The “collection charge” is unlawful as it constitutes a contingency fee (taking a percentage of “winnings”) which is forbidden for contentious work in the UK. It is legal in US where HFC originated. An extract from the solicitors rules, forbidding contingency fees:
The bank/solicitors might argue that the charges are only unlawful when proceedings are issued. However this is not the case. The contract between them is unlawful because it breaches the Solicitors Act 1974 s.59 of which states:
“59 Contentious business agreements….
(2) Nothing in this section or in sections 60 to 63 shall give validity to—
(a) any purchase by a solicitor of the interest, or any part of the interest, of his client in any action, suit or other contentious proceeding; or
(b) any agreement by which a solicitor retained or employed to prosecute any action, suit or other contentious proceeding, stipulates for payment only in the event of success in that action, suit or proceeding; ….“
Since the charges are based on an unlawful contract, they are unlawful.
The charges are also in breach of the indemnity principle on costs:
“The principle is simply that costs are normally to be paid in compensation for what the receiving party has or is obliged himself to pay. They are not punitive and should not enable the receiving party to make a profit.” (Lord Justice May)
Since the bank is not obliged to pay anything by virtue of their contract with the solicitors that is quite some profit.
Besides the illegality of the contingency fees the solicitors also breach the rules by writing to the debtor claiming that the collection charge is due. This extract from the Solicitors Code of Conduct (11.7 & 11.8) shows that this is not allowed:
Besides being illegal the charges are in breach of the Office of Fair Trading Guidelines on debt recovery. This in itself does not make them illegal but it does create an unfair relationship which can be challenged under the Consumer Credit Act 1974.
The provisions of this new act, due to the Jackson reforms, are due to come into force in April. It should not be assumed that the introduction of Damages Based Agreements (contingency fees) will dilute the seriousness of the practice over many years of HSBC and their solicitors, or make them retrospectively lawful.
The new provisions do not allow for claimants’ solicitors to front load the percentage of damages which may be payable on success , thereby inflating the claim. This means on a debt of £10,000 the solicitors, on the basis of a 16.4% fee will recover £1,640 and the client will receive £8,360. The fact remains that HSBC’s arrangement with it’s solicitors has been unlawful for many years, and would have been so even under the new reforms, especially as there was no “damages based agreement” in force or any other contractual provision for the charges to be added.