Background

On 9 May 2011, the British Bankers’ Association (BBA) announced that it would not appeal the decision of the High Court in R (on the application of British Bankers’ Association) v The Financial Services Authority & The Financial Ombudsman Service in relation to PPI misselling.1 This announcement followed on the heels of similar announcements by Lloyds Banking Group and Barclays and signalled the end of what had been high-profile judicial review proceedings.

The proceedings pursued by the BBA had challenged the lawfulness of an August 2010 Financial Services Authority (FSA) “Policy Statement” 10/12, which set out a package of measures arising out of its “serious concerns about widespread weaknesses in previous PPI selling practices.” The BBA did not disagree fundamentally with the FSA’s concerns. Rather, it challenged the suggestion that “Principles” set out in the Policy Statement were themselves actionable in law, and considered that the FSA’s own rules conflicted with what had been set out in the Statement. On 20 April 2011, however, Mr. Justice Ouseley held that the Policy Statement was valid and that the Banks had to adopt the FSA’s guidelines (including their retrospective application).

Immediately following the announcement that an appeal would not be pursued, a number of financial institutions announced the establishment of significant reserves in respect of potential liabilities to customers. Estimates of the financial cost to financial institutions vary significantly, but a mid-range of £4.5 to £5 billion has been reported.

PPI Insurance

Payment Protection Insurance (PPI) policies are designed to provide a borrower with the means to repay a loan in the event that he or she no longer receives a salary due to accident, sickness or unemployment. The typical policy pays for a fixed period of time (e.g., 12 to 24 months) and some policies pay only after a waiting period (e.g., 1 to 2 months) or only a proportion of the monthly payments required under the loan.

Well before the FSA issued its Policy Statement, there had been a history of complaints about such policies (in particular “single premium” PPI). In excess of 1.5 million complaints were made about PPI after the FSA took over regulation of it in 2005. There were various grounds for complaint, although most related to the manner in which the PPI policies were sold to individual customers. Thus, for example, there were complaints that borrowers were led to believe that purchase of a policy was compulsory and many other instances in which policies were sold to individuals who could not possibly make claims due to exclusions and limitations in the policy wording.

The FSA

Although the FSA had occasionally been criticised in connection with its response to PPI mis-selling, it had taken significant enforcement actions against a variety of lenders, having imposed fines of £10.26 million in 2008 alone, including one fine of £7 million against a UK building society.

In February 2009, the FSA asked firms to stop selling single premium PPI in connection with unsecured personal loans. By the time its August 2010 Policy Statement was published, the FSA was in a position to list clear examples of common failings that had been identified in its review of PPI sales. It also included guidance regarding a “root cause analysis,” which relevant firms were requested to undertake, covering among other matters an assessment of whether customers who had not (yet) brought complaints might also be entitled to compensation.

Significantly, the FSA did not suggest that PPI as such was a flawed product. Its criticism was directed at how it had been sold to customers, an approach which, it appears to be accepted, must involve consideration of the individual circumstances of the clients to whom such policies were sold.

As a result of the BBA’s May 2011 climb-down, financial institutions will undoubtedly consider the possibility of an indemnity from insurers to defray the cost of compensation to customers who are determined to have been victims of mis-selling. The institutions are being closely scrutinised by the FSA and the press to ensure that speedy payments are made to customers. On 13 June 2011, for instance, Barclays announced that it would compensate all customers who complained prior to 20 April 2011. The payments would be on a “no questions asked” basis and as a “gesture of goodwill”, and would comprise all premiums paid together with interest. (In a statement the following day, Lloyds Bank apologised for its role but confirmed that it would not automatically refund those whose claims were on hold.) The FSA is highly likely to carry out threats to impose fines for late payments.

Also on 13 June 2011, the FSA agreed temporary arrangements for Lloyds and the Royal Bank of Scotland (as well as Barclays) to extend the time periods for dealing with the backlog, to ensure that complaints are handled properly. However, the deadlines are being closely monitored, and one can imagine a number of issues that might arise in connection with claims under common financial institution professional indemnity policies, including notification and aggregation of losses. Insurers may also question whether they are obliged to indemnify institutions which are merely returning monies received that they should never have had – i.e., whether there has been a “loss” at all. These are difficult issues. As ever, the starting point for any analysis regarding the recoverability of losses sustained by financial institutions will be the specific terms and conditions of the policies at issue. That said, some general observations can safely be advanced.

Notification

The appropriate notification of claims or of circumstances that may lead to future claims has been the subject of significant judicial consideration, most recently in HLB Kidsons v Lloyd’s Underwriters & Ors.2 It is likely that many insureds have, at the very least, notified circumstances which might in the future result in claims to their respective professional indemnity insurers. However, questions may arise under specific policies as to whether the previously given notifications were, in particular, wide enough to encompass the now broader requirements to review all PPI sales, including sales to customers who have not made a complaint. In other words, is the broader review a separate circumstance that must be notified under the relevant policy?

Irrespective of whether an insured has provided notice of a circumstance or, indeed, of claim(s), it is likely that individual payments made to customers will not exceed the deductibles of most policies. The obvious question that will arise is whether those individual claims can be aggregated so as to breach the policy deductible.

English courts have on several occasions been called upon to determine just such questions in the context of pensions misselling, where the question of policy response was determined by reference to the nature of the aggregation wording used in the policies at issue. Specifically, aggregation was permitted where the language of the policy focused on the “cause” (or “originating cause”) of the losses sustained. By contrast, in another key decision, “event” or “occurrence” based aggregation language precluded recovery. It is worth having examples of both in mind when approaching the inevitable question of aggregation in the context of the mis-selling of PPI.

The policy in Countrywide Assured Group v D J Marshall & Others3 defined “any claim” as “one occurrence or all occurrences of a series consequent upon or attributable to one source or original cause”. The limit of indemnity in that policy was £1 million for any one pension claim. The Court held that the use of the word “originating cause” entitled one to see if there was a unifying factor in the history of the claims. On the assumed facts in Countrywide, it was a lack of proper training. Although the Court also reached a conclusion that the losses could justifiably be described as a “series” by reference to analysis that may no longer be viable in the light of the subsequent holding by the House of Lords discussed below, the use of broad originating cause language permitted the insured in that case to aggregate individual claims of mis-selling which it likely would not have been able to do had a narrower event or occurrence based wording been used.

In Lloyds TSB General Insurance Holdings v Lloyds Bank Group Insurance Company Limited,4 the House of Lords determined whether certain Lloyds TSB companies were entitled to recover from their insurers in respect of compensation paid to individuals under a mandated review of pensions mis-selling. Approximately 22,000 policyholders claimed compensation from various Lloyds TSB companies for losses suffered. No single claim exceeded £35,000, but the Lloyds TSB companies paid out in excess of £125 million. The policy included a £1 million deductible for each and every claim which meant that aggregation was essential in order for the policy in practice to respond. The relevant aggregation clause provided:

“[If] a series of third party claims shall result from any single act or omission (or related series of acts or omissions) then, irrespective of the total number of claims, all such third party claims shall be considered to be a single third party claim . . .”

The House of Lords concluded that there had to be a common causal relationship between the acts or omissions and the third party claims. The acts or omissions could be deemed a related series only if together they resulted in each of the claims. The Insured was found unable to aggregate and therefore the policy did not respond.

As firms consider their ability to recover under their own insurance in respect of PPI mis-selling claims, there will undoubtedly be further opportunity to debate the ability to aggregate individual claims. The usefulness of particular policy language will again be tested.