The High Court has handed down its judgment on the regulatory environment surrounding the sale of timeshares. FOS receives many complaints about misselling of fractional ownership of timeshares and selected two cases to consider. In each case, it determined that the package had been missold and that the contractual arrangements, including the associated loan, should be unwound. The lenders in each case brought judicial review proceedings that focus on an error of law. They sought declaratory judgments on an issue by issue basis, and a quashing of the individual decisions.
FOS, and the Court, needed to consider:
- whether the underlying arrangements were “timeshare contracts” for the purposes of the Timeshare Regulations, because if they were not, then they could not benefit from the timeshare exemption in the CIS Order. On the facts of the particular case, FOS found that fractional ownership arrangements were not timeshare contracts, were CISs and that their “operator” was not FCA authorised and was acting in breach of the general prohibition and the restriction on the promotion of CIS. It went on to say that if the operator had not been acting in breach of FSMA, it would not have arranged the loan and the complainants would not have taken on the financial burden under either their agreement with the operator nor the lender. As a result, the FOS said a court would be likely to find this created an unfair debtor-creditor relationship under the CCA. It followed that the lender’s decision to turn down the customers’ claim under s140A CCA was not fair or reasonable. The Court said that any fractional ownership timeshare agreement could fairly be described as a composite or hybrid product. It also said the definition in the Timeshare Regulations is “inclusive” such that so long as a contract includes the periodic holiday accommodation elements required, then it is a timeshare contract whatever else it may also include. The Court recognised that the Ombudsman had tried to look at the value and risk issues to the consumers. In the first case before the Court, the consumers had effectively been offered an upgrade on an existing arrangement, such that they already had the timeshare element, so what they were getting with the upgrade was not that. The Court understood the Ombudsman’s thinking but ultimately held the Ombudsman had erred in law in holding the contract was not a timeshare contract. It was a timeshare contract and, because the meaning of the term is both wide and exclusive, it could not therefore be a CIS;
- however, the Ombudsman in the second case had not considered the relevant contract to be a timeshare, and in the first had proceeded also on an alternative argument that it was not, and both Ombudsmen had found that Regulation 14(3) of the Timeshare Regulations, which states that a trader must not market or sell a contract as an “investment” if it would be a “regulated contract”, had been breached. All parties agreed that “investment” in this sense should be understood to mean a transaction in which money or other property is laid out in the expectation or hope of financial gain or profit. In the first case, which was challenged, the Ombudsman had accepted that it could have been possible to sell the contract without breaching this Regulation, but that in fact there had been a breach. The Court could not in this case find the Ombudsman had erred in law;
- whether the timeshare operator had provided the required information. The Court noted that in both cases the Ombudsman had clearly appreciated the inherent riskiness of the scheme and looked to see whether an information breach could be identified. It seemed, ultimately, that the Ombudsmen were trying to “break new ground2 for disclosure requirements rather than identifying the relevant operators as outlying non-compliers;
- the responsibility of lenders for the acts and omissions of the timeshare companies (CCA ss 56, 140A and 140B): the lenders had provided restricted-use credit agreements to finance transaction between the consumer and the timeshare company. They had done so in the context of a pre-existing relationship with the timeshare companies, so the agreements were also debtor-credit0r-supplier agreements. s56 CCA creates a form of deemed statutory agency such that negotiations between the timeshare company and consumers would be deemed to be conducted by the timeshare company in its own capacity and also as agent of the loan provider. As a result, any act or omission by the timeshare company would be relevant in a consideration of whether there was an unfair relationship. Both Ombudsmen held the relevant bank responsible as deemed agent, and made findings of unfair debtor-creditor relationships. The Court considered a challenge that the banks did not and could not owe the regulatory duties the timeshare companies had, so had extended the statutory deemed agency further than actual agency could have gone. The Court considered many previous cases, but concluded that there was no error of law in the Ombudsmen’s approach – they found no support for a proposition that the deemed agency is limited where there is actual or potential “identity of liability” in relation to the regulatory obligations of lender and seller;
- whether, therefore, the relationships were unfair: the challenges were on how the Ombudsmen had construed various terms – and whether they had applied the meaning most unfavourable to the consumer, which would not reasonably have actually been the case. While the Court made various observations about certain statements the FOS decisions had included, it had “no hesitation” in concluding the remedies the Ombudsmen provided were within the range of decisions a court could properly have made on the facts. The mis-selling was properly capable of being regarded as a fundamental vitiation of the fairness of the whole arrangement, for which the only fair and reasonable outcome for the consumer would be to unwind the contact. So there was no error of law on the part of the Ombudsmen.
In conclusion, neither Ombudsman had erred in law on the challenges to the construction of the information requirements in the Timeshare Regulations, the extent of the deemed agency provisions in the CCA or the application of the unfair relationship provisions of the CCA. While there were some errors, these did not mean the ultimate determinations were unreasonable, and the Court dismissed the claims for judicial review.