The Financial Ombudsman Service (the “FOS”) has a broad jurisdiction to determine customer complaints in the manner it considers fair and reasonable. That makes it difficult to judicially review its decisions: while a number have tried, most fail. But the most recent FOS judicial review has important legal and practical lessons for lenders. It shows that, even where a judicial review claim is dismissed, lenders can obtain real value in challenging FOS decisions. As for many football teams at this time of year, so too for lenders: a draw can be almost as good as a win. We have seen an increasing trend of the FOS making decisions on alternative bases, with an apparent view to making a “blanket” determination in similar complaints. If even some of those bases are wrong or overstated, it can be worthwhile to challenge them to reduce the potential complaint population. This judgment also examines important matters of law under the Consumer Credit Act 1974 (the “CCA”), especially in relation to deemed agency under sections 56 and 140A.

Background

Holiday timeshares are a well-known concept and remain widely used. Customers pay a lump sum in exchange for an entitlement to stay at a resort (or group of resorts) for a given period each year over many years. Some timeshare products include a feature that, at a future date, the property will be sold and the proceeds distributed among timeshare members (known as “asset-backed” timeshares). Timeshare purchasers often finance their purchase via a loan. The timeshare seller effectively operates as an introducer for lenders, facilitating that loan. The claimants in this case were two such lenders. Linklaters represented one of the claimants. 

Certain timeshare customers complained to the FOS about their purchases, including customers who had exchanged their existing membership for a new membership under an “upgrade agreement”. The FOS eventually decided that there was an unfair credit relationship between the customers and the lenders under section 140A of the CCA. It ordered that the loan agreements be voided and that the customers be repaid in full. As detailed below, the FOS advanced multiple, alternative bases for its decisions. The claimants challenged each of these by way of judicial review.

The decision

Mrs Justice Collins Rice found that three of the bases for the FOS’s decisions were errors of law, but ultimately dismissed the judicial review, as the FOS succeeded on other grounds. Crucially, the judge found that the timeshare sellers’ breaches of their regulatory obligations could be attributed to the lenders via the deemed agency provisions of the CCA, even though the lenders did not and could never have breached the relevant obligations directly.

The collective investment scheme ground

The FOS had decided that an upgrade agreement was not a timeshare contract at all, as the customer did not “acquire” any new accommodation rights. That meant that it did not fall within the regulatory regime governing timeshare sales (the “Timeshare Regulations”) and the exemption from the prohibition on marketing collective investment schemes without authorisation. The FOS found that selling the upgrade agreement therefore breached the general prohibition, making the creditor-debtor relationship unfair under section 140A of the CCA because the timeshare seller was the relevant lender’s agent (as explained below). 

The Court held that the FOS erred in law in this respect: an agreement to upgrade a customer’s timeshare membership is plainly a timeshare contract. It did not matter that the customer was already a member of the timeshare club and did not acquire additional accommodation rights when upgrading.

The marketing as an investment ground

The Timeshare Regulations ban the sale or marketing of timeshare products “as investments”. The FOS had decided that (a) features inherent in asset-backed timeshares, in which customers receive a share of the eventual sale of a particular property, meant that they were inevitably marketed as investments and (b) as one of the customers in question said they wanted to “get something back”, the product must have been sold as an investment. The FOS therefore decided that selling the product in breach of this regulation made the creditor-debtor relationship unfair (again because the sellers were the lenders’ agents).

The Court stressed that this required a fact-specific exercise and that, to the extent that the FOS had made a general finding that all asset-backed timeshares are sold as investments because of their inherent features, that would have been an error of law. But the Court held that, on the facts of the particular complaints before it, it was open to the FOS to decide that the products had been sold as investments. That finding was important for the lenders, as detailed further below. 

The provision of information ground

The Timeshare Regulations require sellers to give customers certain “key information”. The FOS considered this should include information about the value of the property which is the subject of an asset-backed timeshare. Timeshare sellers do not typically provide that information on the basis that it would amount to marketing the product as an investment. The FOS decided that the failure to provide valuation information  was a breach of the information requirement, with the breach attributable to the lender via deemed statutory agency. The FOS also found that information on the value of the property should have been provided because (a) failing to provide it would be a “misleading omission” under the Consumer Protection from Unfair Trading Regulations (the “CPUT Regulations”); and (b) a resort industry code, of which the timeshare suppliers were members, encouraged “ongoing protection for the customer” including “the provision of any necessary assistance to customers to enable them to make an informed decision”.

Mrs Justice Collins Rice held that (a) the FOS erred in law in finding that the Timeshare Regulations required valuation information for asset-backed timeshares; (b) the FOS erred in law in finding a breach of the CPUT Regulations; and (c) it was nonetheless open to the FOS to conclude that the industry code required valuation information in these cases (while stating that the industry needed more guidance on this).

The agency ground

Underlying each of the above findings was the FOS’s conclusion on deemed agency under the CCA. The lenders were not subject to the Timeshare Regulations, the CPUT Regulations or the industry code in relation to these sales. But the FOS considered them nonetheless liable because of section 56 and 140A of the CCA, which deem a creditor liable for “any other thing done (or not done) by or on behalf of the creditor”. In that way, the lenders were liable for obligations imposed only on another industry, i.e. timeshare sellers.

The judge agreed with the FOS’s conclusion on this, and it is this ground which will be of most interest to the retail lenders. The lenders had argued that the CCA’s deemed agency provisions could not be used to attribute liability where the lenders did not and could not have owed the relevant regulatory obligations. Mrs Justice Collins Rice rejected this. She observed that, while the authorities do not expressly address this question, section 140A of the CCA directs itself to “things” (i.e. “any other thing done (or not done) by, or on behalf of, the creditor”), rather than particular kinds of liabilities. The judge held that that suggested the legislation should not be qualified as the lenders suggested. She further noted that the existing authorities, especially Plevin v Paragon Personal Finance Ltd [2014] UKSC 61 emphasised the breadth of section 140A. 

This finding matters. It might be used to effectively expand the FOS’s remit beyond the financial services industry. It may mean that the FOS increasingly sees itself as entitled to make pronouncements on whether regulations in other industries have been breached (as it did for the holiday resort industry in this case). That is a significant policy development, and this power may not have been obvious when the CCA was drafted. The correctness of the judge’s analysis, and the policy merit of this position, may be re-examined in future cases and attract the interest of the Court of Appeal. 

The contractual terms ground 

The FOS had held that various contractual terms in the timeshare sellers’ contracts were unfair, e.g. certain payments into a sinking fund. The Court expressed some inclination to agree with part of the FOS’s analysis on this, noting that some of the challenges went to the FOS’s judgment, rather than being errors of law, and that FOS decisions are not legal judgments. The judge did not however need to make a final determination on this ground given her wider reasoning, and it may need to be addressed in subsequent cases.

The relief ground 

Because of the above findings, the FOS considered it fair to void the credit agreements in their entirety and order that the customers be repaid in full. The Court found that it was open to the FOS to reach this conclusion, especially given the unfairness in marketing the products as an investment.

The FOS’s entitlement to make determinations under section 140A of the CCA

The case proceeded on the assumption that the FOS is entitled to determine whether a credit relationship is “unfair” under section 140A of the CCA. That section says that “the court” may make orders as to whether a credit relationship is unfair and, occasionally, it is suggested that the FOS is unable to do so. Given the FOS’s propensity to consider overall fairness of relationships under section 140A, this will also be of interest to retail lenders. 

Comment

As noted above, the key legal finding, which will most interest lenders, concerned deemed agency. But the case also provides wider lessons on when and how to challenge FOS decisions by way of judicial review. Three stand out:

(i) Courts call out errors of law: Courts generally accord expert public bodies (such as the FOS) a wide margin of appreciation in their decisions. That margin of appreciation does not apply to “hard-edged” questions of law: courts consider that a public body is either right or wrong on the law and tend to be more willing to accept challenges based on legal errors. Wherever the FOS purports to apply the law, it must get the law right. This judgment reiterates that point. The bar for overturning a FOS decision is often considered high, but in this case the judge was prepared to find that three of the FOS’s central findings were wrong: all of these were errors of law.

(ii) Partial wins have value, especially if the Court rejects a “blanket” approach: The FOS’s apparent intention was to apply its decisions in these cases to complaints about timeshare sales more widely. Had it succeeded in full, it would have facilitated a straightforward “cookie cutter” approach whereby all complaints sharing the same headline characteristics would be upheld. But in this respect the FOS appears to have failed. The judge went out of her way to emphasise that the complaints were fact-specific and, while it remains to be seen how further complaints will be dealt with, the lenders have (at the very least) likely reduced the pool of complaints which will be upheld.

(iii) Alternative bases of reasoning make a complete win difficult: Nonetheless, the judicial review was dismissed and the FOS’s tactic of upholding complaints on multiple alternative bases has been partly vindicated. The lenders had to succeed on numerous grounds in order to win the judicial review, whereas the FOS only had to succeed on two: it was sufficient for it to defend one finding of breach by the timeshare sellers and the agency ground. The agency finding was in that respect crucial: had the FOS failed on that ground, it would have lost the judicial review, as the two findings of breaches by the timeshare sellers could not have been attributed to the lenders.

The judgment is therefore of significant interest beyond the timeshare industry. It highlights key legal issues and tactics lenders must assess when deciding whether to judicially review the FOS and, for that reason, will be considered closely by the entire retail lending sector.