ Worster considered that any award for damages for interest paid or loss of credit rating as a result of taking out a loan would prove difficult to establish.  HHJ Worster considered that the unfair relationship claim, considered further below, could provide the claimants with an alternative route for recovery.

Negligence claim

A claim was also brought in negligence by one claimant as a result of a psychiatric injury allegedly caused to him by Sunny’s lending decisions. This claimant took out 112 payday loans from 8 February 2014 to 8 November 2017.  Of those loans, 24 loans were with Sunny from 13 September 2015 to 30 September 2017.

The negligence claim was dismissed on the basis that the Judge considered that imposing a duty of care on every lender to every customer not to cause them psychiatric injury by lending them money they may be unable to repay would be overly onerous.

Unfair relationship claim

The claimants alleged that Sunny’s lending decisions made the relationship arising out of the loan agreements unfair under s140A.  It was claimed that breaches of CONC and the prior OFT guidance in respect of creditworthiness and affordability checks rendered the relationship unfair.  It was also alleged the relationship was unfair when taking into account the conduct of the parties.

The claimants also alleged that the interest charged was excessive prior to the cost cap which was introduced under CONC on 2 January 2015.  Prior to the cost cap, Sunny was generally charging 0.97% interest per day with an overall cap of 150% of the sum lent. The cost cap limited this to 0.8% interest per day and an overall cap of 100% of the sum lent.

The claimants sought repayment of interest, repayment of capital (in respect of the claimants’ loss of credit and in respect of the anxiety and distress caused by the unfairness in the relationship); discharge of any outstanding balances; removal of adverse entries on credit reference agency databases; and interest to reflect the claimants’ loss of the use of their money at rates comparable to those they paid under the terms of the loans.

HHJ Worster found that the rate of interest charged on loans prior to 2 January 2015 was a relevant consideration as to whether the relationship was unfair.  The claimants who were marginally eligible for a loan under Sunny’s assessments were considered most at risk given the high rate of interest charged, albeit the court must have regard to the market interest rate for similar products.  Otherwise, in considering the fairness of the relationship, each individual claim should be considered on its own facts by taking into account:

  • the circumstances of each customer
  • the lender’s awareness of the customer’s circumstances
  • the information available at the time and the steps taken by the lender to ensure the customer was properly informed.  

The breaches of CONC, the OFT guidance and the conduct of the parties were also relevant.  Where a customer is making repeated applications for payday loans to a lender, the failure of the lender to consider the financial difficulties that repeat borrowing might cause (in breach of CONC or OFT guidance) will likely lead to an unfair relationship. However, there will be cases where a lender can demonstrate that the failure to comply with FCA rules had no effect on the customer (i.e. such that the relationship was fair or that no relief was justified).

Further, where a series of payday loans were given, the relationship continues even where earlier loans were paid off.  In more general terms, the parties’ bargaining positions were very different and the claimants were financially unsophisticated (but not to the extent that they did not understand they were entering into a loan agreement for monthly repayments).


One of the twelve claimants deliberately provided false information as to her employment status and earnings in her loan applications.  Had the correct information been provided, Sunny would have refused the applications and there would have been no relationship between the parties.  As such, her unfair relationship claim failed (Swift Advances v Okokenu [2015] followed). 

However, where customers provided reasonably accurate information on loan applications, this should not be criticised even if the information turned out to be well short of the mark.  In this case, this was to be expected given the rapid nature of the application process.


As the creditworthiness assessments were not compliant, the relationship was unfair and this justified “some” relief.  As with all unfair relationship claims, it is not necessary to show that a breach or particular act caused loss; the focus is on remedying the unfairness of the relationship.

HHJ Worster thought that the repayment of any interest would likely be an appropriate remedy, whereas, usually, repayment of the capital would not.

The claimants argued that the capital (or proportion thereof) should also be repaid to reflect the customer’s loss in respect of their credit rating, or to reflect distress and anxiety.  The claimants also argued that any award of interest on damages should be at the contractual rate.  HHJ Worster considered both these points required further argument on the facts of an individual case.


The key points for lenders are: 

  • Unfair relationship claims continue to have a wide potential application with uncertain outcomes, especially in respect of historic rule breaches given the generous limitation periods allowed for such claims and the need to interpret rules and guidance from many years ago.
  • Whilst it is likely that a breach of CONC and prior OFT guidance when combined with a high rate of interest or other conduct concerns will render a relationship unfair, there will be cases where the lender can show that the failure to comply with rules or guidance did not have any effect such that no relief should be granted. 
  • This would particularly be the case in payday lending cases if there was no repeat borrowing, or any repeat borrowing was on a limited scale.  More generally, if it can be shown that the customer would have obtained a similar loan compliantly at similar cost elsewhere, the court will be more likely to exercise its discretion in favour of the lender.
  • The remedy for an irresponsible lending claim has been left open to be determined on a case by case basis.  However, the judgment gives a steer at least that the usual remedy for such a claim would be the refund of all interest, but not the capital.  The issue of the applicable rate of interest on any damages awarded remains at large.

Eversheds Sutherland defended another payday lender in a similar test case.