Case No: B2/2001/1022 CCRTF
Neutral Citation No: [2002] EWCA Civ 35
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM TRURO COUNTY COURT
(His Honour Judge Neligan)
Royal Courts of Justice
Strand, 
London, WC2A 2LL

Wednesday 30th January 2002
Before :

LORD JUSTICE AULD
LORD JUSTICE ROBERT WALKER
and 
LORD JUSTICE DYSON
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Between :
	BROADWICK FINANCIAL SERVICES LIMITED	Claimant/ Respondent	
	- and -		
	(1)	DAVID JOHN SPENCER 
(2)	SYLVIA JULIE SPENCER	Defendants/Appellants	

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(Transcript of the Handed Down Judgment of
Smith Bernal Reporting Limited, 190 Fleet Street
London EC4A 2AG
Tel No: 020 7421 4040,  Fax No:  020 7831 8838
Official Shorthand Writers to the Court)
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Mr P. Wulwik (instructed by Messrs Blatchfords) for the Respondent
Mr N. Levy (instructed by Messrs Ralph and Co) for the Appellants

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Judgment
As Approved by the Court
Crown Copyright ©

Lord Justice Dyson : 
Introduction
1.	 Mr and Mrs Spencer appeal against the decision of His Honour Judge John Neligan dated 23 March 2001 at Truro County Court, whereby he granted Broadwick Financial Services Limited (“Broadwick”) an order for possession of 3 Churchtown, St Issey, Wadebridge, Cornwall (“the property”) and dismissed Mr and Mrs Spencer’s counterclaims. Broadwick claimed possession of the property pursuant to a legal charge dated 21 October 1991, which secured a credit agreement of the same date by which it made a loan to Mr and Mrs Spencer in the sum of £7,700. The credit agreement is regulated by the Consumer Credit Act 1974 (“the Act”). Mr and Mrs Spencer challenged the enforceability of the credit agreement on the grounds that it had not been properly executed in compliance with the provisions of Part V of the Act as to the making of the agreement. They also sought to reopen the agreement and the legal charge as an extortionate credit bargain under sections 137 to 140 of the Act.
The Facts
2.	On the 13 February 1989, Mr and Mrs Spencer purchased the property for £19,095. The purchase was funded by means of a mortgage from the Regency and West of England Building Society, which later became the Portman Building Society (“PBS”). Thereafter, Mr Spencer was unemployed from time to time. By July 1991, there were substantial arrears under the PBS mortgage.  During the summer of 1991, Mrs Spencer saw an advertisement for loans in a newspaper.  She telephoned the contact number, and was sent an application form by a company called Carrox Limited (“Carrox”) of Trafford Park, Manchester.  She and her husband applied for a loan of £4000, completed the application form and returned it to Carrox. The form was duly sent by Carrox  to Barex Brokers Limited (“Barex”). In due course a credit agreement was entered into between Barex and Mr and Mrs Spencer. The amount of the loan was £4840 repayable by 180 monthly instalments of £99.49. The annual percentage rate (APR) was 29.78 per cent.  The sum of £4840 included £400 payable as a brokerage fee to Carrox and £440 payable as the premium for a payment protection plan.   On 14 August 1991, Barex registered a second charge dated 2 August 1991 on the property. The arrears due under the PBS mortgage (now £2101.30) were paid off and the balance of £1898.70 was received by Mr and Mrs Spencer. 
3.	Within a few weeks, Mr and Mrs Spencer wished to borrow a further sum of £1000. Mrs Spencer approached Carrox to ask them to arrange a further loan. This was the first in a series of steps which culminated in a credit agreement for £7700 between Mr and Mrs Spencer and Argyll Financial Services Limited (“Argyll”) secured by a legal charge on the property (both dated 21 October 1991). On the day of completion, Argyll transferred the benefit of the legal charge and the agreement to Broadwick.  The loan was disbursed in the following way:
To PBS to discharge further arrears under the first mortgage    £362.00
To Barex to redeem the second mortgage                                 £6026.56
Brokerage fee payable to Carrox                                                £700.00
To Mr and Mrs  Spencer the balance of                                      £611.44
                                                                                                    	     £7,700.
4.	 It is necessary to trace the steps that led to this credit agreement and legal charge.  Following Mrs Spencer’s approach, Carrox sent a fax on 24 September 1991 to Messrs Brand Montague, a firm of solicitors who acted for a number of “non-status lenders”. Mr Brand had been a director of several lending companies including Broadwick. The fax was marked “for the attention of EVS”. “EVS” was Eileen Scott, who was employed by a company called Suburban and Provincial Management Limited, which managed portfolios of various lending companies in the non-status market, including Argyll and Broadwick. The fax referred to the “net amount of loan” as £7000 and the “brokerage fee” as £700.  The second page of the fax contained details which the judge found had been provided to Carrox by Mrs Spencer.  These included personal information about Mr and Mrs Spencer, such as their ages, their occupations, earnings, the value of the property and the amount of their current mortgages.  The document indicated that the amount that they wished to borrow was £1000. 
5.	Mr Brand, who gave evidence, agreed that this was a request by Carrox to Brand Montague to issue a loan agreement. On the same day, Brand Montague wrote to Mr and Mrs Spencer a letter which was headed:
“Your Brokers: CARROX LTD
Loan Application for £7700.00
Our Clients: ARGYLL FINANCIAL SERVICES LTD.”
6.	The letter stated that Brand Montague acted for Argyll which had approved the loan application. Enclosed with the letter were a copy of the credit agreement for each borrower, a copy of the legal charge, and a “concession letter”.   The letter concluded:
“ We will be sending in 8 days from today the signable copies. If you have any queries you should consult CARROX LTD your introducing Broker.”
7.	The copy of the proposed credit agreement included the following condition:
“ THE BORROWER(S) CONFIRM HAVING READ AND UNDERSTOOD THIS AGREEMENT. IN PARTICULAR THE BORROWER(S) CONFIRM HAVING BEEN RECOMMENDED BY THE LENDER TO TAKE INDEPENDENT LEGAL  OR OTHER APPROPRIATE PROFESSIONAL ADVICE ON THE CONTENTS HEREOF AND IN RESPECT OF THE TRANSACTION GENERALLY.”
8.	Immediately below this condition appeared the following words:
“YOUR RIGHT TO WITHDRAW
This is a copy of your proposed credit agreement which is to be secured on land. It has been given to you now so that you may have at least a week to consider its terms before the actual agreement is sent to you for signature you should read it carefully. If you do not understand it you may need to seek professional advice. If you do not wish to go ahead with it, you need not do so ….”
9.	There were then set out the “Terms of Agreement”, which were the same as those that were incorporated in the credit agreement that was eventually concluded on 21 October. 
10.	On 2 October, Brand Montague wrote to Mr and Mrs Spencer. They enclosed various documents that were required to be completed in order that the transaction could be concluded. The letter stated:
“ If you have any problems in completing the forms your broker CARROX Ltd can help you and even witness the document if you so wish”.
11.	The enclosed documents were: the credit agreement to be signed, extra copies of the unsigned credit agreement for them to keep, the “certification and confirmation letter” and the legal charge. A representative of Carrox then telephoned Mrs Spencer, and  told her that she and her husband should not sign any document until one of their representatives had called to see them. A Mr Harper visited them at their home on Sunday 6 October. Mr Harper was a Carrox representative. The meeting lasted between twenty and thirty minutes. During the course of it, Mr and Mrs Spencer signed a number of documents which Mr Harper produced to them. These documents included an application form dated 7 October 1991. This document was headed “Carrox Ltd” and was in a standard form. It recited that the amount required was £7700 repayable over twenty years, and gave personal details of the applicants including their incomes and occupations, outgoings and the details of the property to be offered as security. The other documents signed by Mr and Mrs Spencer were (i) a letter authorising payment to Carrox of a fee of £700; (ii) an undated “confirmation and certification letter” addressed to Argyll, giving various confirmations and instructions regarding the loan, including an instruction for a fee of £700 to be paid to Carrox; (iii) a “signable” credit agreement for a loan of £7700; and (iv) a legal charge securing the credit agreement.
12.	So far as material, the confirmation and certification letter provided as follows:
“ I confirm and certify as follows: 
….
2. That once my first mortgage arrears (if any) have been paid, I will be able to afford the 240 monthly repayments of £147.58 in addition to my first mortgage repayments of £19.500.00 per month
…
4. I understand that the only financial facilities offered by the Lender are the ones stated in the copy Credit Agreement which has been submitted to me and that the Lender has not offered any other financial facilities, whether by way of further advance, third party re-mortgage, overdraft or of any other kind, nor has any representation of any other facilities been made by anyone acting on the Lender’s behalf.”
13.	
APR 29.6%

The credit agreement included the following terms:
“ D. Finance and related particulars.
i) Amount of credit advanced: £7,000.00                           
ii) Current interest rate 1.97% per month equivalent to 26.4% per year (variable as specified below) 
iii) Total amount of loan including broker’s fee is £7,700.00 repayable by 240 monthly instalments of £147.58.
Other charges: Legal costs and disbursements £291.00
The APR is based on a total charge for credit which includes your broker’s fee of £700.00. Such fee is not a term or condition of the loan imposed by the lender.
E. The legal charges shall become due upon completion of the loan. The lender may at its discretion defer collection of the said charges (the Borrower still having the right to pay them) but will require payment no later than the date of settlement of the loan.
The Lender may at its discretion vary the interest rate from time to time by at least seven days prior notice in writing given to the Borrower. In calculating the APR no account has been taken of any variation of the rate or amount of interest payable because of such a change in the interest rate. Interest may only be raised by the Lender in the event that there is a variation in Barclays Bank Plc base lending rate exceeding 1% per annum, and only by an increase.
Repayment of the Loan and interest is to be made by monthly instalments. The amount of each monthly instalment will be the amount mentioned above save that, if the interest rate has been varied, the amount of the final instalment will be increased or decreased to the sum required fully to discharge the balance of the Loan and accrued interest then outstanding.
The first instalment is due one month after the date of this Agreement and subsequent instalments on the corresponding day in each successive month. If in any month there is no day corresponding to the date of this Agreement, the instalment will be due on the last day of that month.        
Accounts to be paid off:
(a) where this Credit Agreement is secured by a first mortgage, all existing charges of whatsoever nature must be discharged on or before completion of the  Loan.
(b) Where this Credit Agreement is secured by a second mortgage, the Lender is hereby authorised to discharge out of the advance any of the  following items:
(i) All or any arrears due to the first mortgagee
(ii) Any existing charge which would otherwise rank in priority to the Lenders second mortgage.
After such payments, the balance of the loan will be paid to the Borrower(s) or as the Borrower(s) shall direct. 
The further conditions of this Agreement are set out overleaf and the Borrower(s) by signing this Agreement confirm(s) having read these further conditions.”
THE BORROWER(S) CONFIRM HAVING READ AND UNDERSTOOD THIS AGREEMENT. IN PARTICULAR THE BORROWER(S) CONFIRM HAVING BEEN RECOMMENDED BY THE LENDER TO TAKE INDEPENDENT LEGAL OR OTHER APPROPRIATE PROFESSIONAL ADVICE ON THE CONTENTS HEREOF AND IN RESPECT OF THE TRANSACTION GENERALLY.”
14.	The Terms of Agreement included the following:
“ 10. No relaxation or indulgence which we may from time to time or at any time extend to you shall prejudice or act as a waiver of our strict rights under this Agreement. Further, we may transfer our rights under this Agreement.
11. You may settle this Agreement at any time by paying to us the outstanding balance of your Total Indebtedness less the statutory rebate provided for in Regulations as made under the Act. We will provide you with a settlement figure following your written request. ”
15.	By the legal charge, Mr and Mrs Spencer charged the property as security for all monies due from them under the credit agreement.
16.	They soon fell into arrears with their monthly payments, and on 13 February 1992 Broadwick served default notices. In September 1992, Broadwick commenced possession proceedings claiming arrears of £1403.38. On 10 November 1992, an order for possession was made, suspended on terms as to payment. 
17.	In 1994, Mr and Mrs Spencer wished to remortgage the property, but they were unable to do so because they could not afford to pay the redemption figure, which by September 1994 had risen to £18,711.53. On 23 June 1997, they issued an application to set aside the possession order and for the credit agreement to be reopened pursuant to section 139 of the Act. On 22 July 1997, the possession order of 10 November 1992 was set aside.  As I have already said, on 23 March 2001 Judge Neligan dismissed their application to reopen the credit agreement.
Some Introductory Comments
18.	As was explained by Mr Bamberg, Broadwick’s expert witness, there are three main sectors in the secured lending market in this country.  First, there are primary lenders such as banks and building societies, who generally lend at the lowest rates of interest. They do not normally grant second mortgages, except by way of a further advance to existing customers. Next there are secondary lenders, who over the years have generally lent at rates in the APR range of 19 to 29 per cent for second mortgages. They have less strict lending criteria than primary lenders, and will often accept applications that have been rejected by primary lenders. The third group of lenders is what Mr Bamberg calls “tertiary or non-status lenders”. They generally lend to persons who are unable to obtain finance from primary or secondary sources. Broadwick and Argyll are both in this group.
19.	Non-status borrowers are a particularly vulnerable group of borrowers. In July 1997, the Director General of Fair Trading issued a document entitled “Non-Status Lending Guidelines for Lenders and Brokers”. These guidelines were revised by him in November 1997.   In the later of these two documents, the Director General said:
“ Scope of Guidelines
2. The guidelines apply to all lenders and brokers in so far as they are involved in mortgages or other secured loans to non-status borrowers – that is to say, individuals with impaired credit ratings or who might otherwise find it difficult to obtain finance on normal terms and conditions from high street banks and building societies and other traditional lending institutions. Such individuals are variously referred to as non-status, non-conforming or sub-prime borrowers. They may be less knowledgeable or experienced in financial matters than a generality of customers, and on the whole they are more vulnerable.
3. There are two broad categories of non-status borrower. The first comprises borrowers with an impaired credit rating – for example, because of outstanding county court judgments or arrears. The second comprises borrowers with a low credit rating – for example, because of a poor history of employment or because their income through self-employment is irregular or difficult to verify – or who lack the supporting documentation necessary to obtain a loan from a high street lender. ”

20.	It was common ground at the trial that Mr and Mrs Spencer were non-status borrowers because of their previous history of serious mortgage arrears.
21.	It is not in issue that, in construing the provisions of the Act and the regulations made pursuant to its provisions, it should be borne in mind that this legislation is intended to protect consumers: see per Sir Christopher Slade in Huntpast Ltd v Leadbeater &Others [1993] CCLR 15, 29.
Was the Consumer Credit Agreement Properly Executed?
22.	The agreement was a “regulated agreement” within the meaning of section 189(1) of the Act. The following provisions of the Act are relevant to this issue:
“ 61 
(1) A regulated agreement is not properly executed unless –
(a) a document in the prescribed form itself containing all the prescribed terms and conforming to regulations under section 60(1) is signed in the prescribed manner both by the debtor or hirer and by or on behalf of the creditor or owner, and 
(b) the document embodies all the terms of the agreement, other than implied terms ….
65
(1) an improperly-executed regulated agreement is enforceable against the debtor or hirer on an order of the court only.
127
(1) In the case of an application for an enforcement order under –
(a) section 65(1)(improperly executed agreements), 
the court shall dismiss the application if, but (subject to subsections (3) and (4)) only if, it considers it just to do so having regard to –
(i) prejudice caused to any person by the contravention in question, and the degree of culpability for it
(3) The court shall not make an enforcement order under section 65(1) if section 61(1)(a) (signing of agreements) was not complied with unless a document (whether or not in the prescribed form and complying with regulations under section 60(1)) itself containing all the prescribed terms of the agreement was signed by the debtor or hirer (whether or not in the prescribed manner)”
23.	The Regulations made by the Secretary of State under section 60(1) are the Consumer Credit (Agreements) Regulations 1983 (“the Agreement Regulations”). Regulation 6 provides: 
“ Signing Of Agreement (1) The terms specified in Column 2 of Schedule 6 to these Regulations in relation to the type of regulated agreement referred to in Column 1 (and no other terms) are hereby prescribed for the purposes of Section 61(1) (a) of the Act (the terms which must be contained in a document if a regulated agreement is not to be improperly executed)”.
24.	The relevant terms relating to repayments prescribed in paragraph 5 of Column 2 of Schedule 6 are:
“ A term stating how the debtor is to discharge his obligations under the agreement to make the repayments, which may be expressed by reference to a combination of any of the following –
(a) number of repayments;
(b) amount of repayments;
(c) frequency and timing of repayments;
(d) dates of repayments;
(e) the manner in which any of the above may be determined;
or in any other way, and any power of the creditor to vary what is payable.”
25.	I have earlier referred to the “concession letter” that was sent by Brand Montague to Mr and Mrs Spencer on 24 September 1991. I now need to set out in full the terms of that letter:
“ CONCESSION LETTER
1. Lender: ARGYLL FINANCIAL SERVICES LTD
2. Borrowers: DAVID JOHN SPENCER
                      SYLVIA JULIE SPENCER
3. Property: 3 CHURCH TOWN
                    ST. ISSEY
                    WADEBRIDGE
                     CORNWALL
4. Amount of normal instalment: £147.58
5. Amount of reduced instalment: £134.75
A. Notwithstanding the amount of each normal instalment specified in paragraph 4 above the lender will (by way of ex gratia concession only) accept the reduced instalment shown in paragraph 5 above.
B. This concession is not intended to be contractually binding upon either party but if and so long as the borrower pays all the reduced instalments promptly on the due payment dates the lender will (as a matter of ex gratia concession only) not seek to invoke the default provisions of the Credit Agreement.
C. This concession shall automatically cease to have effect upon the occurrence of one or more of the following:-
(i) Upon failure by the borrower to pay any of the Reduced Instalments on its due date unless the lender signifies to the contrary.
(ii) Upon breach of the borrowers of any of the provisions of the Credit Agreement or Legal Charge.
D. Provided that neither event specified in paragraphs C(i) and C(ii) shall have occurred, the lender will be prepared to accept early settlement (if the borrower wishes to redeem early) on the basis of settlement figures calculated on the Reduced Instalments and not the normal instalments.
E. This concession letter is not intended as nor deemed as a novation variation revision amendment or modification of the Credit Agreement. It is merely intended as an indulgence offered by the lender to the borrower.”
26.	Mr Levy submits that the monthly figure of £134.75 referred to in the concession letter was “a term stating how the debtor is to discharge his obligations to make repayments” within the meaning of paragraph 5 of Column 2 of Schedule 6 to the Agreement Regulations, and that since this was a “prescribed term” which was not contained in the credit agreement, the agreement was not properly executed.  Accordingly, by reason of section 127(3) of the Act, the court had no power to make an enforcement order.  The effect of the concession letter was that in reality the debtors’ obligation in this case was to pay £134.75 per month unless they defaulted.  The purpose of the statutory provisions was to protect debtors by ensuring that all terms stating how they were to discharge their obligations as to repayment were contained in the credit agreement.  Moreover, the payment terms had to be correctly stated: see Wilson v First County Trust Ltd [2001] QB 407, 416D-H.  Although Mr Levy does not contend that the concession letter was a sham, he submits that, in construing the letter and the agreement, the court should have regard to substance rather than form.  It is only if one concentrates on the form of words used in the concession letter that one can conclude that the terms as to repayment did not include the obligation to pay £134.75 per month unless there was a default.
27.	I cannot accept this argument.  What follows is based on the submissions of Mr Wulwik which I found compelling in this issue. The signed credit agreement undoubtedly contained terms stating how Mr and Mrs Spencer were to discharge their obligations to make the repayments which satisfied the requirements of Schedule 6 to the Agreements Regulations.  The lender made it clear in a number of ways that it was these terms, and these terms alone, that were to have contractual effect.  First, as we have seen, paragraph 4 of the confirmation and certification letter stated that the only “financial facilities” offered by the lender were those stated in the copy credit agreement that had been sent: this letter made no reference to the concession letter.  Secondly, clause 10 of the signed agreement stated that no indulgence extended to the debtors would amount to a waiver of the lender’s rights under the agreement.  Thirdly, the concession letter was not included in the documents that were sent to Mr and Mrs Spencer by Mr Brand on 2 October as the documents that were “required to complete your loan”.  Fourthly and crucially, the wording of the concession letter itself could hardly have been clearer.  The reduced instalment would be accepted “by way of ex gratia concession only”; it was “not intended to be contractually binding”; and it was not intended to be a “variation revision amendment or modification” of the agreement, but merely an “indulgence”.  Since it is conceded that this document was not a sham, these words must be given their ordinary and natural meaning.  It is not suggested by Mr Levy that they mean anything other than what they say.  
28.	It is impossible to say that the concession letter contained terms stating how the debtors were to discharge their obligations under the credit agreement to make the repayments.  It was manifestly not the intention of the lender that it should have that effect, and in my view it did not have that effect.
29.	Was the Agreement an Extortionate Credit Bargain?
 “ 137 Extortionate credit bargains
(1) If the court finds a credit bargain extortionate it may reopen the credit agreement so as to do justice between the parties.
….
138 When bargains are extortionate
(1) A credit bargain is extortionate if it –
(a) requires the debtor or a relative of his to make payments (whether unconditionally, or on certain contingencies) which are grossly exorbitant, or
(b) otherwise grossly contravenes ordinary principles of fair dealing.
(2) In determining whether a credit bargain is extortionate, regard shall be had to such evidence as is adduced concerning-
(a) interest rates prevailing at the time it was made,
(b) the factors mentioned in subsections (3) to (5), and
(c) any other relevant considerations.
(3) Factors applicable under subsection (2) in relation to the debtor include –
(a) his age, experience, business capacity and state of health; and
(b) the degree to which, at the time of making the credit bargain, he was under financial pressure, and the nature of that pressure.
(4) Factors applicable under subsection (2) in relation to the creditor include –
(a) the degree of risk accepted by him, having regard to the value of any security provided;
(b) his relationship to the debtor; and
(c) whether or not a colourable cash price was quoted for any goods or services included in the credit bargain.
(5) Factors applicable under subsection (2) in relation to a linked transaction include the question how far the transaction was reasonably required for the protection of debtor or creditor, or was in the interest of the debtor.
….
139 Reopening of extortionate agreements
(1) A credit agreement may, if the court thinks just, be reopened on the ground that the credit bargain is extortionate – 
….
(b). At the instance of the debtor or a surety in any proceedings to which the debtor and creditor are parties, being proceedings to enforce the agreement, any security relating to it, or  any linked transaction…..
171 Onus of Proof in Various Proceedings
(7) If, in proceedings referred to in section 139(1), the debtor or any surety alleges that the credit bargain is extortionate it is for the creditor to prove the contrary.”
30.	The judge decided that the agreement was not an extortionate credit bargain. In reaching this decision he held that:
i)	the interest rate of APR 29.4 per cent was lower than the APR rates for non-status loans prevailing at the time of the agreement (which were 32 - 40.6 per cent);
ii)	the loan to value ratio of 61.8 per cent was high ( this was one of the factors that he took into account in assessing the degree of risk accepted by the lender);
iii)	there were no other “relevant considerations” within the meaning of section 138 (2) (c) which made it just to reopen the agreement on the ground that the credit bargain was extortionate.
31.	Mr Levy challenges each of these three aspects of the judge’s decision.  
Interest rates prevailing at the time the agreement was made (section 138(2)(a))
32.	Mr Levy makes two criticisms of the judge’s findings under this head.  First, he submits that the judge was wrong to concentrate exclusively on a comparison of APRs. He should also have had regard to pure interest rates. If he had done so, then on the evidence that was adduced, he would have been obliged to compare the interest rates charged by Broadwick under the credit agreement with interest rates charged by leading banks and building societies, and concluded that the Broadwick rates were considerably higher.  Secondly and in any event, the judge was wrong to accept the evidence of Mr Bamberg that the prevailing APRs were in the range of 32 to 40.6 per cent.  I shall take these two points in turn.
33.	Mr Levy submits that the interest rates referred to in section 138(2)(a) are pure interest rates and not APRs.  He accepts that a comparison of APRs is relevant to the determination of whether a credit bargain is extortionate, but it falls to be taken into account as another relevant consideration under section 138(2)(c).  He submits that the Act distinguishes between pure rates of interest and the “total charge for credit”: see section 93 and Regulation 4(a) and (b) of Consumer Credit (Total Charge for Credit) Regulations 1980 (“the TCC Regulations”).  The total charge for credit includes both interest and other charges payable by the debtor under the transaction.  
34.	I do not consider that the reference to “interest rates prevailing” in section 138(2)(a) is a reference to rates of pure interest rather than APRs.  First, it is obvious that the essential function of rate disclosure is to provide the prospective debtor with a statement of credit costs that will enable him or her to compare the cost of one source or type of credit with another.  As Professor Goode says in Consumer Credit Law and Practice [2001] at paragraph 29.2: “the relevant fact is the cost to the debtor, not the net return to the creditor”.  Thus, in order to obtain a meaningful comparison of credit costs, the debtor needs to know the amount of the credit charge, and also the percentage rate of charge.  The conventional period taken for this computation is one year, so that what the debtor requires is disclosure of the annual percentage rate of charge or APR.  It would, therefore, be most surprising if section 138(2)(a) were referring only to one (albeit usually the most significant) component of the APR, and that it should have been intended that other elements of the vitally important APR should only be taken into account under the heading of “other relevant considerations”.  Secondly, it is not an unacceptable use of language to refer to the annual cost of credit as a rate of interest.  In Davies v Directloans Ltd [1986] 1 WLR 823, 835C-D, Mr Edward Nugee QC sitting as a deputy high court judge said that it would be wrong to use any other “rate of interest” than the APR “without at all events recognising that other ways of stating the rate of interest may be misleading”.  He was considering the application of section 138(2)(a) at this point of his judgment.  I should also mention paragraph 13 of the November 1997 revision of the Director General’s guidelines which stated:
“The contract documentation should indicate clearly the APR…..
Inclusion of an annual flat rate of interest should be avoided, as this may be misleading to borrowers. If an interest rate other than the APR is shown, this should be of no greater prominence than the APR….” (emphasis added).
35.	But even if section 138(2)(a) does refer only to rates of pure interest, I cannot accept that the judge was in error in failing to compare the rates of pure interest charged by Broadwick with those charged by leading banks and building societies.  The primary lenders’ market is so different from the non-status lenders’ market that such a comparison is of no relevance.  That was the position adopted by Mr Bamberg, and   during his cross-examination, Mr Lewis, Mr and Mrs Spencer’s expert witness, agreed with it.  If a comparison of rates of pure interest were to be made, it should have been between the Broadwick rates and those of other non-status lenders.  In fact, there was evidence before the judge that the flat rates of interest being charged by Mr Bamberg’s own non-status lending firm in June 1991 for a 20 year loan were 22 per cent per annum.  That figure was significantly higher than the 18 per cent flat rate charged by Broadwick to Mr and Mrs Spencer.
36.	I turn to Mr Levy’s second point. Mr Bamberg’s evidence that the APRs prevailing in 1991 were in the range of 32 to 40.6 per cent was based on the APRs charged by members of the London Personal Finance Association (“LPFA”).  Mr Levy makes the following criticisms of this evidence.  Mr Bamberg was unable to identify the full lending criteria applied by those lenders in calculating their APRs.  He was unable to verify the rates on the basis of his direct personal knowledge: his evidence was based on information that had been obtained by the secretary of the LPFA from a computer database.  It was, therefore, hearsay.  He did not know how many members of the LPFA had submitted information to the secretary for inclusion in the database.  These points were explored during the course of Mr Levy’s cross-examination of Mr Bamberg.  In my view, the judge was entitled to accept the evidence of Mr Bamberg.  In view of the criticisms made by Mr Levy, it is of some importance to point out that Mr Bamberg did not only rely on the information taken from the LPFA database.  He also produced to the judge his own firm’s charging rates for non-status borrowers in June 1991, which showed an APR of 30.4 per cent for 20 year loans.   I should add that Mr Lewis was unable to give any evidence of APR charging rates.   I, therefore, reject Mr Levy’s second point.
The loan to value ratio of 61.8 per cent was high (section 138(4)(a))
37.	The evidence of Mr Bamberg was that the property had been valued on a forced sale basis at £44,000.  The combined total of arrears under the PBS and the Broadwick mortgages was £27,213: hence the loan to value ratio of 61.8 per cent.  Mr Levy does not question the ratio.  He does, however, submit that the judge was wrong to say (page 33 of the judgment) that Mr Bamberg’s evidence was that this ratio was “high in the non-status lending market in October 1991 and justified APR of 29.6%”. 
38.	I accept that Mr Bamberg did not say in terms that a ratio of 61.8 per cent was “high”.  At pages 11-12 of his report, however, although he said that “at first sight” this ratio would seem to be “a highly acceptable margin of security for many lenders”, he went on to explain why that was not so in the case of non-status borrowers.  In his oral evidence, he said that in the early 1990s, some non-status lenders would not lend more than 55 per cent, whilst others may have lent up to 65 or even 70 per cent.   There was also evidence from Mr Collis, Broadwick’s managing director, that 61.8 per cent was a high loan to value ratio for a non-status loan to borrowers who had a poor credit history (paragraph 6 of his supplemental witness statement). 
39.	In my view, the judge was entitled to interpret the evidence of Mr Bamberg, when read as a whole, as tantamount to his saying that a ratio of 61.8 per cent was high for non-status borrowers such as Mr and Mrs Spencer.  Even if the effect of Mr Bamberg’s evidence was not that the ratio was high, he was certainly not saying that it was low.  At best from Mr Levy’s point of view, the judge slightly overstated the effect of Mr Bamberg’s evidence.  I do not regard this as a matter of much significance.
Other relevant considerations (section 138(2)(c))
40.	Mr Levy submits that the judge failed to take into account a number of factors to which he should have had regard as “other relevant considerations” within the meaning of section 138(2)(c).  He has conveniently grouped these under the following headings: (a) the way in which the transaction was concluded; (b) the interest variation clause; (c) the concessionary instalment arrangement; and (d) the early redemption clause.
The way in which the transaction was concluded
41.	Before the judge Mr Levy relied on four features of the way in which the transaction was concluded in support of his submission that there was a gross contravention of ordinary principles of fair dealing (section 138(1)(b)).  These were the fact that:
	(i) the loan application was received and processed on 24 September 1991 without the lender having received a signed application from the borrowers;
	(ii) at no time did the lender seek any explanation of the purpose of the loan, and in particular of the reason why Mr and Mrs Spencer were seeking to refinance the Barex loan at very high cost to themselves so soon after they had obtained that loan; 
	(iii) the underwriting process was based almost exclusively on the information provided by Carrox: the lender did not check the accuracy of any of the material provided by the borrowers; and 
	(iv) the agreement was not expressed in terms whose meaning was clear or whose effect was transparent, and the lender made no attempt to provide any explanation to the borrowers of the terms or implications of their entering into the agreement.
42.	As to (i), like the judge I do not regard this as a point of any significance.  On 24 September, Carrox sent the fax to Brand Montague to which I have already referred.  It gave details of the loan required by Mr and Mrs Spencer.  The judge found that it was based on information provided to Carrox by Mrs Spencer during a telephone conversation.  The fax gave information about their financial position, and stated that they wanted to borrow £1000.  The fact that this information was not incorporated in an application form signed by the borrowers at the time when the loan application was processed by the lender was of no consequence.  The lender had the information.
43.	The remaining three features relied on by Mr Levy can be taken together.  They raise the question of the scope of “ordinary principles of fair dealing” (section 138(1)(b) of the Act) in circumstances such as those that existed in the present case.  Mr Levy relies on certain passages in the guidelines published by the Director General of Fair Trading in July and November 1997.  In the July document, the Director General said that the contract documentation should set out in plain and intelligible language the borrower’s rights and obligations under the agreement (paragraph 5).  It is helpful to consumers for lenders to issue a customer handbook emphasising the consequences of failure to abide by the terms of the agreement (paragraph 6).  The borrower should be encouraged to read all contract documentation carefully and to obtain independent legal or other advice before entering into the agreement (paragraph 7).  If interest rates can be varied unilaterally by the lender, the contract documentation should indicate this clearly and the basis on which rates may vary should be explained (paragraph 8).  The lenders should comply at all times with the principle of responsible lending: all underwriting decisions should be subject to a proper assessment of the borrower’s ability to repay, taking full account of all relevant circumstances, including the purpose of the loan, the borrower’s income, commitments, employment, age, state of health and previous credit history, and details of any other mortgages; the aim being to ensure that borrowers do not take on commitments which they are unlikely to be able to fulfil (paragraph 30).  In assessing the loan application, lenders should not place undue reliance on  information provided by brokers; they should take reasonable steps to verify the accuracy of the information before granting a loan (paragraph 32).  The contract documentation should explain clearly the purpose and nature of the procedures applying on early redemption and the implications for the borrower; it should also set out the method of calculation of the settlement figure, indicating the settlement figure and redemption charges that would apply on the basis of current rates of interest at different points in the contract (paragraph 52).  The November 1997 version was to similar effect.
44.	Two important points need to be made.  First, the Director General did not purport to say that, if the practices that he considered to be desirable were not carried into effect, the result would or might be that the credit bargain grossly contravened ordinary principles of fair dealing within the meaning of section 138((1)(b) of the Act.  In his introductory note to the November guidelines, he made it clear that the earlier guidelines:
“highlight some of the practices in this market which I consider to be deceitful or oppressive, or otherwise unfair or improper, within the meaning of section 25(2)(d) of the Consumer Credit Act, and which would be likely to lead me to take regulatory action against those involved.  They also provide examples of good practice which I consider that lenders and brokers should seek to adopt.”
45.	Secondly, the judge found (page 33) that Carrox was not Broadwick’s agent, but was the agent of Mr and Mrs Spencer. Mr Levy does not challenge these findings. It follows that, in judging what ordinary principles of fair dealing required of the lender on the facts of this case, it should be borne in mind that Mr and Mrs Spencer had the benefit of the services of Carrox, to whom indeed they paid the substantial brokerage fee of £700.  
46.	I would emphasise the following features of this transaction. On 24 September, Brand Montague wrote to Mr and Mrs Spencer enclosing an advance copy of the credit agreement.  In their letter they said that they would be sending the signable copy within 8 days, and that if Mr and Mrs Spencer had any queries they should consult Carrox.  At paragraph 7 above, I have quoted the contract condition that was printed in capital letters and which stated that the borrowers had been recommended by the lender to take independent legal or other appropriate professional advice on the contents of the agreement and in respect of the transaction generally. Mr Levy makes the point that this recommendation had not been made at the time when Mr and Mrs Spencer received the advance copy of the agreement.  This is true, but since the same form of words was incorporated in the signable copy that was sent on 2 October, Mr Levy’s point is in my view one of no substance.  On 24 September, Brand Montague also sent a letter to Carrox stating that Argyll had approved the loan application, and that the proposed loan agreement had been sent to “your clients(s)”.  They added that neither they nor their clients were permitted under the Act or the regulations made under it to “instigate any communications with your client during the consideration period”.  On 2 October, Brand Montague wrote to Mr and Mrs Spencer enclosing inter alia the signable agreement, and saying that if they had any problems in completing the forms, they should contact Carrox.  Finally, the various documents were signed at a meeting with the Carrox representative, Mr Harper, on 6 October. 
47.	Carrox was able to and did obtain the relevant information about the borrowers’ financial and other circumstances and as to their requirements.  It was in a position to give them professional advice as to the meaning and effect of the credit agreement and legal charge, and in respect of the transaction generally.   The borrowers were advised by the lender in the clearest possible terms to seek independent legal or other professional advice. In view of this recommendation and the presence of Carrox, subject to the qualification to which I refer at paragraphs 56 and 57 below, I cannot accept that there was any, still less a gross, contravention of ordinary principles of fair dealing.  
The interest variation clause
48.	Mr Levy submits that, in deciding whether to reopen the credit agreement, the judge was entitled to have regard to the way in which the lender operated the interest variation clause during the life of the contract.   The evidence of Mr Collis was that, for reasons of simplicity and administrative convenience, it was the practice of Broadwick  (which it did not communicate to the borrowers) neither to raise nor to reduce interest rates regardless of changes in the rates prevailing from time to time.   Between 1991 and 1997, building society rates fell steadily and significantly, and they remained at a fairly constant level from 1997 until 1999.  At the date of the credit agreement, they were 13 per cent per annum; by 1 January 1997 they had fallen to 7.25 per cent.  And yet the APR charged by Broadwick to Mr and Mrs Spencer remained constant at 29.6 per cent.   Mr Levy submits that, on the facts of this case, the judge should have held that Broadwick’s failure to reduce its APR so as to reflect the fall in prevailing interest rates rendered the agreement an extortionate credit bargain.
49.	The judge held (page 31 of the judgment) that it was permissible to have regard to events subsequent to the making of the agreement, but should only do so “when the subsequent events plainly show that the payments which the debtor was required to make under the credit agreement make the credit bargain grossly exorbitant or otherwise grossly contravene the principles of fair dealing”.   
50.	In Nash and Staunton v Paragon Finance Plc [2001] EWCA Civ 1466 (15 October 2001), this court had to consider whether variations in the rates of interest after a credit agreement has been made can be taken into account in deciding whether the agreement is an extortionate credit bargain.  In that case (like the present) the lender had a discretion to vary the interest rates that were payable from time to time.  The court decided that variations in interest rates were not to be taken into account.  In my judgment (with which Thorpe LJ and Astill J agreed) I said:
“63. In my judgment, the Recorder was right to hold that the subsequent changes in rates of interest were irrelevant to the question whether the credit bargains were extortionate. The submission advanced by Mr Bannister is seductively simple. It is that the interest payments that the appellants were required  to make were payments required to be made by the credit agreements. Accordingly, they were payments to which section 138(1) applies, and if they were grossly exorbitant, that would be sufficient to render the credit bargains extortionate. It is to be noted that Mr Bannister does not submit that changes in interest rates are capable of being “other relevant considerations” within the meaning of section 138(2)(c).
64. But I cannot accept his argument. My principal reason is that variations in rates of interest are excluded from the calculation of the “total charge for credit” and therefore excluded from being part of the credit bargain. Section 137(1) provides that a credit agreement may be reopened if the credit bargain is extortionate. Section 137(2)(b) defines “credit bargain” by reference to the transaction or transactions that are to be taken into account in computing the “total charge for credit”. It is not in dispute that the effect of section 20 of the 1974 Act and the Credit (Total Charge for Credit) Regulations 1980 is that (with exceptions that are immaterial for present purposes) subsequent variations of the rate of interest are not taken into account in determining the total charge for credit. This is the clear effect of Regulations 2(1)(d), 3 and 4 of the 1980 Regulations and section 20(1) of the 1974 Act which provides: 
	“(1) The Secretary of State shall make regulations containing such provisions as appear to him appropriate for determining the true cost to the debtor of the credit provided or to be provided under an actual or prospective consumer credit agreement (the “total charge for credit”), and regulations so made shall prescribe –
	(a) what items are to be treated as entering into the total charge for credit, and how their amount is to be ascertained;
	(b) the method of calculating the rate of the total charge for credit.”
65. Thus the purpose of the 1980 Regulations is to determine the “true cost to the debtor of the credit provided”, and it does this by defining the total charge for credit. The definition of “credit bargain” in section 137(2)(b) is based on the transaction or transactions which are taken into account in determining the total charge for credit. The total charge for credit is central to a consideration of whether a credit bargain is extortionate. It would be extraordinary if the rules for computing the total charge for credit were to be ignored in deciding whether a credit bargain is extortionate, and yet that is the effect of Mr Bannister’s submission. He submits that section 137(2)(b) serves no other purpose than that of defining the credit bargain, and ensuring that all transactions that are taken into account in computing the total charge for credit, and not merely the credit agreement, are taken into account. I agree that section 137(2)(b) does serve that purpose. But it does not follow that the rules for computing the total charge for credit can be ignored when deciding whether a credit bargain is extortionate. An important purpose of the Regulations which define the total charge for credit is to provide a measure by reference to which it can be determined whether a credit bargain is extortionate. Regulation 2 contains detailed provisions as to the assumptions that should be made in carrying out the calculation.
66. Quite apart from the argument based on the 1980 Regulations, I derive support from the language of section 138 itself. The factors that are relevant to the question whether a credit bargain is extortionate are not only the credit agreement and other transactions that are to be taken into account in computing the “total charge for credit”, but also other factors present at the time when the credit bargain was made. Thus it is expressly provided in section 138(2)(a) (interest rates prevailing) and section 138(3)(b) (financial pressure) that the relevant time for considering these matters is the time of the making of the credit bargain. It is also the natural reading of section 138(3)(a) (age, experience, business capacity and state of health), section 138(4)(a) (degree of risk), section 138(4)(b) (relationship to the debtor), section 138(4)(c) (quote of  a colourable cash price for goods or services included in the credit bargain) that all of these matters are to be considered as at the date when the credit bargain is made, and at no other time.”  
51.	Mr Levy submits that this court should not follow Nash and Staunton.  He points out (correctly) that in that case counsel for the borrowers did not submit that variations in interest rates were capable of being “other relevant considerations” within the meaning of section 138(2)(c).  Mr Levy argues that they are, and that accordingly the decision was per incuriam.  Secondly, he submits that in any event the reasoning of the court was wrong and should not be followed.
52.	Mr Levy criticises the reasoning in paragraph 65 of my judgment.  He submits that it confuses two distinct questions, namely (a) what is meant by the credit bargain, and (b) what is meant by extortionate.   The answer to the first question is provided by section 137(2): it is the transaction or transactions that are to be taken into account in computing the “total charge for credit”.  The answer to the second question is provided by section 138(2), which contains no reference to the total charge for credit.  In his supplemental skeleton argument he says: “where the interest rate is variable at the creditor’s discretion, it would not be possible to include this information without making an assumption that such variations will not occur.  But the fact that such an assumption has to be made in order to calculate a figure cannot be treated as supporting a wider principle that interest rate variations are excluded from the calculation of the total charge for credit, because it is clear that some interest rate variations are included-namely those which are certain to occur on a date which can be ascertained at the date of the making of the agreement (reg 2(1)(d))”.
53.	I have not been persuaded by Mr Levy’s criticisms of my reasoning.  At paragraph 65 of my judgment, I acknowledged that there are the two distinct questions that Mr Levy has emphasised.  But for the reasons that I gave in that paragraph, I do not consider that it can have been the intention of Parliament that the rules for computing the total charge for credit are to be ignored when a decision has to be made as to whether a credit bargain is extortionate.  Nor is the validity of that reasoning affected by the fact that the total charge for credit is computed on the assumption that a variation of interest that is certain to occur will occur, provided that the date of occurrence (or earliest date of occurrence) can be ascertained at the date of the making of the agreement.
54.	Even if I were to accept that the reasoning of paragraph 65 is wrong, I remain of the view that I expressed at paragraph 66.  Mr Levy criticises the reasoning of that paragraph too.  He submits that, if it had been intended that the phrase “any other relevant considerations” in section 138(2)(c) should refer only to factors existing at the date when the agreement was made, one would have expected it to have been qualified by words such as “prevailing at the time it was made” or “existing at the time it was made”. 
55.	In response, I would refer to the points that I made in paragraph 66.  I would add the following.  Mr Levy accepts that variation of interest clauses were very common at the date when the Act was passed as they are today.  The most obvious way in which a credit bargain is likely to be held to be extortionate is if the interest rates payable under the credit bargain are grossly exorbitant.  No doubt that is why the first of the two broad categories of extortionate bargains identified in section 138(1) is a bargain which requires the debtor to make payments which are grossly exorbitant, and why the first of the three factors mentioned in section 138(2) is “interest rates prevailing at the time it was made”.   If it had been intended that regard should be had to interest rates prevailing from time to time during the life of the agreement, it is difficult to see why section 138(2)(a) was limited to the time at which the credit bargain was made.  The decision to limit the relevance of other interest rates to those prevailing at that time must have been quite deliberate.  It would have been easy enough to refer to interest rates prevailing “from time to time”.  Furthermore, on Mr Levy’s construction it is difficult to see why it should have been intended that such an important and specific factor should be dealt with under the general sweep-up heading of “other relevant considerations”.  I emphasise the specific nature of this factor.  It is noteworthy that the draftsman of the Act took some trouble to identify a number of quite specific factors in section 138(3) to (5).  It is at least arguable that some of these factors are less obviously important in the context of extortionate credit bargains than interest rates which, though not exorbitant when compared with rates prevailing at the time when the bargain is made, become so as a result of the operation of a discretionary variation of rates clause.
56.	Accordingly, subject to the qualification that I am about to express, I remain of the view that I expressed in Nash and Staunton that the way in which a discretionary variation of rate clause is operated in fact is not a factor to be taken into account in determining whether a credit bargain is extortionate.  But it does not follow that the existence of such a clause can never be relevant to the question whether a credit bargain is extortionate.  Such a clause has the potential to make the bargain extremely burdensome for the borrower if a wide gap opens up between the interest rates payable under the bargain and market rates prevailing from time to time.  If the lender has a policy of operating the clause in a certain way, or (as in the present case) of not operating the clause at all whether market rates go up or down, then it seems to me that ordinary principles of fair dealing require the lender to inform the borrower of that policy before the bargain is made.   Failure to inform the borrower may, therefore, be a factor to be taken into account in determining whether there has been a gross contravention of ordinary principles of fair dealing, and therefore whether the credit bargain is extortionate.  
57.	I consider that Broadwick should have told Carrox and Mr and Mrs Spencer that its policy was not to reduce the rates even if market rates fell. This is not a point that was pleaded but was relied on by Mr and Mrs Spencer in closing submissions at trial. However there is no evidence that they would not have proceeded with the transaction on the same terms if they had been given the information. Nobody could have foreseen what changes in interest rates would occur. Broadwick’s policy would have worked to their advantage if rates had risen. The policy was not inherently oppressive or unconscionable. In these circumstances, I do not regard the failure to communicate its existence as a serious contravention of ordinary principles of fair dealing, still less a gross contravention.
The concessionary instalment arrangement
58.	I have already referred to the concession letter which provided that, in the absence of default by the borrowers, the lender would accept a reduced monthly instalment of £134.75 per month, instead of the “normal” (ie contractual) instalment of £147.58.  Mr Levy submits that this dual rate of instalments contravenes ordinary principles of fair dealing.  
59.	He relies on a passage in the July 1997 version of the Director General’s guidelines.  The Director General expressed concern about the practice of charging a dual rate of interest, saying that it was particularly unfair where the lender knew that there was a high chance of the borrower defaulting.  In some cases, the rate chargeable in the event of default could be as much as double the concessionary rate (paragraph 40).  The Director General concluded that “the dual interest rate system operated by many non-status lenders is unfair and oppressive, and should be discontinued” (paragraph 45).  It is clear that the system that he considered to be unfair and oppressive was one in which there was a very substantial difference between the two rates, and where there was insufficient transparency regarding the operation of such schemes (paragraphs 40-44).
60.	In my view, these observations have no application to the facts of the present case.  First, the comments of the Director General were directed to dual contractual rates of interest.  They were not intended to apply to a case where the reduced rate was payable as an ex gratia concession.  In my view, the fact that the reduced rate had no contractual effect is fatal to Mr Levy’s argument.  But secondly and in any event, even if the reduced rate had contractual force, I do not consider that it would have been unfair or oppressive on Mr and Mrs Spencer that Broadwick should provide them with a comparatively modest incentive not to default.  This case comes nowhere near the threshold of unfairness or oppression which was plainly met by many of the lenders whose practices were criticised by the Director General.  The difference between the two rates is about £150 per annum.  Over the full twenty year period, the difference would be about £3000.  These differences are not trivial, but they are not evidence of oppression or unfairness, still less of gross contravention of ordinary principles of fair dealing.
The early redemption clause
61.	It is convenient to repeat clause 11 of the agreement:
“You may settle this Agreement at any time by paying to us the outstanding balance of your Total Indebtedness less the statutory rebate provided for in regulations under the Act.  We will provide you with a settlement figure following your written request”.
62.	Section 94(1) of the Act gives the debtor under a regulated consumer credit agreement the right to discharge his indebtedness under the agreement by payment of:
“all amounts payable by the debtor to him under the agreement (less any rebate allowable under section 95) to discharge the debtor’s indebtedness under the agreement.”
63.	Section 95(1) and (2) provides for regulations to be made as to the allowance of the rebate and its calculation.  The relevant regulations are the Consumer Credit (Rebate on Early Settlement) Regulations 1983 (“the Rebate Regulations”).  
64.	Regulation 2(1) of the Rebate Regulations provides that:
“…the creditor shall allow to the debtor under a regulated consumer credit agreement a rebate at least equal to that calculated in accordance with the following provisions of these Regulations whenever early settlement takes place…”
65.	The relevant calculation for present purposes is contained in Schedule 2 of the Rebate Regulations, which provides for the rebate to be calculated in accordance with a mathematical formula which is known as “the Rule of 78”.
66.	There are no doubt many ways of calculating the rebate of future charges in the event of early redemption.  One is called “the actuarial rule”, where a calculation is made of the interest still remaining to be earned at the date of redemption, and that is the sum that is rebated: the actuarial spread determines what interest has accrued up to the end of any payment period, and what remains to be earned.  But the problem with this approach is that it is unfair to the lender unless he has no overheads or other expenditure in connection with the transaction, or the spread of costs incurred by the lender exactly matches the actuarial spread of income.  But this never happens: see Professor Goode’s Consumer Credit Law and Practice (2001) Volume 1, paragraphs 36.42 ff.   Another method of calculating the rebate is the “direct ratio” method, otherwise known as “the Rule of 78”.  
67.	The Rule of 78 is, therefore, the minimum rebate that is required to be paid in accordance with the Rebate Regulations.  The reference in clause 11 of the credit agreement to the “statutory rebate provided for in regulations under the Act” was a reference to the Rule of 78.  It is not necessary to explain the statutory formula in any detail.  In practice, finance houses have never adopted the actuarial rule, but have employed the direct ratio method.  The Rule of 78 assumes that charges (ie all charges) are spread in the ratio which the number of instalments remaining to be paid bears to the total number of instalments in the contract.
68.	As Professor Goode points out, in recent years there has been criticism of the use of the Rule of 78, principally in connection with the calculation of settlement figures on long-period secured loans.  The problem with the Rule of 78 is that it assumes that the balance on the debtor’s account decreases by equal steps month by month, whereas the actuarial rule takes into account the exact reduction of the balance each month.  The result is that the Rule of 78 favours the creditor over the longer period.  The difference between settlements calculated by the two rules is not uniform throughout the life of the agreement.  Professor Goode explains (Volume 3, paragraph 3.63): “it starts at a low figure, rising to a broad rounded peak at about one-third of the way through the life of the agreement and decreasing to nothing at the end of the agreement”.
69.	The Director General of Fair Trading has criticised the use of the Rule of 78 on a number of occasions.   In his report on Consumer Credit Deregulation, published in July 1994, he explained why he considered the rule was unsatisfactory, and recommended for all loans that the formulae in the Rebate Regulations should be replaced by a more accurate method of calculation reflecting the principles of compound interest, such as the actuarial method.  At paragraphs 47-52 of his July 1997 guidelines, the Director General repeated this opinion, and said:
“The office considers that the use of the Rule of 78 is inappropriate in the non-status market, and amounts to a penalty on early redemption that is not justified by the costs involved.  Lenders should discontinue its use at the earliest possible opportunity, and should not apply it rigidly to existing loan arrangements without some form of cap to ensure that payments on early redemption are not excessive.  They should move to alternative methods of calculating the settlement figure such as the actual reducing balance or actuarial methods”.
70.	The Director General revisited the subject in his November 1997 guidelines.  Having referred to what he had said in the July document, he said at paragraph 58 that his earlier conclusions:
“apply solely in relation to unregulated non-status loans, as the position for regulated loans is governed by the Rebate Regulations made under section 95 of the Consumer Credit Act.  The Director General has written recently to DTI ministers, urging a review of those Regulations.  Consideration should be given in any such review to the Office’s recommendations in its report on Consumer Credit Deregulation in June 1994, and to its subsequent comments on that report.  Further announcements may be made in due course regarding the wider use of the Rule of 78 in all types of credit agreement”
71.	Despite the urgings of the Director General, no change has been made to the Rebate Regulations.  In Grangewood Securities Ltd v Ellis [unreported 9 November 2000], Judge Serota QC sitting at Milton Keynes County Court recorded that, following the July 1997 guidelines, the Council of Mortgage Lenders contended that the Rule of 78 was a reasonable basis for determining rebates on early settlement except in the case of loans at high interest rates or over a period of 10 years or more.  It seems that they also pointed out that the Rebate Regulations were framed “so as to set a maximum to the lenders’ entitlement”.  Judge Serota stated that the then government was persuaded by these arguments, and decided not to change the regulations.
72.	With that rather long introduction to this issue, I return to the facts and submissions in the present case.   Mr and Mrs Spencer sought to redeem the agreement on two occasions in 1994 at a time when they wished to remortgage the property in order to raise a further loan of £12,500.  On the first occasion, the redemption settlement figure was £16,576; on the second occasion it was £18,711.  The property was valued at £42,500.  In view of the size of these settlement figures, they were unable to redeem.  In effect, therefore, they were locked in.  But there is no evidence as to the amount of the rebate calculated on the basis of the Rule of 78, or what it would have been if calculated by the actuarial method.  On the basis of Professor Goode’s analysis, since these attempts to redeem were made during the third year of a 20 year loan agreement, there should have been little difference between the amount of the rebate, whether it was computed on the actuarial basis or by the application of the Rule of 78. 
73.	On the sixth day of the trial, Mr Wulwik made a concession on behalf of Broadwick in these terms:
	“In the light of recent authority (viz Grangewood Securities Limited v Ellis – Milton Keynes County Court on 9th November 2000) and to shorten matters, the Claimant by way on concession and entirely without prejudice to its strict rights, is prepared, in this case only, to permit the Defendants to redeem upon giving two months’ notice and upon paying as a redemption fee, a sum equal to two months’ instalments, together with the account balance then due, including any arrears and the legal costs associated with early redemption.”
74.	The judge decided that the incorporation of the Rule of 78 for calculating the rebate on redemption did not render the agreement an extortionate credit bargain.  His reasons were that the application of the Rule of 78 for the purpose of calculating the amount of rebate was (a) not unusual in 1991, and (b) sanctioned by statute.  He also relied on the fact that Broadwick had made the concession to which I have referred as a reason for refusing to exercise the discretion given by section 139(1) not to reopen the agreement: see page 44 of the judgment.
75.	Mr Levy submits that the judge was wrong to reach the conclusion that he did on this issue.  He relies on the criticisms of the Director General as showing that the Rule of 78 operates very unfairly on borrowers who enter into long period loan agreements at high APRs.  He says that there is no logical justification for distinguishing between regulated and unregulated loans for this purpose.  He also submits that the Rebate Regulations do no more than lay down certain minimum terms.  Moreover, it is irrelevant that clause 11 of the agreement was a “usual provision for a non-status credit agreement”: the fact that a term is commonly incorporated in credit agreements of a certain type does not necessarily mean that such a term cannot render the agreement an extortionate credit bargain.
76.	Mr Levy relies on the decision of Judge Serota in Grangewood Securities Ltd v Ellis. The credit agreement in that case contained an early redemption clause in the same terms as clause 11 in the agreement in the present case.  The agreement was for 20 years and the APR was 35.4 per cent.  Judge Serota observed that the figures in that case showed how the application of the Rule of 78 has a “tendency to lock borrowers into their current properties and acts as a strong disincentive to move house” (paragraph 69).  It was argued on behalf of the lender that the use of the Rule of 78 to calculate early settlement figures could not be regarded as “extortionate” for the same two principal reasons as are advanced by Mr Wulwik in the present case: (a) all non-status lenders in 1991 applied the Rule of 78 when calculating early settlements, and (b) the use of the Rule of 78 was expressly permitted by the Rebate Regulations.  
77.	Judge Serota held that, although the fact that a term is usual affords powerful evidence that the agreement is not extortionate, it is not conclusive.  As regards the second point, he said that he agreed with the criticisms of the Director General of the use of the Rule of 78 in long period loan agreements at high rates of interest.  Despite the statutory sanction of its use, he could see no reason why:
“if as here, the effect of the application of the Rule of 78 is extortionate because of its interaction with other terms of the agreement, the agreement as a whole cannot be regarded as extortionate.  Here I consider that clause 11, when coupled with the 20 year term, the APR of 35.4%, the absence of a required reduction in the APR, the fixed monthly instalments, the inevitable increase in unpaid capital caused by default, the lack of transparency in the original agreement and absence of explanation as to what settlement figures might be, renders the agreement as a whole extortionate, unconscionable and oppressive.  I stress that it is not clause 11 in isolation that makes the agreement unconscionable, but its effect on the agreement as a whole.  I would have come to the same conclusion having regard only to the high interest rate and the length of the loan as well as the lack of transparency”.
78.	I agree with Judge Serota that the fact that a term such as clause 11 was usual in such an agreement in 1991 is powerful (but not conclusive) evidence that it did not make the agreement an extortionate credit bargain.  I also agree with Judge Neligan that the statutory sanction of the use of the Rule of 78 is very relevant in this context.  Moreover, it is significant that in November 1997 the Director General made it clear that his earlier comments about the use of the Rule of 78 were limited to their use in relation to unregulated non-status loans.  He said that he had written to DTI ministers urging a review of the Rebate Regulations, but the regulations have not been amended. In these circumstances, I find it impossible to hold that the incorporation of clause 11 rendered the agreement an extortionate credit bargain.  The judge also took into account the concession that was made on behalf of Broadwick on the sixth day of the trial.  That concession was based on the decision of Judge Serota, and reflected the order that he made upon reopening the agreement in that case.  If I had been of the view that clause 11 rendered the agreement an extortionate credit bargain, I would not have been disposed to conclude that the agreement was saved by the concession.  The concession would have come too late to have been of any value to Mr and Mrs Spencer.
Conclusion
79.	For the reasons that I have explained, I do not consider that any of the points relied on by Mr Levy individually rendered the agreement an extortionate credit bargain.  Nor do I think that they did so when their cumulative effect is considered  At paragraph 27.26 of Consumer Credit Law and Practice, Professor Goode said: 
“Nevertheless, it seems clear that the concepts of extortion and unconscionability are very similar. ‘Extortionate’, like ‘harsh and unconscionable’, signifies not merely that the terms of the bargain are stiff, or even unreasonable, but that they are so unfair as to be oppressive. This carries with it the notion of morally reprehensible conduct on the part of the creditor in taking grossly unfair advantage of the debtor’s circumstances. This element of moral culpability, in the form of abuse of power or bargaining position, is well brought out in the judgment of Sir John Donaldson MR in Wills v Wood [1984] CCLR 7: 
‘It is, of course, clear that the Consumer Credit Act 1974 gives and is intended to give the widest possible control over credit bargains which, for a variety of reasons, might be considered “extortionate”. But the word is “extortionate”, not “unwise”. The jurisdiction seems to me to contemplate at least a substantial imbalance in bargaining power of which one party has taken advantage’.”.
80.	Accordingly, the statutory test of “extortionate” is a high one: the payments required to be made must be grossly exorbitant, and/or the bargain must otherwise grossly contravene ordinary principles of fair dealing.  In stating the test in this way, I do not overlook the fact that the burden is on the lender to prove that the credit bargain is not extortionate.   The Director General of Fair Trading has expressed concern about the statutory test.  In September 1991, he issued a report on the provisions of sections 137-140 of the Act entitled “Unjust Credit Transactions”.  He identified certain abuses affecting non-status borrowers in the secured lending market, and expressed the opinion that the extortionate credit bargain provisions of the Act had not dealt effectively with the problems to which they were addressed.  He recommended that the government should introduce legislation:
“to reform and develop sections 137-140 of the Consumer Credit Act, recasting them with a view to making them work as originally intended.  The concept of an “unjust credit transaction” should replace that of an “extortionate credit bargain”.  In such cases the court would, as now, have the power to reopen an agreement, on application by the debtor (or surety), so as to do justice between the parties.”(paragraph 1.9 of the report).
81.	The report also made various specific recommendations as to the factors to be taken into account in determining whether a transaction was unjust.  But ten years later, so far as we have been told, there are no indications that the Government intends to change the statutory test. It would seem, however, that the position of non-status borrowers has been improved by the Unfair Terms in Consumer Contracts Regulations 1999. But we heard no argument about these regulations, since it is conceded by Mr Levy that they do not apply to the transaction in this case.  
82.	 The judge found that there was no pressure on Mr and Mrs Spencer to enter into the credit agreement, and there is no challenge to that finding. At page 39 of his judgment, he said:
“For them to say that they did so because of panic due to pressure from the Building Society at the time they did so is not supported by the evidence.  The sad fact is that on their own admission they just did not read the documents sent to them let alone accept the clear invitation printed on the documents, including the advance copies, to take legal or other professional advice.”
83.	As Mr Wulwik points out, the arrears of instalments payable by Mr and Mrs Spencer to PBS had been paid off when the loan agreement had been entered into with Barex in August 1991.  Although there were further arrears of £362.00 by the time the credit agreement was entered into with Argyll, Mr and Mrs Spencer were not being subjected to any pressure from PBS at that time. It is clear that they were extremely ill-advised to make the credit bargain that they made, but in my judgment the judge was right to conclude that this was not an extortionate credit bargain within the meaning of the Act.
Lord Justice Robert Walker: 
84.	I agree that this appeal must be dismissed for the reasons fully set out in the judgment of Dyson LJ.  In particular, I agree that the decision of this court in Nash and Staunton v Paragon Finance plc [2001] EWCA Civ 1466 was not arrived at through any inadvertent error.  It was correctly decided and is binding on us.  
85.	I do however reach this conclusion with some regret.  I share the concerns expressed by the Director General of Fair Trading as to whether in a significant number of cases the provisions in sections 137 ff of the Consumer Credit Act 1974 fail to achieve their purpose of protecting consumers, and especially “non-status” borrowers who are unable to obtain credit on more favourable terms from primary lenders.
86.	Mr and Mrs Spencer are now going to lose their home because of a transaction under which they wished to borrow only £1,000, and actually received only £611.44, after a further round of brokerage fees and other deductions.  The transaction locked them into a 20-year arrangement from which it was in practice impossible for them to extricate themselves (as they discovered in 1994) because of the terms applicable on early redemption.  Those terms have however been officially sanctioned (as providing a minimal level of protection, which is in practice the industry’s norm).  
87.	Dyson LJ quotes a passage from the judge’s findings which is not challenged on appeal:
“For [Mr and Mrs Spencer] to say that they [entered into the credit agreement] because of panic due to pressure from the building society at the time they did so is not supported by the evidence.  The sad fact is that on their own admission they just did not read the documents sent to them let alone accept the clear invitation printed on the documents, including the advance copies, to take legal or other professional advice.”
88.	Without in any way disturbing the judge’s careful findings of primary fact I would comment that to my mind there is no inconsistency between the notion that Mr Spencer’s unemployment may have induced a sense of panic in him and his wife (they were first-time buyers with very limited means) and the sad fact that they did not adequately read or understand, or take advice about, the terms of the credit agreement.
89.	Legislative safeguards requiring prominent warnings, cooling-off periods and the use of plain language (a requirement hard to reconcile with the complicated formulas prescribing the rule of 78) may not in practice provide adequate protection for borrowers who do not have ready access to professional advice, and who feel that they have no alternative but to grasp what they can get as non-status borrowers.  It is very unfortunate for Mr and Mrs Spencer that they did not seek help from Citizens Advice Bureaux (or some comparable advice centre) when they first started to fall into arrears with their building society mortgage.  Had they done so, there would have been a much better chance of avoiding the misfortunes which have overtaken them.
Lord Justice Auld : 
90.	For the reasons given by Dyson LJ, I also agree that the appeal should be dismissed. I express no view as to the adequacy of the Consumer Credit Act 1974 as a general protection for "non-status" borrowers. I do, however, consider that there is an urgent need for simplification of this complicated legislation so that lenders and borrowers alike can readily understand what each should expect of the other.
Order: Appeal dismissed with costs; order as per counsels’ minuted draft order, excluding paragraph 4; application for permission to appeal to the House of Lords refused.

(Order does not form part of the approved judgment)