Positive or Neutral Judicial Treatment

National Westminster Bank Plc v Devon CC

Abbey National Plc v Devon CC
Divisional Court

25 June 1993

Case Analysis
Where Reported

(1994) 158 J.P. 156; [1995] E.C.C. 361; (1994) 13 Tr. L.R. 70; [1993] C.C.L.R. 69; [1994] C.O.D.
5; (1993) 157 J.P.N. 768; [1993] N.P.C. 103; Times, July 16, 1993; Independent, August 25,
1993

Case Digest

Subject: Consumer law

Keywords: Advertisements; Consumer credit; Interest; Offences

Summary: Total charge for credit regulations; calculations made on assumptions;

whether APR has been correctly calculated; assumption where there are changes in
charges which are not certain to occur

In calculating an APR where interest was fixed for a period after which a borrower had an
option of a further period at a fixed rate then offered, the APR may be calculated on the
assumption that the interest rate would apply throughout the entire borrowing term. It
is therefore correct in applying the Consumer Credit (Advertisements) Regulations 1989,
reg. 2(1)(d) to assume that no variation in the initial fixed rate would occur albeit that
that possibility may be remote. D, who were a bank and a building society, published
advertisements as to the availability of mortgages at a fixed rate of interest after which
the rate would revert to Ds' normal fluctuating rate or to whatever fixed rate was then
available. The bank was convicted of 12 offences under the Consumer Credit Act 1974,
s.46 of publishing a misleading advertisement and under reg.167(2) of contravening the
Advertisements Regulations and appealed by way of case stated. The building society
was acquitted in separate proceedings and the prosecution also appealed by way of case
stated.

Held, allowing the bank's appeal and dismissing the prosecution's appeal, that (1) the
transaction did "provide for a variation of the rate of interest" after the initial fixed rate
period and it was further held that the event of the fixed rate period was "an event
which was certain to occur and of which the date of occurrence, or the earliest date of
occurrence, can be ascertained at the date of the agreement". However, the transaction
did not provide for variation of the interest rate in consequence of the occurrence of that
event because of the possibility, albeit remote, that at the end of the fixed rate period
the borrower would continue to pay interest at the original fixed rate during the whole
of the period; (2) Accordingly, the bank acted in good faith in seeking to apply the
regulations as understood by it and the convictions were quashed; and (3) the material
distinction in the case of the building society was that borrowers did not have the option
of moving to another fixed rate of interest on the expiry of the initial period but they had
instead to revert to the normal fluctuating rate. However, the appeal against the
acquittal was dismissed on the same basis of the court's interpretation of reg. 2(1)(d).

Judge: Kennedy LJ; Macpherson J

Counsel: For NWB: Timothy Walker Q.C. and Thomas Keith. For DCC: Anthony Scrivener
Q.C. and Martin Meeke. For Abbey National: Michael Beloff Q.C. and Nicholas Paines.

Solicitor: For NWB: Osborne Clarke. For DCC: Philip Jenkinson (Exeter). For Abbey
National: Deborah Henning (Milton Keynes).

Key Cases Citing

Considered

Scarborough Building Society v Humberside Trading Standards Department

[1997] C.C.L.R. 47; QBD; 14 November 1996

All Cases Citing

Considered

Scarborough Building Society v Humberside Trading Standards Department

[1997] C.C.L.R. 47; QBD; 14 November 1996

Significant Legislation Cited

Consumer Credit (Advertisements) Regulations 1989 (SI 1989 1125) reg. 1(2).

Consumer Credit (Total Charge for Credit) Regulations 1980 (SI 1980 51) reg. 2(1)(d)

Consumer Credit Act 1974 (c.39) s.167(2)

Consumer Credit Act 1974 (c.39) s.20

Consumer Credit Act 1974 (c.39) s.44

Consumer Credit Act 1974 (c.39) s.46

Consumer Credit Act 1974, s.46

Legislation Cited

Consumer Credit (Advertisements) Regulations 1989 (SI 1989 1125) reg. 1(2).

Consumer Credit (Advertisements) Regulations 1989 (SI 1989/1125) reg.1

Consumer Credit (Total Charge for Credit) Regulations 1980 (SI 1980 51) reg. 2(1)(d)

Consumer Credit (Total Charge for Credit) Regulations 1980 (SI 1980/51) reg.2

Consumer Credit Act 1974 (c.39) s.167(1)

Consumer Credit Act 1974 (c.39) s.167(2)

Consumer Credit Act 1974 (c.39) s.20

Consumer Credit Act 1974 (c.39) s.20(1)

Consumer Credit Act 1974 (c.39) s.44

Consumer Credit Act 1974 (c.39) s.44(1)

Consumer Credit Act 1974 (c.39) s.46

Consumer Credit Act 1974 (c.39) s.46(1)

Consumer Credit Act 1974, s.46

Journal Articles

Advertising low start mortgages.

Advertisements; Consumer credit; Interest rates; Mortgages.
S.J. 1997, 141(40), 1006-1007

Consumer credit.
Advertisements; Consumer credit; Interest rates; Mortgages.
C. & F.L. 1994, 7(2), 94-95

Advertising "discounted rate" mortgage products - LACOTS view on the APR.

Advertisements; Consumer credit; Interest rates; Mortgages.
Consumer C. 1994, 49(2), 14
Determining the true cost of credit.
Advertisements; Consumer credit; Interest rates; Mortgages.
J. Crim. L. 1994, 58(3), 244-246

APR of mortgage may be calculated on basis of initial fixed interest rate period.
Advertisements; Consumer credit; Interest rates; Mortgages.
B.J.I.B. & F.L. 1993, 8(9), 458

Advertising dispute.
Advertisements; Consumer credit; Interest rates; Mortgages.
C.S.W. 1993, 44(3), 58

Important credit advertising decision.

Advertisements; Consumer credit; Interest rates; Mortgages.
Cons. & Mar. Law 1993, 11(6), 3-5

Advertising fixed-rate mortgages: the legal implications.

Advertisements; Consumer credit; Interest rates; Mortgages.
Cons. L. Today 1993, 16(9), 1-2

Divisional Court rules on mortgage APR.

Advertisements; Consumer credit; Interest rates; Mortgages.
Consumer C. 1993, 48(3), 21-22

Mortgage APRs - the aftermath of the appeal.

Advertising; Consumer credit; Interest rates; Mortgages.
Consumer C. 1993, 48(4), 21

Consumer credit.
Advertisements; Consumer credit; Interest rates; Mortgages.
I.B.F.L. 1993, 12(6), 54-55

An update on the Consumer Credit Act.

Advertisements; Consumer credit; Mortgages; Personal loans.
J.P. 1993, 157(41), 645-647

Advertising standards.
Advertising; Building societies; Consumer credit; Interest rates; Mortgages.
M.F.G. 1993, 126(1534), 34,36-37

[1995] E.C.C. 361

( Kennedy L.J. and MacPherson J. of Cluny)

25 June 1993
Appeal by way of case stated from a conviction for breach of the Consumer Credit Act
1974 imposed by Plymouth Magistrates.

Consumer credit. Mortgages. Calculation of annual percentage rate. Regulation 2(1)(d) of

the Consumer Credit (Total Charge for Credit) Regulations 1980 provides that in the case
of a transaction which provides for variation of the rate or amount of any item included
in the Total Charge for Credit in consequence of the occurrence after the relevant date of
any event, the assumption is that the event will not occur. This requires a mortgage
lender to calculate the annual percentage rate on a mortgage on the assumption that a
change in interest rates will not occur. [4], [9]

The appellant and second respondent were lenders under what are known as “fixed
rate” mortgages. The interest rate on such mortgages is fixed for a certain period, often
two years, after which it reverts to the lender's normal fluctuating rate or to whatever
fixed rate is then available. Consumer protection legislation requires that, when
advertising such mortgages, the lenders set out not only the initial rate of interest but
also the annual percentage rate (APR). This figure is artificial because nobody knows
what the interest rate will be after the initial period, but regulations prescribe how the
calculation is made. In September 1990, the Devon County Trading Standards Officer
came to the conclusion that the lenders in this case were not calculating their advertised
APR correctly. In each case it was calculated by treating the initial fixed rate as though it
would be the rate payable for the whole of the mortgage, whereas, according to the
Trading Standards Officer, it should have been made on the basis that the rate of interest
after the initial fixed rate period would be the fluctuating rate being offered by the
lender at the outset. Informations were laid against both lenders and the appellant was
convicted by the magistrates. Both lenders contended that their calculations complied
with the statutory *362 requirements. On appeal, the court concluded that the mortgage
lenders were correct and quashed the convictions.

Representation

Timothy Walker, Q.C., and Thomas Keith, instructed by Osborne Clark of Bristol,
appeared for the appellant bank. Michael Beloff, Q.C., and Nicholas Paines, instructed by
the Abbey National in-house solicitors, appeared for the appellant building society.
Anthony Scrivener, Q.C., and Martin Meeke, instructed by the County Solicitor, appeared
for the respondent.

No cases were cited.

JUDGMENT

KENNEDY L.J.:

[1] We have before us five appeals by way of case stated in which the issues are very
much the same. They arise in this way: for some time now many banks and building
societies have been offering what they describe as fixed rate mortgages, that is to say
mortgages where the rate is fixed for an initial period of, say, two years, after which it
reverts to the bank or building society's normal fluctuating rate, or to whatever fixed
rate is then available. Consumer protection legislation requires that when advertising
such mortgages the banks and building societies set out not only the initial rate of
interest, but also the annual percentage rate (APR). Of course the figure is artificial,
because no one knows what the interest rate will be after the initial period, but
regulations prescribe how the calculation will be made. In September 1990 the County
Trading Standards Officer of Devon County Council came to the conclusion that the APR
being advertised by National Westminster Bank and the Abbey National was not
correctly calculated. In each case it was calculated by treating the initial fixed rate of
interest as though it would be the rate payable for the whole mortgage period, whereas,
according to the Trading Standards Officer, the calculation should have been made on
the basis that the rate of interest after the initial fixed rate period would be the
fluctuating rate being offered by the bank or building society at the outset. Informations
were laid against both financial institutions which were heard in the Plymouth
Magistrates Court. The allegations made against the National Westminster Bank were
found to be proved, but those made against Abbey National were dismissed. Hence
these appeals. National Westminster Bank and Abbey National contend that their
calculations of APR complied with the statutory requirements, or at least that the
criminal offences alleged against them have not been proved. That being the general
nature of this litigation I propose to look first at the relevant statutory provisions, and
then at the case as it has been put against each of the financial institutions, and their
response to it. In that way I should be able to provide answers to the critical questions
posed by the magistrates for our consideration.

[2] Section 20(1) of the Consumer Credit Act 1974 requires the *363 Secretary of State to
make regulations for determining “the true cost to the debtor of the credit provided”.
The regulations are to 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.

Section 44(1) requires the Secretary of State to make regulations as to the form and
content of advertisements, and section 167(2) provides that a person who contravenes
any regulations made under section 44 commits an offence. Section: 46(1) provides:

(1) If an advertisement to which this Part applies conveys information which in a material
respect is false or misleading the advertiser commits an offence.

[3] So already it can be seen that an advertiser can offend in two ways—either by failing
to comply with the advertisement regulations (section 167(1)), or by conveying
information which is in a material respect false or misleading (section 46(1)).

[4] In order to discharge his duty under section 20(1) the Secretary of State made the
Consumer Credit (Total Charge for Credit) Regulations 1980 (S.I. No. 51). Regulation 2 of
those regulations requires that any calculation under the Regulations shall be made on
certain assumptions, the fourth of which is:

(d) In the case of a transaction which provides for variation of the rate or amount of any
item included in the Total Charge for Credit in consequence of the occurrence after the
relevant date of any event, the assumption that the event will not occur: and, in this sub-
paragraph, `event' means an act or omission of the debtor or of the creditor or any other
event (including where the transaction makes provision for variation upon the
continuation of that circumstance) but does not include an event which is certain to
occur and of which the date of occurrence, or the earliest date of occurrence, can be
ascertained at the date of the making of the agreement.

[5] The relevant date is defined by regulation 1 as meaning in most cases, including the
type of cases with which we are concerned, the date of the making of the agreement,
and transaction has a definition which includes any contract for the provision of security
in relation to the agreement.

[6] The central issue in the present case is how the assumption in regulation 2(1)(d)
should be applied when calculating APR in respect of a fixed rate mortgage. It is clear
from regulations 3 and 4 that the total of the interest on the credit which may be
provided under the agreement, determined as at the date of making of the agreement, is
a charge to be included in the calculation of the Total Charge for Credit in relation to the
agreement.

[7] That brings me to the Consumer Credit (Advertisements) Regulations 1989, made by
the Secretary of State as required by *364 section 44(1) of the 1974 Act. They are linked
to the Total Charge for Credit Regulations in that regulation 1(2) of the Advertisement
Regulations specifically provides that the APR means the annual percentage charge for
credit, and that both it and the total charge for credit are to be determined in accordance
with the Total Charge for Credit Regulations and Schedule 3 to the Advertisement
Regulations, which begins:

Schedule 3: Provisions relating to disclosure of the total charge for credit and
the APR

Use of representative information in calculation of the total charge for credit and the
APR.

Where, in the case of an advertisement in relation to credit to be provided under a

consumer credit agreement:

 (a) the amount of any charge required to be included in the total charge
for credit in respect of any transaction within a particular class of
transactions is not ascertainable at the date when the advertisement is
published or differs from the amount which applies in relation to another
transaction within the same class; or
  (b) any other fact required for such calculation is not ascertainable at that
date or is different from a comparable fact in relation to another
transaction within the same class,

there shall be included in the total charge for credit an amount in respect of that charge
which, having regard to the amount and facts which apply to other transactions within
the same class, is representative of the charges which the advertiser might reasonably
expect at the date the advertisement is published would apply in relation to transactions
of the class in question being transactions which he might then reasonably contemplate
he would enter into on or after that date.

If this paragraph is applied in relation to the amount of any charge or to any other fact:

 (a) the sum in the determination of which any such amount or fact is
employed shall not be taken to be the amount of the total charge for
credit; and

 (b) a rate of charge in the determination of which any such amount or fact
is employed shall not be expressed to be the A.P.R.

unless the advertisement either:

 (i) identifies any such amount or fact and quantifies so far as practicable
such amount; or

 (ii) contains an indication that representative amounts have been included

in calculating the total charge for credit.

(3) For the purposes of this paragraph a class of transactions means a class determined
by reference to the subject-matter of the transactions or to the time at which, the
circumstances in which or the persons with whom they are made.

The remainder of Schedule 3 is concerned with tolerances, regulation 2 allowing for small
tolerances in the disclosure of the APR.

[8] For the case against National Westminster Bank I turn to the first information which
shows the allegation to be that contrary to section 46 of the 1974 Act a display notice
which said: “Fixed Rate Mortgage 13·85% A.P.R. 14.90%” was misleading in that the APR
“was at least 16%”. Other informations alleged contraventions of section 167(2) of the Act
but before the magistrates court the parties helpfully agreed *365 that in every case the
issue was whether or not the APR had been correctly calculated in accordance with
regulation 2(1)(d) of the Total Charge for Credit Regulations 1980 (see paragraph 3(b) of
the second case stated). The basic facts were not in dispute. On 26 September 1990 and
5 October 1990 a notice had been displayed by the bank offering a fixed rate mortgage
“of little interest 13.85% A.P.R. 14.90%”. Those attracted were told to: “ask for details”,
and the details were in a bank leaflet which explained that the fixed rate of 13·85 per cent
(APR 14·90 per cent) applied until 31 December 1992, after which the borrower had an
option of a further period at the fixed rate then offered by the bank or of switching to
the bank's normal variable mortgage rate. So in all probability the rate of interest to be
paid by a borrower was going to change on 1 January 1993 when the fixed rate period
came to an end, but it would not do so if by chance the bank's fluctuating rate or a fixed
rate then being offered by the bank happened to be 13·85 per cent. and the borrower
exercised his option in a way which required him to continue paying interest at that rate.

[9] On those facts it is clear that the bank, for the purposes of advertisement literature,
calculated the APR on the basis that the interest rate of 13.85 per cent. would apply
throughout. They say that they did so because they applied the assumption which
regulation 2(1)(d) of the Total Charge for Credit Regulations required them to apply. So I
return to the wording of that regulation. Clearly this was a transaction which provided
for variation of the rate of interest (after the initial fixed rate period), but did it provide
for variation “ in consequence of the occurrence after (the date of the making of the
agreement) of any event (which was) certain to occur and of which the date of
occurrence or the earliest date of occurrence can be ascertained at the date of the
agreement”? In my judgment the answer to that question must be “no” because of the
possibility, albeit remote, that at the end of the fixed rate period the borrower would
continue to pay interest at 13·85 per cent. The end of the fixed rate period was an event
which was certain to occur and of which the date could be ascertained at the outset, but
it was not an event in consequence of which the borrower would necessarily pay a
different rate of interest. Of course the bank might decide not to make available at 1
January 1993 any option which would enable the borrower to continue paying interest at
13·85 per cent. If so such a decision would be an event, but it would not be an event
which was certain to occur, and of which the date of occurrence or the earliest date of
occurrence could be ascertained at the outset. So in my judgment the bank was required
by regulation 2(1)(d) to calculate the APR on the assumption that the event, for example
the change in interest rates, would not occur.

[10] Mr Scrivener for the Trading Standards Officer submits that such an interpretation
thwarts the purpose of consumer legislation, which in this field is intended to require
lenders to advertise their offers in such a way as to enable potential borrowers to make
valid comparisons. He submits, rightly, that if I am right a disreputable *366 lender could
secure an advertising advantage by offering a very low rate of interest for a short fixed-
interest period and calculating his APR on that basis.

[11] But the answer to that submission is, as it seems to me, clear. First of all, when the
tortuous wording of regulation 2(1)(d) is unravelled and applied to the type of
transaction with which we are concerned it eventually becomes clear, as I have
attempted to demonstrate, that the bank's interpretation of that regulation is correct.
Secondly, there are many types of transaction to which the wording of regulation 2(1)(d)
could be applied with a different result (for example, if the low start mortgage provided
for the rate of interest to rise by a fixed percentage after a given period of time). Thirdly,
these are criminal charges, and the prosecution is not entitled to ask this or any other
court to adopt a “purposeful” construction which goes beyond the statutory words.
Furthermore it is worth emphasising that the bank's literature, when considered as it
would be considered by any potential borrower, makes it absolutely plain that there is no
initial certainty as to what the rate of interest will be after the fixed interest period. Had
it not done so it might have contravened section 46(1) which could be used against, the
type of disreputable lender Mr Scrivener had in mind. There might also be other remedies
which I need not explore in the course of this judgment.

[12] Mr Scrivener also invited our attention to a statement by the Council of Mortgage
Lenders which agrees with the Trading Standards Officer as to how the APR should be
calculated, and he asserts, no doubt rightly, that other banks and building societies do
follow the Council of Mortgage Lenders' advice, so that the potential borrower is not
really able to compare one offer with another. But here, as it seems to me, Mr Scrivener
faces a further difficulty, because even if the bank were wrong in its interpretation of
regulation 2(1)(d) there is nothing in the Total Charge for Credit Regulations or in the
Advertisement Regulations which requires the bank to adopt, for the purpose of
calculating APR, what happens to be the bank's fluctuating rate of interest at the time of
advertising, when there is nothing in the proposed mortgage agreement to suggest that
what happens to be the fluctuating interest rate at the time of advertising, will ever
apply. I respectfully agree with Professor Guest who says, in the Encyclopedia of
Consumer Credit 1 that this approach adopted by the Trading Standards Officer in the
present case is erroneous, and that it cannot be justified by reference to the “outset”
principle in regulation 3 of the Total Charge for Credit Regulations.

[13] Of course there is much to be said for Mr Scrivener's objective, namely to enable a
potential borrower easily to compare one offer with another, but if every mortgage
lender is to be required to make the same assumptions in a way that cannot be
circumvented by the disreputable it may be necessary to add to the regulations. It would
*367 appear from the bank's letter of 18 January 1991 that some steps were taken in that
direction a long time ago. I do not know what happened thereafter, but if Mr Scrivener's
objective is to be achieved there is more to be said for amending the regulations than for
prosecuting lenders who, it is conceded, were in good faith seeking to apply the present
regulations as they understood them.

[14] So I conclude that all of the questions posed in each of the four cases stated which
relate to the National Westminster Bank should be answered in the negative. The result is
that the convictions were wrongly recorded and must be quashed.

[15] The case against Abbey National was in most respects the same as the case against
National Westminster Bank. The only important distinctions for present purposes were
that:

 (1) Abbey National borrowers did not have the option of moving to
another fixed rate of interest after the initial period. They had to revert to
the normal fluctuating rate.

 (2) the informations against Abbey National on which the prosecution

elected to proceed alleged only that the Abbey National literature
“conveyed information that in a material respect was misleading, namely
APR 14·85% in that the Annual Percentage rate of the Total Charge for
 Credit for the advertised agreement was at least 16%, contrary to Section
46 of the Consumer Credit Act 1974”. In other words the alleged
contravention of regulations was not relied on as an offence contrary to
section 167(2). The allegation was simply that because there was non-
compliance with the regulations in the calculations of the APR the
literature was misleading.

[16] So the decision in relation to the proper interpretation of regulation 2(1)(d) of the
Total Charge for Credit Regulations is once again critical, and having given my decision in
relation to that issue, I can say at once that in my judgment the two questions posed by
the case stated which relates to Abbey National must be answered in the negative, and
that the Justices were right to decide as they did. But in fairness to the argument
carefully advanced by Mr Beloff, I should indicate that in the alternative he submitted
that:

 (1) schedule 3 of the Advertisement Regulations entitled Abbey National in

compiling an advertisement to use an interest rate for the post fixed rate
period that was representative of the rates that might reasonably be
expected to apply.

 (2) that in any event the advertisement literature was not misleading.

[17] My decision in relation to his principal submissions, which reflected the submissions
made by Mr Walker on behalf of the bank, makes it unnecessary for me to deal with his
alternative submissions, and I do not do so. Suffice it to say that in my judgment so far as
the National Westminster Bank appeal is concerned that appeal should succeed, and the
prosecution's appeal in the Abbey National case should be dismissed.

*368

MACPHERSON J.:

[18] I agree and simply add a footnote in sympathy with those who have to try to
calculate the magic figure of APR. The regulations involved are abstruse and plainly hard
to implement. It would be desirable that those involved in their preparation take another
look at the regulations as my Lord suggested, in order to simplify and spell out that
which government wishes to achieve and the means to achieve it.

[19] Probably 99 per cent of borrowers have no real idea what APR means, let alone what
it represents, and it is surely undesirable that there should be prosecutions of highly
reputable lenders, who in complete good faith set out a figure which, although it may be
wrong, as it has turned out, is less wrong than that which the prosecution argued in the
two cases before us. I see much less basis for the prosecution's chosen calculation in this
case than that used by the lenders. Some further attention to the regulations and the
calculations could avoid such unnecessary prosecutions as these in the future and allow
prosecuting authorities to concentrate on real abuse or disreputable lending which may
be truly misleading.
Appeal allowed.

*369

1. At para. 3.090.