Update: consumer

Payment protection insurance

The British Bankers Association judicial review of the Financial Services Authority and Financial Ombudsman Service approach to payment protection insurance complaints is over with the banking industry choosing not to appeal the decision of Mr Justice Ouseley in the High Court.

The case provides a useful examination of the operation of the regulatory framework. The FSA had sought to take a flexible approach to the way it regulates. The banks were effectively asking the court to support a stricter interpretation of the limits and manner of that regulation.

It is helpful to appreciate that the FSA publishes a handbook that contains 'principles' or general statements of expected conduct in the sale of PPI and also specific rules setting out the manner in which PPI policies can be sold.

The catalyst for the fall out between the parties related to the approach of the FSA and FOS arising from guidance issued in August 2010 by the FSA. That guidance placed much more emphasis on compliance with the principles which could cover much more than the rules. There were three challenges made on behalf of the banks and firms selling PPI.

The first dispute was the treatment of breaches of the 'principles' in the FSA handbook as giving rise to an obligation to pay compensation to customers. This is despite the fact that the FSA had specifically excluded any legal liability '“ in terms of the right of individual customers to pursue a private action '“ arising from a breach of the principles.

The banks argued that when the regulatory framework was established in relation to financial services it was envisaged that guidance such as the principles could be issued which was wide ranging and general. It was not intended that breaches of that type of guidance would give rise to penalties as was now the case.

The counter argument was that although the FSA had specifically excluded the possibility of a breach of the principles giving rise to a private action there is no basis for saying that other actions should be similarly restrained. The Financial Ombudsman for its part has a very broad obligation to consider complaints by reference to what was fair and reasonable.

It was suggested by the judge that a failure to take into account breaches of the principles could in fact amount to a breach of duty on the part of the ombudsman. The point was made on behalf of the ombudsman and the judge accepted that it was important to avoid narrowing the scheme when it was intended to be non-legalistic and flexible.

The closest the banks came to success on this point was by seeking to compare the position with that where a scheme is set up under section 404 of the Financial Services and Markets Act 2000. Such a scheme is designed to provide compensation where the FSA identified fundamental failings in the practice adopted across the sector. The scheme would apply to all customers and not simply those who had made a complaint. Such a scheme is specifically limited to that compensation which would be recoverable through court proceedings.

The court still rejected this argument on the basis that there was a difference between the need for certainty as what might be involved in a wide-ranging scheme under section 404 and the approach on an individual case-by-case basis.

The second argument deployed by the banks was that the existence of detailed specific rules made by the FSA meant that it was inappropriate to treat a breach of the more general principles as giving rise to an entitlement to compensation. Essentially the banks sought to argue that the rules issued by the FSA in relation to the sale of insurance amounted to the entire scheme of regulation. To go beyond the provision of the rules might penalise a bank that had fully complied with a particular rule.

When getting down to the finer detail of this argument it seems that the differences between the BBA and FSA were fairly nuanced. The FSA's position was that in reality the rules did not cover every circumstance that might arise. Therefore where there were gaps the principles provided an overarching approach that was to be expected of insurance sellers.

There is no doubt that the rules do not cover every possible scenario. For example, there is no rule to prevent the sale of a PPI policy to someone whereby the individual circumstances of that customer means the policy is of no benefit to them whatsoever (for example, if they are self employed). The banks suggested that the approach in such circumstances should be that further rules could be issued to deal with the point.

The Financial Ombudsman's approach was slightly different on this point. It was contended that the FOS could find in favour of a customer for breach of the principles where there had been compliance with a specific rule. The FSA's position was that the principles should really only be considered where the rules did not cover a particular set of circumstances.

The court accepted this argument and therefore that the principles provided a general supplement to the specific provisions of the rules. The court was more cautious of the ombudsman's argument and felt that if a firm had complied with a rule there would have to be a very clear explanation of how a breach of the more general principles could give rise to an award of compensation.

The third area of dispute related to guidance issued in August 2010 on 'root-cause analysis'. This was designed to require firms selling of PPI to identify where there had been a fundamental problem with those sales. Where this was identified those customers who had not made a complaint might also be compensated. The FSA indicated that it would be looking for evidence that such an exercise was being undertaken.

The arguments in this area were put forward by Nemo Finance which had joined the proceedings as an interested party. The point was that the FSA's guidance to firms to act on failings identified by a root-cause analysis was in error as the ability to establish a scheme under section 404 was the appropriate way to deal with this. In effect it was wrong of the FSA to try to achieve by way of guidance that which it had the power to achieve by a formal scheme.

It is significant that a section 404 scheme would be limited to compensating those breaches which would give rise to legal liability in the courts. The difference in the approach taken by the FSA and a formal scheme was that the former would only affect those firms that identified systemic failings whereas a scheme would affect a wider pool.

Nemo Finance's argument failed on several grounds. The court was concerned that the FSA should not be more limited in how it might address problems the more serious and deep-seated they became. There was already in place before the August 2010 guidance a requirement for root-cause analysis of complaints to be carried out (and acted upon) by firms. The recent guidance had the effect of increasing the pressure on firms to follow that.

The court held that an alternative approach (such as that adopted) to a section 404 scheme was lawfully available and therefore the FSA was entitled to take that approach. The fact that it might take into account breaches of the principles which such a scheme would not in itself make it an attempt to avoid the procedural regulation of a scheme under section 404.

Ultimately therefore the court dismissed all three grounds of challenge. Given the money at stake in these cases, the banks may feel that they had nothing to lose by trying to limit the potential cost to them of dealing with PPI misselling.

The FSA did clarify the position somewhat before the hearing which will have given the banks some comfort. It has been stated that a breach of one of the more general provisions of guidance will not give rise to an automatic entitlement to compensation in the view of the FSA. It would still be necessary to consider all the circumstances of the case. Despite this, as the banks set aside large funds to deal with anticipated repayments it seems on this issue the pendulum has swung firmly in the direction of the consumer.

Notice of a right to cancel: uncertainty reigns

A decision in Gateshead County Court is at odds with the previous decision of Swansea County Court with regards to how a notice of cancellation is incorporated into a contract under regulation 7 of the Cancellation of Contracts made in a Consumer's Home or Place of Work etc Regulations 2008. Previously under Guerrero v Nykoo (Swansea County Court 25 October 2010) it was held that while the notice of cancellation could be a physically different document it was necessary for the notice to be referred to in the contract itself.

Now in Orley v Viewpoint Housing Association (Gateshead County Court 7 December 2010) an alternative view has been taken. In that case, while the contract did not refer to the notice of cancellation, there were multiple references in the notice itself to the contract. That was deemed sufficient, the court taking a less prescriptive view of the regulations. Put simply, the test was said to be: would a reasonable consumer consider the notice to refer to the contract in question.

These cases both relate to credit agreements in road traffic accident claims with defendant insurers seeking to defeat claims for hire charges. Keep an eye on them as one or the other is likely to find its way higher up the appeal process. In Guerrero the judge was concerned that the lack of reference in the contract itself to the notice to cancel could mean that an unscrupulous dealer might simply withhold the notice to cancel from the consumer. The consumer would not then be alerted to the omission and that does seem to remain an unresolved issue.

Personal injury disbursement funding agreements

A case to watch on behalf of personal injury colleagues is Proddow Mackay v Hampshire Trust PLC [2011] EWHC 536 (Ch). The High Court allowed an appeal against Hampshire Trust's successful summary judgment application. The claimants, a firm of solicitors, had undertaken personal injury litigation which included disbursement funding from the defendant. Part of the agreement between the various parties required the firm to repay the loans to Hampshire Trust or make administrative payments at a certain point. Total payments of over £600,000 were made in the course of the relationship.

The claimants are seeking repayment of that sum on the basis that it had been paid because of a mistake of fact or law following Conister Trust Ltd v John Hardman & Co [2008] EWCA Civ 841.

The key points are whether the agreement between the personal injury clients and Hampshire Trust are exempt agreements under the Consumer Credit Act 1974 and Consumer Credit (Exempt Agreements) Order 1989 '“ so as not to fall foul of the House of Lords well-known ruling in Dimond v Lovell '“ and if not whether the solicitors were still obliged to honour their payment obligations to Hampshire Trust under the separate agreement.

The court held that it was possible that if the agreements with the client were not exempt and thereby unenforceable pursuant to Dimond, then it was arguable that the solicitors did not have to make the payments. Having overturned the earlier summary judgment, everything is still to play for between the parties '“ assuming no settlement is achieved.