Upper Tribunal confirms compensation and validation possible for credit breaches

In its recent decision, the Upper Tribunal drew a distinction between the compensation regime available to consumers under section 28(2) of FSMA and the enforceability of a regulated credit agreement under section 28(3) of FSMA. In doing so, the Upper Tribunal confirmed that the right to apply for compensation exists independently of the right to apply for a validation order.

The Upper Tribunal was asked to determine the lawfulness of a Validation Order made by FCA of certain regulated credit agreements under section 28A, which was entered into by consumers and Barclays Partner Finance (BPF), through an unauthorised and non-exempt broker. s27 FSMA applied to those regulated credit agreements to render them unenforceable and to enable consumers to claim compensation for losses to be suffered in connection with sums paid under those regulated credit agreements. FCA made a Validation Order, under which a remediation scheme was established and implemented, but it did not include a provision for compensation which consumers may claim under s28(2). Following the completion of the remediation scheme, a group of consumers referred the matter back to the Upper Tribunal, contending that the remediation scheme had not addressed the issue of compensation and there were further issues concerning fraud, unlawful activities, criminal offences and failures by both BPF and FCA along with serious regulatory failures surrounding the activities of the broker which had not been fully dealt with (Other Grounds).

The Upper Tribunal did consider that it was highly desirable for the application for a validation order regime to run parallel with the application for compensation regime, to ensure that both decisions work together closely so as to avoid unnecessary delay. Information gathered under one regime could be relevant for an application under the other regime.  However, the Tribunal had no power to determine the compensation issue unless and until FCA had done so.

As regards the Other Grounds, the Upper Tribunal confirmed that it only had to determine the reasonableness of the Validation Order, which had been implemented and completed successfully so it would have been an academic exercise to consider the Other Grounds.

Further, the Upper Tribunal declined to stay the determinations in respect of the Validation Order until the issues concerning the compensation had been determined, because:

  1. a Validation Order does not prevent a consumer from claiming compensation;
  2. BPF and FCA agreed to consider claims for compensation, regardless of the determination concerning the lawfulness of the Validation Order;
  3. the remediation process had been carried out on the basis that regulated credit agreements are unenforceable; and
  4. the remediation process had been carried out and thereby the regulated credit agreements had been cancelled, so the Validation Order had been fulfilled.


Harshil Patel