UK: Default Charges & Unfair (Credit) Relationships: Debt Sales

Last Updated: 4 February 2008
Article by Kevin Heath

On the sale by a lender of distressed consumer debt, the debt sale documentation should take account of:

  • the recoverability of charges made by the debt seller for the consumer's failure to comply with the credit agreement; and
  • the risk to the debt buyer of receiving a claim from the consumer under the new law on unfair (credit) relationships.

Default Charges

It is public knowledge1 that default charges2 applied by credit card lenders are legally challengeable by the consumer on two discrete but similar legal grounds:

Unfair Terms in Consumer Contracts Regulations 1999 (UTCCRs): a term in a standard form contract is deemed to be unfair if, contrary to the requirement of good faith, it causes a significant imbalance in the parties' rights to the detriment of the consumer, e.g. if the provision has the object or effect of "...requiring any consumer who fails to fulfil his obligation to pay a disproportionately high sum in compensation".

Common law of penalties: where the contract stipulates that a fixed sum, which is not a genuine pre-estimate of the loss, is payable for breaching an obligation.


In July 2007, the OFT commenced a test case against 8 lenders3 to determine whether the UTCCRs and the law of penalties apply to overdraft charges. The lenders' primary case is that overdraft charges are "core terms" under the UTCCRs, because they are charges for a service, which is expressly excluded from the scope of the UTCCRs. A preliminary court hearing on this issue is due to take place this month (January 2008) and the resulting judgment (which may well be appealed) should clarify the legal position on this issue in respect of overdrafts.

Unfair Relationships

The Consumer Credit Act 2006 enables courts to re-open "unfair [credit] relationships" 4on behalf of the consumer or any surety.

The law applies:

  • now to all new credit agreements written from 6 April 2007;
  • from 6 April 2008 to all credit agreements written before 6 April 2007.

The new law will not apply if the agreement was written before 6 April 2007 and is or becomes a completed agreement (i.e. paid off) before 6th April 2008.

A court can make an order if it finds that the relationship between the creditor and the consumer arising out of a credit agreement (or that agreement taken together with any "related agreement") is unfair to the consumer as a result of:

  • any of the terms of the agreement;
  • the way in which the creditor has exercised or enforced any of his rights under the agreement;
  • any other thing done (or not done) by or on behalf of the creditor, whether before or after the making of the agreement.

The court is required to have regard to all matters it thinks relevant in determining whether a relationship is unfair.

Under the new law, the court can require the creditor to (i) repay any sum paid by the consumer or guarantor to the creditor or any other person; (ii) require the creditor to do or not to do (or cease doing) anything specified in the order in connection with the agreement; (iii) reduce or discharge any sum payable; (iv) direct the return of any property provided as a security; (v) otherwise set aside any duty imposed on the consumer or guarantor; (vi) alter the terms of the agreement; or (vii) direct accounts to be taken between any persons.

Once the consumer or guarantor claims that the credit relationship is unfair, the onus is on the creditor to prove otherwise.

Legal Issues On Debt Sales

Are unpaid default charges recoverable from the consumer? In practice, unlikely, as the consumer is likely to dispute liability and the debt seller is likely to want to control any litigation risk of the consumer getting a judgment on the enforceability of the debt seller's default charges. The debt sale documentation should oblige the debt buyer to keep the debt seller informed of any such challenges. The debt seller should expect the debt buyer to ask for disclosure of the amounts unpaid by the consumer in respect of default charges on the accounts for sale, so as to take this into account in pricing the purchase.

Can the consumer off set his claim for default fees already paid against the non-default fee elements of the debt? In principle, yes. On the sale of debt, the debt seller should be prepared to disclose the amounts already paid by the consumer in respect of default charges on the accounts for sale, so that this can be taken into account in pricing the purchase.

Is the debt buyer liable under the unfair (credit) relationship to the consumer for repaymentof default charges already paid to the lender (the debt seller)? In principle, yes.


On the sale of distressed consumer debt, the sale documentation should reflect the risks that:

  • unpaid default charges are likely, in pactice, to be irrecoverable from the consumer and the consumer can off set paid default charges already paid to the lender (for up to 6 years) - both should trigger buy back rights under the debt sale agreement (subject to time limits) and should be taken into account in pricing the purchase;
  • the courts may make debt buyers liable to the consumer to repay default charges already paid by the consumer to the lender, together with interest and legal costs.


1. On 5 April 2006, the OFT publically stated that it would presume that credit card default charges over Ł12 were unfair and would be challenged.

2. In a credit card contract, charges made by the lender for failure to pay a minimum payment on the due date, exceeding a credit limit or a failure to honour a payment made.

3. Abbey National, Barclays, Clydesdale Bank, HBOS, HSBC, Lloyds TSB, Nationwide and RBS.

4. In considering the unfairness of a contract term for the purpose of the new law on unfair relationships, the OFT has said that it will have particular regard to whether the term is unfair for the purposes of the UTCCRs.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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