Southern Pacific Securities 05-2 Plc (in substitution for Southern Pacific Personal Loans Limited) v Walker and another

Under section 9(4) of the Consumer Credit Act 1974, an item entering into the total charge for credit cannot form part of the amount of credit, even when the creditor advances that item and charges interest on it. The court must first identify the true cost of obtaining the credit and strip those charges from the amount of credit.

An administration fee paid to an intermediary for arranging a loan is part of the total charge for credit. Neither financing the fee nor charging interest on it converts the fee into credit. A regulated agreement therefore states the amount of credit correctly when it excludes such a fee while clearly identifying the total amount financed and the interest payable.

The borrowers entered into a regulated credit agreement under the Consumer Credit Act 1974. It identified £17,500 as the amount of credit, an £875 broker administration fee and £18,375 as the total amount financed. The lender advanced the fee and charged interest upon it at the same rate as the principal loan.

A district judge made a suspended possession order. On appeal, the circuit judge held that the amount of credit had been stated incorrectly and discharged the charge over the borrowers’ property. The Court of Appeal allowed the lender’s appeal in [2009] EWCA Civ 1218.

The borrowers appealed to the Supreme Court. The central issue was whether the financed, interest-bearing broker fee formed part of the amount of credit or, under section 9(4), formed part of the total charge for credit and therefore had to be excluded.

1. Appeal dismissed. Lord Clarke delivered the judgment of the Court. The £875 broker administration fee was part of the total charge for credit and could not be treated as credit. The agreement correctly stated the amount of credit as £17,500 and was enforceable.

2. Section 9(4) of the Consumer Credit Act 1974 gives credit a special statutory meaning. Once an item is identified as entering into the total charge for credit, it must be excluded from the amount of credit, even if it would otherwise constitute financial accommodation. The first step is therefore to identify the charges representing the true cost to the debtor of obtaining the credit. Those charges must then be stripped from the amount of credit.

3. The broker administration fee was paid to an intermediary and represented a cost of borrowing £17,500. It was therefore an “other charge” within regulation 4(b) of the Consumer Credit (Total Charge for Credit) Regulations 1980. Financing the fee did not alter its character. The conclusion accorded with Wilson v First County Trust Ltd [2001] QB 407, where an interest-bearing document fee was excluded from credit.

4. Charging interest upon the fee did not convert either the fee or the interest into credit. Section 9(4) contains no exception for an item upon which interest is charged. Both the fee and its interest entered into the total charge for credit under regulation 4(b). Interest is not a necessary indicator of credit.

5. The statutory treatment did not infringe the principle of truth in lending. The agreement clearly distinguished the amount of credit, the broker fee and the total amount financed. It also disclosed that interest applied to the whole amount financed, together with the monthly payment and annual percentage rate.

6. The possibility mentioned in Wilson that financing a charge might, in another case, amount to separate credit did not assist the borrowers. Such a case might arise on different facts, although it was difficult to envisage. The broker fee here was simply part of the cost of the single credit transaction.

1. United Kingdom Supreme Court: The borrowers’ appeal was dismissed in [2010] UKSC 32. The agreement correctly stated the amount of credit.

2. Court of Appeal: The lender’s appeal was allowed in [2009] EWCA Civ 1218. The court held that the broker administration fee formed part of the charge for credit and was correctly excluded from the amount of credit.

3. Circuit Court: His Honour Judge Halbert allowed the borrowers to raise unenforceability on appeal, accepted their argument and ordered the registered charge to be discharged.

4. County Court: District Judge Gilham made a suspended possession order requiring payment of current instalments and the arrears.