According to some sources (which I’ll come to in a moment or two), Monday January 15 is “blue Monday”, a day said to be “the most depressing of the year”. The concept was apparently thought up by a UK travel agent decades ago, although that is debated and there’s even a formula to work out when the date may apply.

Part of that formula, which appears on Wikipedia, references debt levels and that is where this article takes up the running.

Mental health and its relationship with debt is a topic that has been growing in the public and professional conscience for some time. However, most of that discussion has justifiably centred around consumer credit, payday loans and personal finances. But in a broader financial markets’ context, mental health as a trigger – and a consequence – of personal liability may not be as well understood.

October 10 marked World Mental Health Day and there is now a greater awareness and understanding in many areas of society about mental health than ever before. The UK government’s introduction of mental health debt respite legislation and its concept of “breathing spaces” perhaps reflects burgeoning enlightenment in the world of finance, some of which is discussed below but will be explored in more detail in part two in this series of insights.

Mental health triggers in finance contracts

Lending contracts often include provisions that trigger a default if certain conditions are met. These conditions, known as “events of default”, include a wide range of scenarios, from missed payments to insolvency. However, the inclusion of mental health-related triggers and any consequent enforcement action raises significant ethical and legal questions.

Legal and ethical considerations

The use of mental health triggers in lending contracts intersects with various legal and ethical considerations, including discrimination law, privacy issues, and the need for sensitive handling of mental health crises.

Aside from the clear moral imperative to ensure customers with mental health issues are treated fairly (and have the same level of access to financial services as others who do not suffer from such conditions), individuals may have legal redress.

Can discrimination and mental health law concepts help?

This is an extremely complex area and, at first look, there may be obvious synergies or legal concepts in areas of discrimination/equality and employment law where protections exist for individuals with protected characteristics, including disability. It is illegal for a financial service provider to treat a customer differently because of a disability, for example (see section 29, Equality Act 2010).

Mental health conditions can be classified as disabilities in this context, meaning that any contractual provisions that disadvantage individuals with mental health issues could be deemed discriminatory. However, the use of such protective legislation (and other industry standards) for vulnerable people is not straightforward.

Any individual with a protected characteristic who has suffered discrimination arising from a failure by a lender to make reasonable adjustments or that has adopted a practice which indirectly discriminates against that individual (or both) can issue proceedings in the county court and seek remedies including payment of damages or injunctive relief.

The Equality and Human Rights Commission may also launch an investigation into any financial service provider if it is put on notice of potential breaches of the Equality Act. Banks may be particularly vulnerable in this regard due to their high profile.

Finance documents default triggers have been known to refer to the Mental Health Act 1983 definition of a mental disorder as “any disorder or disability of the mind” encompassing conditions such as depression, bipolar disorder, and schizophrenia alongside developmental disorders (such as autism spectrum disorders), personality disorders and other conditions affecting the mind, such as severe anxiety or obsessive-compulsive disorder.

Generally, the terminology where it is used in finance documents to refer to mental health or capacity is archaic. With a greater understanding of these conditions and challenges, legal references to being of “unsound mind” or “incompetence” for example should be avoided.

Regulatory oversight and mental capacity

CONC 2.10 of the FCA Handbook provides guidance on how lenders should approach mental health in the context of lending agreements and their enforcement, ensuring they act responsibly and ethically when dealing with customers who are vulnerable, including those who may have mental health challenges.

Lenders must assess a customer’s mental capacity to make informed decisions about borrowing (or providing credit support). This includes understanding, remembering, and weighing up relevant information.

While lenders may assume a customer has mental capacity unless there is reasonable evidence or suspicion to the contrary, if a lender suspects a customer has a mental capacity limitation, they must take reasonable steps to assist the customer in making a decision before concluding they lack capacity.

Mental capacity limitations (at least as seen through the lens of a lender) can arise from various conditions, including depression and anxiety-based mental health challenges, dementia, learning disabilities, developmental disorders, neurological disabilities, or substance intoxication.

Mental capacity and vulnerability may also change during the lifespan of a financing arrangement.

Lenders are expected to treat customers fairly, considering their individual circumstances and ensuring that vulnerable customers are not disadvantaged.

The Financial Ombudsman Service is empowered to look at complaints involving discrimination, vulnerability and ensuring customers are treated fairly and may, among other remedies, require financial business to pay compensation.

Privacy concerns

Provisions that require parties to disclose their mental health status can raise significant privacy concerns. Such requirements may infringe on individuals’ rights to privacy and could deter them from seeking necessary mental health support. The acquisition and retention of highly personal categories of data by creditors or their agents also requires a high degree of legal compliance, which is outside the scope of this article.

Lending standards

The Lending Standards Board has published guidance and policy documents considering how lenders should approach lending and enforcement decisions, particularly concerning customers with mental health challenges.

• Identification and support: Lenders are encouraged to identify customers who may be experiencing mental health issues and provide appropriate support. This includes training staff to recognise signs of vulnerability and ensuring they have the skills to handle such situations sensitively.
• Communication: Communication with customers should be clear, empathetic, and tailored to their needs. This might involve using simpler language, offering different communication channels, or allowing more time for customers to respond.
• Debt management: When dealing with debt, lenders should consider the customer’s mental health condition. This includes avoiding aggressive collection tactics and considering alternative repayment plans that are manageable for the customer.
• Exclusion from debt sales: Customers with ongoing mental or critical illnesses should be excluded from debt outsourcing and sales, recognising the additional stress and potential harm this could cause.

Recent legal developments

Case law and comparatively-new debt respite legislation provide some guidance on how mental health issues should be handled in the context of debt and lending; helping to shape how mental health issues are addressed in finance contracts and their enforcement.

Principally the debt respite legislation, which came into force in 2021, essentially provides a degree of forbearance to personal debtors experiencing a mental health crisis, allowing individuals time to seek help and stabilise their situation during such time as they are receiving treatment as certified by a mental health professional (known as a “breathing space” moratorium). However, it is not a payment holiday and the liabilities continue to accrue. 

The legislation and the way it has been used and applied by the courts since 2021 is not without its issues, and this will be explored in more detail part two.

Additionally to the legislation, courts are increasingly recognising the need to consider the mental health of borrowers, third party security providers and guarantors (Obligors) when making decisions about debt enforcement and relief.

Addressing creditors’ concerns

While it is essential to protect Obligors with mental health challenges, it is also important to address the legitimate concerns of creditors. Lenders need to balance their need to manage risk with the need to treat Obligors fairly and sensitively.

Calibrating default provisions

One approach is to calibrate default provisions in finance documents so that mental health issues are not automatic triggers for default. Instead, these provisions could serve as early warnings, prompting lenders to engage with Obligors (or their representatives) and explore alternative solutions, such as debt restructuring.

Sensitive debt restructuring

Sensitive debt restructuring can provide a more compassionate approach to managing debt for individuals with mental health issues. This might involve extending repayment terms, reducing interest rates, or temporarily suspending payments to allow Obligors time to recover.

Specific mental health conditions

Mental health issues are extremely complex and should not be homogenised or conflated. Different conditions will require different approaches by creditors. For example, dementia and depression (even in their broadest clinical sense) each present distinct challenges and will necessitate different types of support and intervention for the individual.

In cases of dementia, it may not be reasonable or appropriate for a Receiver to be appointed (for example) if a borrower is “incapable by reason of mental incapacity from managing their affairs”, particularly if the borrower is not in arrears or is otherwise meeting their obligations. It may be that lasting powers of attorney can be invoked to manage the financial affairs of individuals who are no longer capable of doing so themselves. This helps to ensure that their financial obligations are met without causing them undue stress or hardship.

For individuals experiencing depressive episodes, post-traumatic stress or anxiety, temporary relief from debt obligations and access to mental health support can be crucial. Indeed, those suffering serious mental health conditions often find their condition exacerbated by debt. As such lenders should be prepared to offer flexible solutions that accommodate the fluctuating nature of particular mental health conditions, backed by clinical assessment.

A bespoke approach

The broader context of lending and mental health includes considerations of different types of loans and Obligors. Personal loans for everyday expenses, cars or even mortgages will likely require different handling by creditors compared to loans for high-net-worth individuals or personal guarantees provided by company directors.

Personal loans and mortgages

For personal or consumer loans, particularly those for essential expenses like vehicles or home repairs and mortgages, lenders should prioritise compassionate and flexible approaches. This will likely include offering payment holidays or reduced payments during periods of mental health crisis.

High-net-worth individuals and directors

For high-net-worth individuals or those with significant business interests, assets and financial sophistication, the stakes can be higher, and the arrangements more complex. In these cases, bespoke solutions that consider the relevant individual’s (and any related persons and entities) overall financial situation and mental health are necessary.

Directors and officers may experience debt-related stress and anxiety, particularly where “business-to-business” lending is supported by personal guarantees or security linked to personal liability in the event of any subsequent insolvency. In such circumstances, lenders should not disregard the mental health implications of enforcement action, even over business assets.

Conclusion

The use of mental health triggers in lending contracts is a nuanced issue that requires careful consideration of legal, ethical, and practical factors. By balancing the needs of obligors and creditors, and by adopting compassionate and flexible approaches, it is possible to create a more equitable and supportive financial system. As awareness of mental health issues continues to grow, so too must our efforts to ensure that lending policies and practice do not exacerbate these challenges but instead contribute to the well-being of all individuals.

The author would like to thank Dr Geoff Isaacs, a visiting consultant psychiatrist at Priory Hospital North London for his assistance with this article.