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Lenders' responsibilities in credit reporting

Does Durkin require a fundamental rethink when disputes arise?

The recent Scottish case of Durkin v DSG Retail Ltd highlighted the issues that can arise in relation to credit reporting in connected lending when disputes arise in relation to the funded product. Whilst English law does not necessarily follow Scots law, the referral of the case to the Supreme Court suggests the outcome is likely to have repercussions across England and Wales.

As featured in Motor Finance

The recent Scottish case of Durkin v DSG Retail Ltd highlighted the issues that can arise in relation to credit reporting in connected lending when disputes arise in relation to the funded product. Whilst English law does not necessarily follow Scots law, the referral of the case to the Supreme Court suggests the outcome is likely to have repercussions across England and Wales.

David Wood, partner in the Finance Litigation team at national business law firm DWF, outlines the case and its implications for lenders.

The Facts

Mr Durkin bought a laptop computer from PC World utilising the third party credit facilities offered by PC World on the understanding he could return it if it didn’t meet his specific requirements. On arriving home, he realised it wasn’t suitable and tried to return it. The shop rejected the return but, undeterred, Mr Durkin left the laptop with the retailer, and refused to make any payments on the credit agreement, informing the lender of the situation by phone.

Despite Mr Durkin’s actions, the lender issued a default notice against Mr Durkin and reported the default to the credit reference agencies.

Mr Durkin, claimed that the lender’s actions had negatively affecting his credit rating. He successfully argued that both the sale and credit agreement had been validly ended - relying on s75 of the Consumer Credit Act 1974 (“the CCA”) - and was awarded £8,000 by the Sheriff for the injury to his credit rating, together with significant further sums said to represent specific loss suffered by his inability to obtain credit.

The lender appealed, and had its case upheld by the First Division of the Inner House. It held that whilst section 75 gave Mr Durkin a right to claim damages from the lender in relation to his claim against PC World, it did not give him the additional right to treat his credit agreement at an end.

The Final Word

The case was then referred to the Supreme Court, which confirmed the First Division’s view that on a strict interpretation section 75 did not give Mr Durkin the right to end the credit agreement.

However, despite this, the Supreme Court clearly felt some sympathy for Mr Durkin’s position, and accordingly found that a restricted use debtor-creditor-supplier agreement under section 12 of the CCA such as this, would always nevertheless contain an implied term that if the supply agreement was ended then the credit agreement could be ended too as the two agreements were clearly connected. As such, the legitimate return of the laptop by Mr Durkin combined with his initial telephone call to the lender excused him from having to make credit payments. Accordingly, given that the essence of Mr Durkin’s claim was about the damage to his credit rating by the lender’s reporting of his default, it was also held that the lender was in breach of its duty to him by reporting that default. Whilst Mr Durkin was successful in his appeal, he only came away with the basic award of £8,000 for damage to his credit, the further compensatory awards made by the Sheriff being rejected due to a lack of evidence.

What are the implications of Durkin, particularly for credit reporting?

It is clear that the creditor should show restraint where the customer raises any dispute and properly investigate that dispute before registering default. Unless reasonable steps have been taken to ensure the reference is accurate, the creditor is at risk when submitting an adverse credit reference. A consumer’s right to redress for damage to his credit, where breach of contract or breach of duty is proved, is clearly established under English law. Durkin undoubtedly sets a benchmark for the level of damages which might be awarded in such cases.

As an additional point, Mr Durkin was permitted to rescind the credit agreement on grounds which were outside the scope of the Act – implied terms – in order to provide him remedy. Lenders should, therefore, be aware that such disputes could have implications for their rights in relation to the credit agreement. However, it is not clear whether the lender in such a case has an automatic right to indemnity from the supplier (as it would under a s75 claim).

Under the new Financial Conduct Authority (FCA) requirements for consumer credit, particularly the Treating Customers Fairly principles, lenders must ensure they give reasonable consideration to a customer’s claims against the supplier which may have an impact on their compliance with the credit agreement. It is also important that they have a clear and fair policy for dealing with the registration of defaults in such cases, with particular regard to the provisions in the Consumer Credit sourcebook (CONC) concerning data accuracy.

This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.

David Wood

Partner

I advise clients in all sectors on asset and consumer finance documentation and procedures and FCA consumer and mortgage credit regulation.