The decision in the British Bankers' Association's (BBA) and Nemo Personal Finance Ltd's (Nemo) challenge to the Financial Services Authority's (FSA) payment protection insurance (PPI) complaints handling procedure was handed down on 20 April 2011.
Mr Justice Ouseley hearing the judicial review, found in favour of the FSA and the Financial Ombudsman Service (FOS) on all three challenges raised.
The review arose out of the FSA's Policy Statement 10/12 "The assessment and redress of Payment Protection Insurance complaints". This is the FSA's package of measures stemming from its serious concerns about widespread weaknesses in previous PPI selling practices to the detriment of many consumers.
The package includes amendments to the FSA Handbook rules, guidance about how PPI sales complaints should be handled and the basis upon which they should be decided, and an Open Letter identifying what the FSA sees as common failings in the selling of PPI policies. The measures also include guidance on "root cause analysis", a mechanism whereby those who have not yet complained may also receive compensation.
The BBA and Nemo raised three grounds of challenge to the lawfulness of the Policy Statement:
- The Policy Statement treats the FSA's rules, known as Principles, as giving rise to obligations owed by firms to customers, leading to compensation being payable for their breach. This is unlawful because those Principles are not actionable in law as a breach of statutory duty due to the application of s150(2) of the Financial Services and Markets Act 2000 (the Act). They should not be used to advise firms on how they should handle complaints and assess failings or be taken into account in ruling on redress for complaints.
- The FSA has made specific other rules governing the manner in which PPI policies are sold (such as Insurance: Conduct Of Business rules), designed to incorporate the Principles so far as the FSA chose to do so. It was therefore unlawful for the FSA to provide in its Policy Statement that a customer might be entitled to redress by reference to Principles which conflicted with or augmented those specific rules. Where a regulated activity was governed by specific rules the BAA argued that the only obligation of the firm could be to comply with those rules.
- The FSA's Policy Statement was designed to address what it saw as widespread misselling of PPI policies. The Act had prescribed a specific statutory procedure in s404 for dealing with this (the consumer redress scheme) providing for redress for non-complainants, but with safeguards for the firms affected. The FSA's Policy Statement attempted to circumvent s404 with its informal procedure in the Policy Statement on "root cause analysis" and this was unlawful. The Policy Statement provides that where a firm has identified systemic problems it should consider of its own initiative whether it should provide redress to those who had not complained. It also states that failure to deliver fair outcomes following a review (which itself would be monitored) could lead to tough action from the FSA. Nemo argued that this all fell within s404 which the FSA was unlawfully attempting to avoid.
The relevant Principles referred to above mean that a firm must:
- Conduct its business with integrity (Principle 1).
- Conduct its business with due skill, care and diligence (Principle 2).
- Pay due regard to the interests of its customers and treat them fairly (Principle 6).
- Pay due regard to the information needs of its clients, and communicate information to them in a way which is clear, fair and not misleading (Principle 7).
- Take reasonable care to ensure the suitability of its advice and discretionary decisions for any customer who is entitled to rely upon its judgment (Principle 9).
The court's findings
- On the first ground, the judge held that although a breach of a Principle may not be actionable due to the application of s150(2) i.e. it does not give rise to a cause of action in a court of law, it does not mean that breach does not give rise to other obligations as between the firm and the customer. The Principles are still relevant to the Ombudsman's duty to reach a decision as to what is fair and reasonable in all the circumstances of the case and upon what redress should be afforded.
The FOS has a very broad statutory basis for reaching its decisions. The Ombudsman's procedures and the evidence he can admit are not limited to those of a court. The statutory purpose of the scheme is to provide a quick, informal, non-legalistic method of dealing with complaints. The Ombudsman has a broad power to decide what to take into account, including regulators' rules, guidance and standards, good industry practice as well as law and regulations. The Principles are relevant rules that can be taken into account.
- On the second ground, the judge held that the Principles are the overarching framework for regulation and govern the actions of firms as well as covering all those circumstances not provided for by specific rules. They should be seen as the ever present substrata to which specific rules are added. The Principles always have to be complied with and the specific rules do not supplant them and cannot be used to contradict them. They are but specific applications of the Principles to the particular requirements they cover.
There is no reason in principle why the specific obligations in the rules should not be subject to the wider role of the Principles. The specific obligations are not to be seen as exhausting the requirement to comply with the high level Principles. The correct starting point is therefore that the Principles govern the sales activities at all times. The real question is whether there is any reason to interpret a specific rule as excluding the general so that breach of the Principle goes unredressed, even though a specific rule has been complied with.
- On the third ground, the judge accepted that there was evidence of widespread misselling and that consumers had suffered. That was enough for the FSA to have considered applying for a scheme under s404. However, that of itself was not sufficient to deprive the FSA of all powers to act in any other way to deal with misselling claims.
The statutory scheme is a compulsory pro-active industry or sector wide vehicle for a review of past breaches of the rules and the provision of redress for actionable complaints. The root cause mechanism in the FSA Handbook does not have universal compulsion. It is aimed at looking at the depth and range of systemic or recurrent faults within a particular firm (although there may be many firms caught by the provisions) bearing in mind the Principles. Firms have to consider compensation to non-complainants in respect of failings but the payment of compensation to non-complainants is not compulsory, but merely guidance. It is only those firms which themselves identify systemic or recurrent problems which are advised to take further steps. The guidance as to how to undertake such an analysis is not a compulsory scheme.
S404 does not exclude what the FSA has done and the fact that a large number of firms in a sector may need to carry out a review does not make it unlawful. Although there are similarities in scope and aim, the judge did not regard the measures in the Policy Statement, taken as a whole, as a device or evasion of the protective requirements of s404 and thus forbidden by it.
The court therefore rejected all three grounds of challenge. The BBA and Nemo have 21 days to appeal this decision.
It is clear from the comments made by the judge that the FOS has a very broad statutory basis for reaching its decisions based upon what it considers fair and reasonable in all the circumstances of the case. Consideration of the Principles is paramount.
It is only those whose sales show systemic problems on their own analysis who have to take remedial steps, not all sellers of PPI insurance. However it is envisaged that the number of complaints made will substantially increase given this judgment. The FSA has estimated that the costs that might be incurred by the industry over five years in relation to complaints handling is between £0.8 billion and £1.3 billion, with the wider costs of the package ranging between £1.1 billion and £3.2 billion. It estimates that there are between 3.8 million and 11.3 million non-complainant customers who might be contacted and a number of intermediaries might fail, at a cost to the compensation scheme of about £35 million.