Payment Protection Insurance (PPI) mis-selling has been a huge issue for firms. Not only has it damaged public trust and confidence but it has also been an enormous drain on resources with firms handling over 18.4 million PPI complaints and paying out over 26 billion in redress since 2011. Firms will therefore welcome the news that the Financial Conduct Authority (FCA) has finally completed its lengthy consultation on the future conduct of such claims and has published final rules and guidance. Importantly it has concluded that the PPI issue must be brought to an orderly close by imposing a two year deadline on consumers within which they must make their claims or lose their right to have them assessed by firms or by the Financial Ombudsman Service.
Why were new rules and guidance needed?
Rules and guidance on the handling of PPI complaints have been in force since December 2010 but consumer bodies have been lobbying the FCA asking for more to be done to help consumers understand the potential issues and complain if dissatisfied. Firms themselves have also expressed concerns about the dubious practices of some Claims Management Companies (CMCs) which have resulted in valuable resource and time being wasted on dealing with speculative and poorly evidenced claims.
Also, in 2014, the Supreme Court handed down a significant judgment in Plevin v Paragon Personal Finance Ltd  UKSC 61. This decided that despite there being no regulatory requirement for firms to disclose commission paid to a lender or intermediary out of a PPI premium, there could come a tipping point where the commission paid became so large that non-disclosure could (depending on all other circumstances) render the lender's relationship with the consumer unfair under s.140A of the Consumer Credit Act 1974 (CCA). The court did not indicate exactly where that tipping point lay other than ruling that in Mrs Plevin's case nondisclosure of commission which equated to 71.8% of the premium was "beyond the tipping point". Her case was remitted to the County Court for that court to decide what relief if any should be granted, taking into account all the individual circumstances and specific facts of her case. The decision led to fears that there would be uncertainty and inconsistency in how non-disclosure of commission complaints would be handled by County Courts.
Against that backdrop the FCA has been consulting on a package of measures designed to improve firms' handling of PPI complaints since November 2015.
What do the final rules and guidance say?
The final rules and guidance provide for:
A new rule which will require consumers to make PPI complaints within a two year deadline or lose their right to have them assessed by firms or the Financial Ombudsman Service. This rule will come into force on 29 August 2017 with the deadline falling on 29 August 2019;
An FCA led communications campaign designed to inform consumers of the deadline. This will start on 29 August 2017. The estimated cost of this is 42.2 million which the FCA will recover by a fee levied on the 18 firms which have generated the most PPI complaints. The first half of the fee will be collected on 30 April 2017;
New rules and guidance on the handling of PPI complaints in light of the Supreme Court's decision in Plevin which will come into force on 29 August 2017.
The new rules and guidance on Plevin
The final rules and guidance provide that when a firm is assessing a complaint in respect of a PPI policy covering a credit agreement under s.140 of the CCA it should presume that a failure to disclose a commission and anticipated profit share which together amount to more than 50% of the total amount paid for the policy does give rise to an unfair relationship.
In such cases the firm should offer redress amounting to:
The amount of commission plus an amount representing the actual value of any payment(s) made in respect of the PPI policy under profit share agreements expressed as a percentage of the premium, less 50%. (So, for example, if 70% of the premium comprised commission and profit share, the difference between that percentage and 50% would be 20%); and
Historic interest the customer paid on that portion (i.e. the interest paid, in this example, on the 20%); plus
Annual simple interest on the sum of the two points above.
How do the final rules and guidance differ from past proposals?
There are four main points to note:
1.When the FCA originally looked at the issue of nondisclosure it focussed solely on non-disclosure of commission. Following its last round of consultation it has concluded that "profit share" arrangements should also be taken into account. Such arrangements typically
entitle firms to receive back some PPI premium money which has gone to the insurer but is not ultimately used to cover claims on policies but often this is on an aggregate non-customer specific basis varying across different time periods and depending on which insurer was involved. Non-disclosure of any anticipated profit share sums must now be taken into account, where possible, as well as non-disclosure of commission, both in terms of identifying whether an unfair relationship exists and in respect of any redress that is then due to the customer.
2.The FCA was mindful that there are customers who may have previously made PPI complaints which were rejected but who may now be eligible to make a further complaint in light of Plevin. It estimated that around 1.2 million customers fall into that category. It is now requiring firms to identify such customers and write to them explaining this.
3.The original rules and guidance on the handling of PPI complaints in the light of Plevin were anticipated to come into force by the end of March 2017. This has been pushed back to 29 August 2017 giving firms more time to prepare.
4.The FCA has clarified that the deadline rule will not apply to future complaints which concern a rejected claim on a live PPI policy, if the claim was rejected for reasons connected to the sale, such as ineligibility, exclusions or limitations.
The change to the Plevin rules and guidance to include profit share will complicate the way in which claims need to be evaluated and how redress is calculated. It will also lead to an increase in the number of cases where an unfair relationship is presumed and where redress will need to be paid. In the short term there is also likely to be a spike in marketing activity by CMCs leading to increased volumes of claims. Firms will have to dedicate considerable resource to dealing with this but will now have five months to prepare. Overall, firms will pleased that the FCA has remained committed to introducing the two year deadline rule and has not extended the deadline further. Although the consumer campaign costs are high, an overall reduction in uncertainty about PPI liabilities may lead to a reduction in firms' long term weighted cost of capital. The rules and guidance should help firms bring the PPI issue to an orderly conclusion.
Is this the last chapter?
Not everyone has welcomed the final rules and guidance. CMCs in particular have been outspoken in their opposition suggesting that the FCA's move to introduce a deadline for claims without requiring firms to embark on a full letter writing campaign is legally unsound. One newspaper report suggests that one CMC, "We Fight any Claim", has actually launched a judicial review of the FCA's decision to introduce a time bar but we have not been able to substantiate whether that is indeed the case. Given that the threat of judicial review has been mooted a number of times in the past, the FCA has been on notice and will surely have taken legal advice on the point before publishing its final policy statement to make sure any challenge can be resisted. However, time will tell....