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Fairness test may open can of worms

Kevin Paterson takes a weekly look at the latest developments in the market and brings you what’s hot and what’s not in the world of mortgages

I recently wrote about the Consumer Credit Act 2006 that comes into force in April, in particular its inclusion of what is called the unfair relationships test.

Essentially, this intentionally ambiguous test allows the courts the widest possible discretion to challenge secured loan agreements.

Recently, I was alerted to a case in which it didn’t require much imagination to see how the test could be app-lied and misused.

It involved the potential blurring of individuals’ responsibility for their own actions – something the unfair relationships test is in danger of promoting.

Ponder for a moment the case of an obese man going into a burger bar and ordering a supersize greaseburger with cheese and a side order of fries.

Should the spotty teen behind the counter refuse to serve him on the basis that the order is not good for him? Of course not.

We take responsibility for our actions and in scenarios such as this, we assume customers are aware of the risks involved. If they choose to do something that is not good for them, we have no right to stop them.

And so to the case I mentioned. Our compliance director recently reviewed a borrowing request in which the applicants were in their 50s. They had £33,000 of unsecured debt in default as well as a mortgage and a second charge loan, both in arrears.

They also had a County Court judgement against their names for £6,000, again in default. They had applied for a £5,000 secured loan to pay for a holiday.

Nobody in their right mind would suggest that this couple need any more debt, but are they so different from our fat friend and his burger? Nevertheless, under the unfair relationships test, the case could be cited as an example of irresponsible len-ding and the courts could rule that the clients had been treated unfairly.

I’m not sure where the culpability lies here. It could be with the broker who should have been confident that the clients could repay the loan.

But because advice on second charge loans is unregulated, this would be largely unenforcable.

And the lender involved could argue that it is its commercial prerogative to set its own underwriting criteria. In which case, who would the courts find against?

The revised CCA has more teeth but I’m pretty sure it’s not strong enough to take on the can of worms claims management companies and the Financial Ombudsman Service may open when this test is introduced. I know we live in a nanny state but surely there must still be room for personal responsibility.

Watering down the effect of bankruptcy is an idea that will bite us

The government has announced plans to make it easier for individuals to go bankrupt by removing much of the stigma attached.

Its argument is that the current process dissuades entrepreneurs from taking risks and it cites the US as an example of how individuals are encouraged to go into business for themselves – something celebrated with no stigma if they subsequently fail.

This is all well and good but simply tinkering with the bankruptcy rules is not going to encourage every would-be entrepreneur to set up in business tomorrow and it certainly won’t make the UK like the US in its outlook on business and success.

Unlike the US, we do not celebrate the pioneer spirit or congratulate success. In the UK, we prefer failure because when this happens it justifies our cynicism.

This huge cultural difference will not be changed by relaxing a few rules.

But the government seems to think that many potential business start-ups are avoided for fear of failure. Forgive me, but isn’t fear of failure a sufficient motivator in itself?

Of course, true entrepreneurs are not easily put off and a reassurance that there will be less of a stink if they fail won’t change anything.

But as is often the case with this government, it has overlooked the law of unintended consequences. It has opened the bankruptcy process up to abuse and misuse. At a time when the Treasury is warning about profligate lending, the government is making it easier to go bankrupt.

If the consequences of bankruptcy are watered down there is the possibility it will become too easy an option.

There’s a reason why the bankruptcy process is the way it is. It is not something that should be entered into lightly.

We have already seen the government water down individual voluntary arrangement rules, creating a huge industry in the process. I can’t believe changing the bankruptcy rules will help.

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