On 2 October 2015 the FCA released its widely-anticipated statement on the payment of redress by financial institutions in relation to the mis-selling of Payment Protection Insurance (“PPI”). The statement also set out the proposed steps the FCA will take in light of the November 2014 Supreme Court decision in Plevin v Paragon Personal Finance Ltd (“Plevin”).
In summary, the FCA plans to publish a consultation this year with respect to imposing a deadline by which consumers would need to make their PPI complaints. It also plans to consult on rules and guidance on fair PPI complaints handling in light of Plevin.
Although PPI mis-selling has been a well-known issue in the financial services industry for some years, the case of Plevin unearthed further issues in relation to PPI sales practices which had the potential to spark a whole new wave of costly claims and redress programmes.
In Plevin, the Supreme Court ruled that a failure to disclose to a borrower that her single premium PPI policy involved commission payments amounting to 71.2% of the premium (a fact of which the borrower was not aware) made the relationship between the lender and the borrower unfair under section 140A of the Consumer Credit Act 1974. These “unfair relationship” provisions confer upon a court a notoriously wide discretion in terms of the type and level of redress it can order.
The Court decided that if the borrower had known that such a large percentage of her premium was being paid as commission, she would not have bought the policy. This case had potentially serious ramifications in relation to PPI sales where a commission had been paid, and there were fears it could be applied more broadly to sales of other products involving undisclosed commissions.
In January 2015, the FCA announced that it would be gathering evidence on PPI complaints to consider whether complaints processes were working effectively, and whether any further intervention was required. This was followed by a further statement in May 2015, in which the FCA announced that it would be considering whether additional rules or guidance were required to deal with the impact of Plevin.
Since then, there has been much speculation about the potential impact of Plevin in the press and a great deal of anticipation about when the FCA would clarify its proposed approach.
Approach to general PPI complaints
In relation to PPI mis-selling complaints generally, the FCA has indicated that it will launch a consultation by the end of the year on the introduction of a deadline by which consumers will need to raise PPI complaints with firms or otherwise lose their right to redress. The FCA has indicated that it will propose a deadline of two years from the date of any new rules, and that it would not expect this deadline to be earlier than Spring 2018.
Alongside this, the FCA also proposes to run a consumer communications campaign, designed to prompt consumers to complain in advance of the deadline.
The FCA indicates that the reason for proposing these measures is that recent trends indicate that a growing proportion of PPI claims are handled through claims management companies, increasing numbers of claims are based on older, “stale” evidence, there are more invalid claims and there is a level of inertia amongst those with potential complaints.
The FCA believes that the intervention proposed will bring certainty and finality to the PPI saga, something which would no doubt be welcomed by the industry.
Proposals in light of Plevin
The FCA will also consult on proposed rules and guidance concerning the fair handling of PPI complaints in cases where the customer paid an undisclosed commission, with such complaints also being subject to the proposed two-year deadline.
The FCA states that its proposed rules and guidance would only apply in cases where full redress was not payable and/or had not already been paid under the FCA’s current PPI complaint handling rules.
The rules would include a presumption that a failure to disclose a commission of 50% or more gave rise to an unfair relationship under section 140A of the Consumer Credit Act 1974 - a relatively high threshold, although the FCA also plans to consult on limited circumstances where the non-disclosure of commission of less than 50% could be regarded as giving rise to an unfair relationship.
Where an unfair relationship is deemed to have arisen, the rules would require the firm to pay redress, to be calculated by reference to the amount by which the commission paid exceeded 50% of the premium paid. Again, this seems fairly generous to firms, although they would also be required to consider whether the particular circumstances of any case meant that they ought to pay more redress.
It is noteworthy that the FCA does not propose to require, and states that it does not expect, firms to proactively review PPI sales, or previously rejected complaints, against the new rules and guidance. Rather, they will only need to address issues on a reactive basis if they receive a complaint.
Firms affected by PPI mis-selling likely will be relieved at the prospect of a line being drawn under the scandal, albeit that they may not feel the benefit for some time, and may first have to deal with a surge of last-minute claims before the deadline.
The FCA’s statement will also provide some comfort to an industry already beleaguered by redress schemes which feared that the FCA could have used Plevin as a means to require firms to conduct further lengthy and costly reviews into their PPI sales.
Under the proposals as detailed, not only would firms not have to undertake proactive redress programmes, but it appears that in most cases they would not be required to pay redress unless the level of commission was very high, and in any event the amount of redress payable in each case will also be reasonably limited.
The statement also provides a potential reprieve to those not involved in PPI sales, but who believed the FCA might have used Plevin to require redress to be paid in respect of other products sold through brokers where undisclosed commissions were paid by customers.