Huntpast Limited v Leadbeater
Court of Appeal 21 July 1992 (Consumer Law Today November 1992)

This case turned on the question as to whether a secured loan taken out by Mr and Mrs Leadbeater was within the £15,000 upper limit of the Consumer Credit Act 1974. In this case the point was of crucial importance since Huntpast Limited were not licensed under the Consumer Credit Act.

The transactions leading up to the loan were complicated, not least by the presence of another lending company, and brokers, Richard Murtagh and Co Limited.

Following a series of negotiations, the terms of the loan were that the sum lent should be £18,500 with the sum of £2,960, representing 4 months' interest, being retained from the advance. The interest rate was 4% per month. Approximately £11,000 of the loan went to discharge debts incurred by the Leadbeaters and a further £4,500 constituted a broker's fee payable to the broker. The agreement, having been made in 1986, this broker's fee did not form part of the total charge for credit. A fire insurance premium of £125 and the lender's legal costs of £450 were also deducted from the loan.

Since the lender was unlicensed, the essential point before the court was whether the agreement was regulated by the Act. Section 8(4) says that an item entering into the total charge for credit shall not be treated as credit even though time is allowed for its payment. Thus the case turned on what items deducted from the total sum lent of £18,500 were to be regarded as part of the total charge for credit. If the total of these items was more than £3,500 the agreement was regulated and therefore unenforceable because Huntpast were unlicensed.

It was clear that the £2,960 interest deducted from the loan at the start was an item entering into the total charge for credit. Also, the brokerage fee of £4,500 was not part of the total charge for credit, since the Consumer Credit (Total Charge for Credit) Regulations 1980 were then in force. Regulation 4(b) provided that other charges at any time payable under the 'transaction' by or on behalf of the debtor or a relative of his, whether to the creditor or any other person, were part of the total charge for credit.

The definition of 'transaction' in Regulation 1(2) of these Regulations included the following:

In the lower court, the judge held that the fire insurance premium and legal costs fell within the scope of these definitions and were therefore charges within the scope of the total charge for credit. When added to the interest deducted at the start, they totalled £3,535 so that the amount of credit was £14,965, and the agreement was regulated by the Act and was therefore unenforceable against the borrower. The lenders appealed.

Under the somewhat tortuous arrangements for setting up the loan, the fire insurance premium of £125 and the legal costs of £450 had been deducted by Huntpast from the brokerage fee of £4,500 due to the broker. Huntpast argued that these were payable, not by or on behalf of the borrowers but by the brokers out of their £4,500 fee.

The court, however, took the view that they needed to look at the substance of the transaction rather than the form and, having regard to the purpose of the legislation, the suggestion that these two charges were payable or paid by the brokers was unrealistic. The court took the view, that these two charges were 'payable under the transaction by or on behalf of the debtor' and that it made no difference that the borrowers were not fully aware of what was being done on their behalf.

The court rejected an argument on behalf of the borrower that the broker's fee of £4,500 payable to Richard Murtagh should be regarded as part of the total charge for credit, taking the view that they had no power to make retrospective the amending regulations introduced in 1989.

Huntpast also endeavoured to argue that the fire insurance premium and the legal costs related not only to 'services or benefits incidental to the loan agreement' but also to 'other services which may be supplied to the debtor' because under the arrangements made between the brokers and the borrowers it was contemplated that at the end of the four month period of the bridging loan the brokers would negotiate for the borrowers a new longer term mortgage. Nothing of this kind appeared to have been done and the court held that neither the £450 lawyer's fee nor the £125 fire insurance premium were excluded from the total charge for credit under Regulation 5(d) of the 1980 Regulations, as they would have been if Huntpast's argument had been accepted.

The court therefore concluded that the amount of credit was £14,965. The agreement was accordingly a regulated agreement and, because Huntpast Limited were unlicensed, it was unenforceable by them against the Leadbeaters.

COMMENTARY (Consumer Credit Magazine January 1993)

(a)    THE POSITION SINCE 1989 - If a similar transaction had been entered into after June 1989 it would have been well within the scope of the Consumer Credit Act since not only the interest but also the £4,500 broker's fee would have been within the scope of the total charge for credit and would thus have been excluded from the amount of the credit.

(b) THE APR - Although this case turned on the technical intricacies of the Consumer Credit (Total Charge for Credit) Regulations in relation to the Total Charge for Credit, it is worth looking at what it involved in terms of the APR. The rate of interest was 4% per month. If charged monthly in arrears on the balance this constitutes an APR of 60.1%. Where four months' interest are deducted in advance, the APR, before taking into account any fees, becomes 68.7%.

In this case the figures were:

If the 1989 amending regulations had been in force at the time the agreement was made:

 This was in respect of a loan secured on the borrower's house! The unusual feature of this case compared with a number of others was the nearness of the transaction to the upper limit of the Act. There is no upper limit to the 'extortionate credit bargain' provisions of the Consumer Credit Act and there would seem to be scope for borrowers to make better use of these (even in their present form) than the Courts have so far seen, especially where brokers' fees are involved.