Overview of PPI Litigation

Mis-selling PPI may involve tricking a consumer into purchasing single premium  PPI when they did not want it or against their will, pressurising consumers into taking PPI, or selling PPI which is unsuitable for the Insured’s demands and needs or which is unnecessarily expensive (which is another aspect of suitability).

After the 14^th January 2005 sales of insurance were regulated by the FSA and the Rules it made under the Financial Markets and Services Act 2000. The relevant rules from 14.01.05 until 06.01.08 were the Insurance: Conduct of Business Rules (ICOB). After 06.01.08 the Rules were revised and the Insurance: Conduct of Business Sourcebook (ICOBS) was published. To access these rules visit the FSA web site. Links to ICOB and ICOBS appear in the Links Section of this website.

Many banks and financial institutions have been fined by the FSA for breach of ICOB. A link to the records of fines appears in the links page.  They are worth reading to understand how the banks and finance companies have been mis-selling PPI and why the FSA intervened.

There are three layers of regulation within the FMSA, Principle, Rule and Guidance. Private individuals may not sue for breach of principles (Only the FSA can do that).  By section 150 of the FMSA an action for damages can be brought for breach of a Rule. There is no remedy for breach of Guidance.  In ICOB the rules are followed by a capital ‘R’, e.g. 4.2.1R

Before 14^th January 2005 the industry was self regulated. Most insurers belonged to the General Insurance Services Council (“GISC”). Its Private Code regulated private sales. The content of GISC more or less mirrors the FSA regulations in less detail (but possibly with greater clarity).

If a lender or insurer is a member of GISC then compliance with the Code will be an implied term. If not, it will be viewed as industry standard, and will be good evidence for a claim for breach of an implied term that PPI would be sold with reasonable care and skill or negligence.  This is not yet accepted by the Banks and is yet to be tested in actual litigation although what is stated represents the current view of the FOS.

Misrepresentation is also a relevant cause of action in respect of all financial mis-selling – primarily on the basis of partial non disclosure. Negligence in the sense of negligent mis-statement is plainly relevant too. As to negligence properly so called, there is a debate at the moment whether there is a duty of care owed by lenders to customers but negligence as a cause of action is currently being pleaded also. The forthcoming test cases before HH Judge Waksman this summer should provide some answers.

If financial mis-selling can be proved damages may amount to the return of PPI instalments already paid with interest at contract rate from the date they were paid until the date of repayment.  There is much debate as to whether this should be paid or may be set off against arrears.

Brokers

If the PPI is sold by a broker the lender bears no liability for the mis-selling unless the credit agreement is regulated. In the case of a regulated agreement Section 56 of the Consumer Credit Act will often make the lender liable for antecedent negotiations by the broker.

Always check the Broker is solvent – a lot have liquidated to avoid these claims.

A spin off of PPI litigation may arise where the lender has paid the broker a commission which has not been declared either as to existence (secret commission) or as to amount (undisclosed commission). Because a broker owes a fiduciary duty to a borrower (arising from the relationship of principal and agent) the broker should pay the commission to the borrower if the borrow did not give informed consent to the broker to receive it.

If the broker is in liquidation an action may be brought against the lender who paid the commission for procuring the broker’s breach of fiduciary duty.  There is no fiduciary duty owed by the lender direct to the borrower.

Enforceability of Regulated Agreements

Since 14^th April 2000 the Consumer Credit (Total Charge for Credit) Regulations 1980 included Regulation 4 (c) which provided that in any case where PPI is made a condition of the loan agreement it will be deemed to be part of the cost of credit and not the amount of credit (and therefore will become a component of the APR). (Pre 14^th April 2000 there was much case law on Regulation 14 (b) which will apply to PPI sales but it is complex and needs specialist consideration)

The importance of this regulation is that if the single premium PPI is made a condition of the loan and is included in the agreement as credit as opposed to cost of credit, that breaches the prescribed term as to statement of amount of credit and can make pre 6^th April 2007 agreements irredeemably unenforceable.

The same thing does not happen with unregulated agreements.

No agreement which was made after 06/04/2007 can now be made irredeemably unenforceable by breach of a prescribed term - although the agreement will still be improperly executed and so may be enforced only by order of the court.

There is current case law as to what is and is not ‘enforcement’ for such purposes. Reporting to credit reference agencies is not enforcement, nor is issuing a statutory demand, nor, apparently (on current authorities) is the commencement of proceedings.

After the 6^th April 2008 the financial limit for regulation of consumer credit agreements was lifted so that all credit agreements (unless made wholly or predominantly for business purposes and not excluded (e.g. first mortgages or debtor-creditor-supplier agreements with less than 4 instalments)) are regulated. In the PPI context regulation remains important in respect of the application of section 56 CCA where brokers are involved.

Unfair Relationships

These are wide ranging. They cover all credit agreements (note- they cover regulated and unregulated agreements). They give a wide discretion to the Court to consider the terms of the agreements, the way they were entered into and the conduct of the Creditor after the agreement and to adjust the financial obligations under the agreements to make them fair. This may or may not add to the remedies available under FMSA or at common law for damages for mis-selling.  The court may consider related agreements and the conduct of associated parties.

For a check list of matters to consider with a client in a PPI claim please follow this link.

Copyright 2010 John Pugh