October 4, 2024

Last week, the Chancery Division handed down its judgment determining two preliminary issues in the so-called "mortgage prisoners" claim against TSB Bank plc (TSB) brought by a group of former customers of Northern Rock, with a third issue having been resolved shortly before the hearing.

Of particular note are the court's findings as to the application of the unfair relationship provisions under the Consumer Credit Act 1974 (CCA) to regulated mortgage contracts.

The issues in context

Prior to its collapse, Northern Rock offered a "Together" loan package which comprised (i) a secured mortgage loan and (ii) an unsecured loan. These two loans were offered at the same interest rate, which was only available for such time as the secured mortgage loan was not repaid. By taking both loans, homeowners were able to borrow more than the assessed value of their mortgaged property. After an initial period, the fixed interest rate moved to a floating rate, known as the standard variable rate (SVR), which was typically higher.

Northern Rock was nationalised in 2008 and a portfolio of its mortgages were transferred to TSB's "Whistletree" brand. TSB applied its Whistletree SVR rate to the mortgages, which at the time was 4.79% and higher than the rate charged for TSB's non-Whistletree mortgages.

A total of 392 former Northern Rock customers whose mortgages and/or loans were transferred to TSB claim that they were unfairly locked into mortgages at an excessively high SVR rate. Around half of these claimants had also taken a "Together" loan.

As a preliminary matter, the court was asked to determine:

• whether TSB breached the express terms of the mortgage contracts by charging interest at the higher Whistletree SVR rate (as opposed to the lower non-Whistletree SVR rate) (the Express Terms Issue);
• whether it was an implied term of the mortgage contracts that TSB's discretion to set and/or vary interest rates was subject to certain restrictions - for example, that it could not be exercised arbitrarily (the Implied Terms Issue). The Implied Terms Issue was resolved shortly before the hearing and so did not fall to be determined by the court; and
• to what extent the court could make orders under the unfair relationship provisions of the CCA in respect of regulated mortgage contracts (the CCA Issue).

The court's decision

Express Terms Issue

The Express Terms Issue required the court to decide on the correct interpretation of the General Conditions applicable to the mortgage contracts, where these were transferred to a new mortgage provider. The court found that, while certain aspects of the claimants' interpretation of the terms were problematic and at times lacked credibility, in contrast, TSB's proposed interpretation produced a much more consistent reading of the General Conditions and one which aligned with the way in which mortgage transfers were expected to operate. Applying TSB's interpretation of the terms, the Whistletree SVR rate was simply to be treated as a continuation of the SVR originally applied by Northern Rock and not a new rate. As a result, TSB had not breached the express terms of the claimants' mortgage contracts.

CCA Issue

It was common ground that, while the unfair relationship provisions of the CCA empower the courts to order relief where a consumer credit relationship is deemed unfair under section 140A CCA, the courts cannot make such an order "in connection with" certain exempt agreements, which includes "Together" mortgages entered into on or after 31 October 2004 (each an Excluded Regulated Mortgage). The claimants argued that this did not prevent the courts from taking into account the circumstances of an Excluded Regulated Mortgage, where it was a "linked transaction" to a "Together" loan, in deciding whether the relationship between TSB and the claimants was unfair.

The court ultimately held that, while it was not entitled under section 140A(5) CCA to make an order for the repayment of amounts paid under an Excluded Regulated Mortgage, nothing prevented it from considering any unfairness arising out of the circumstances of an Excluded Regulated Mortgage (including its terms, conduct and any resulting loss or damage) in making an order for repayment of sums paid under the unsecured loan.

In arriving at this conclusion, the court considered the legislative history and the text of the unfair relationship provisions in the CCA, and found that:

• Parliament intended for the courts to have a broad discretion to remedy unfair relationships in credit agreements (or credit agreements combined with any related agreements) and for regulated mortgage contracts to be excluded from the scope of the regime, given they were governed by a separate regulatory framework;
• at the same time, Parliament cannot have intended to leave a gap in consumer protection where (as here) a consumer credit loan combined with a related agreement in the form of a regulated mortgage contract gave rise to an unfair relationship, but did not fall neatly within either the mortgage regulation framework or the unfair relationship regime under the CCA.

In the court's view, interpreting the unfair relationship provisions in this way best reflected Parliament's objectives.

Wider implications

The Chancery Division's findings on these two issues will be significant for the roughly 2,000 customers whose potential claims against TSB have been stayed pending the outcome of this group claim. FT Advisor has reported that the Mortgage Prisoners Action Group met with Treasury officials on 1 October to discuss potential measures relating to residential mortgage reform.

More generally, the court's interpretation of the unfair relationship provisions under the CCA and its determination that regulated mortgage contracts can nevertheless be relevant to determining an unfair relationship in respect of a related credit agreement will be instructive to others seeking to bring claims involving mortgage contracts under the regime.

The judgment can be accessed here.