Out-Law Guide | 09 Nov 2009 | 2:19 pm | 15 min. read
This guide is based on UK law. It was last updated on 10th May 2011.
New rules and guidance on handling and redressing customer complaints about payment protection insurance (PPI) came into force on 1st December 2010.
The finalised text, published by the Financial Services Authority (FSA) in a policy paper on 10th August 2010, now forms part of the dispute resolution sourcebook (DISP) in the FSA Handbook. The paper was the final stage in a consultation process that began in September 2009.
In October 2010, the British Bankers Association (BBA) (many of whose members sell PPI policies) issued an application for judicial review, claiming that the August 2010 policy statement was unlawful. It said the FSA was seeking to augment the specific rules that were in place at the time the sales were made.
The application was dismissed by the High Court on 20th April 2011 (see: Banks lose PPI complaints battle, OUT-LAW News 20/04/2011). On 9th May, the BBA announced that it would not be pursuing an appeal.
The guidance applies to complaints about the sale of all types of PPI contract, whatever the basis on which it was sold and irrespective of whether the policy is still in force, was cancelled during the policy term or ran its full term (DISP App 3.1.1G).
For banks and insurers, the new regime covers complaints about PPI sales going back to 1st December 2001.
Brokers and intermediaries, however, have only been subject to FSA regulation since 14th January 2005. The FSA has confirmed that DISP applies to complaints against intermediaries about earlier sales if the intermediary was a member of the General Insurance Standards Council (GISC) at the time of the sale and the subject matter was covered by its rules.
Although the GISC code did not include many of the more detailed provisions now found in ICOBS, the FSA is satisfied that its general principles are sufficiently similar to those in the Handbook.
Sections in the final amended DISP text that have been given the status of "evidential provisions" will, however, only apply as guidance to complaints about pre-2005 sales (DISP App 3.10). Guidance is illustrative, but not binding, whereas compliance with an evidential provision will be taken as evidence that the firm has complied with FSA requirements.
For non-GISC sales (which would be outside the scope of DISP), complainants have to rely on common law principles, such as negligence or (where the broker was acting as agent of the insurer) the duty of utmost good faith or the general law on misrepresentation.
Under DISP, a consumer must make a complaint to the Financial Ombudsman Service (FOS) within six years of the sale, or three years from when he knew (or ought reasonably to have known) he had cause for complaint, whichever is the longer.
Given all the publicity about PPI, many respondents to the consultations argued that the three-year time limit will have expired in most cases.
The FSA, however, takes the view that general media coverage, or even FSA comment, would not be enough to give rise to the sort of specific knowledge required by DISP.
Although some consumers may be deemed to have had sufficient awareness before January 2008 (so that their complaints would have been out of time by January 2011), the FSA says this is unlikely to apply generally. In any event, the final decision will rest with the FOS.
The guidance defines complaints as complaints "which express dissatisfaction about the sale, including the rejection of claims on the grounds of ineligibility or exclusion (but not matters unrelated to the sale, such as delays in claims handling)", (DISP App 3.1.1.G).
The phrase "breach or failing" is used throughout to describe cases where the firm's conduct of the sale failed to comply with the rules or was otherwise in breach of a duty of care or any other requirement of the general law, taking into account any relevant materials published by the FSA, other regulators and the FOS (DISP App 3.1.2.G).
Where the firm decides there was a breach or failing, it should consider whether the complainant would have bought the PPI in the absence of that breach or failing. Two rebuttable presumptions apply: that the complainant would have not bought the PPI at all, or (in the case of single premium PPI) that he would have bought a regular premium policy instead (DISP 3.1.3G).
There may, however, be instances where the firm concludes that, despite its breaches and failings, the complainant would still have bought the same policy (DISP 3.1.4G).
Overall, the firm should be looking to establish the true substance or nature of the complaint rather than taking a narrow interpretation of the issues raised. In particular, it should not focus solely on the specific way the complaint has been expressed (DISP App 3.2.2G).
This will sometimes mean contacting the complainant directly to understand the issues raised. Firms, are, however, expressly warned not to use this as an excuse to delay the assessment (DISP 3.2.3G).
Irrespective of the main focus of the complaint, if it raises issues about the original sale or a subsequently rejected claim under the policy, the firm should proactively consider whether the same issues underlie both the sale and the claim and assess the complaint accordingly (DISP App 3.2.4G).
Similarly, if the assessment of an individual complaint uncovers evidence of a breach or failing not raised in the complaint, the firm should consider those matters as if they were part of the complaint (DISP App 3.2.5G).
The firm should also take into account any information it already holds about the sale and other issues that may be relevant, including issues identified by any root clause analysis (DISP 3.2.6G).
In the case of PPI sold in connection with refinanced loans, the firm should consider all its PPI sales to the complainant that were rolled up into the loan covered by the PPI contract in question, and the cumulative financial impact of any breaches or failings in those earlier sales (DISP App 3.2.7G).
The emphasis here is on discouraging firms from relying solely on narrow, technical defences, such as the detailed wording of the policy or the fact that the consumer signed the relevant documentation or failed to exercise a right to cancel.
Taking into account some of the responses received to the first consultation, however, the finalised guidance highlights the need for balance.
Firms are encouraged to give "appropriate weight and balanced consideration" to the complainant's evidence, bearing in mind what the complainant says and any other information the firm identifies. But the guidance adds: "The firm is not expected automatically to assume that there has been a breach or a failing" (DISP App 3.3.1G).
Firms should, however, recognise that oral evidence may be sufficient and should not dismiss the complainant's evidence solely because it is not supported by documents. The firm should also take into account the complainant's limited ability to articulate his complaint or explain his actions or decisions (DISP App 3.3.3G).
Where evidence conflicts, the reliability of the complainant's account should be assessed "fairly and in good faith" and the firm should make all reasonable efforts to clarify ambiguities or conflicts before making a final decision (DISP App 3.3.4G).
In particular, the firm should give "more weight" to any specific evidence about what happened during the sale than to general evidence about selling practices at the time, "unless there are reasons not to because of the quality and plausibility of the respective evidence," (DISP App 3.3.9G). This last proviso has been added in response to criticisms that the guidance was too one-sided.
Just because a firm was not authorised to give advice or did not intend to make a recommendation, it should not assume that it did not in fact do so, implicitly or explicitly, on a particular sale (DISP App 3.3.10G).
Firms should also be asking themselves whether the information was provided to the customer in a way that was clear, fair and not misleading and with due regard to the customer's information needs (DISP App 3.3.11G).
This consideration should include whether the documentation "from a reasonable customer's perspective" was sufficiently clear, precise and presented fairly. Were the complainant's individual circumstances at the time of the sale taken into account? When oral disclosures were made, was the information read out too quickly to be properly understood? (DISP App 3.3.12G).
Two provisions make it clear that (1) a firm should not consider that a successful claim on a PPI policy is in itself sufficient evidence that the complainant had a need for the policy or would have bought it regardless (DISP App 3.3.7G) and (2) that a complaint should not be rejected solely because the complainant had held a PPI policy before (DISP App 3.3.13G).
Under DISP 1.3.3R, firms were (and are still) required to take reasonable steps to identify and remedy recurring or systemic problems when handling complaints. These include analysing root causes, considering whether they affect any other processes or products and correcting the problem where it is reasonable to do so.
Existing DISP guidance encourages firms to consider acting on their own initiative with regard to customers who have been disadvantaged or potentially disadvantaged by the firm's failings but who have not made a complaint (DISP 1.3.5G).
The new PPI guidance adds that, where the firm receives complaints about PPI sales, it should carry out a root cause analysis and, where this suggests recurring or systemic problems, consider whether these were likely to have contributed to a breach or failing in an individual case (DISP App 3.4.1G).
Under DISP 3.4.3G, the firm should also consider whether it ought to act with regard to customers who may have suffered detriment but who have not complained and, if so, take "appropriate and proportionate" measures to ensure they are given appropriate redress.
This might include setting up a redress or remediation exercise, but the policy paper acknowledges that fair and appropriate measures are likely to differ from firm to firm and across different products and sales channels.
In the recent judicial review action, it was argued that, by this guidance, the FSA was seeking to circumvent the statutory procedure for setting up a consumer redress scheme under section 404 of the Financial Services and Markets Act.
Under s.404, if there is evidence of widespread or regular failure to comply with the rules, the FSA can ask the Treasury to authorise a past business review that would require all firms to take action in regards to all sales within the scope of the review, whether or not the customer has made a complaint. (On 11th October 2010, s.404 was amended to remove the need for the regulator to apply to the Treasury before setting up a scheme.)
During the consultation exercise, the FSA considered whether to instigate the s.404 process but decided against it, preferring to expand the existing guidance on root cause analysis. The applicants for judicial review, however, said the FSA acted unlawfully in setting up an alternative review scheme when there was a statutory remedy available.
The court disagreed. There was nothing in s.404 that prevented the FSA from choosing an alternative remedy. In any event, the guidance does not purport to set up a compulsory, industry-wide review. Only firms that have identified recurrent or systemic problems are advised to take further steps and given guidance on how to undertake them.
Where a complaint is made about the sale of a policy, the firm should determine whether any claim on that policy has been rejected and, if so, whether the complainant "may have reasonably expected that the claim would have been paid" (DISP App 3.5.1E).
A guidance note gives an example of this reasonable expectation: where the firm failed to disclose appropriately an exclusion or limitation later relied on by the insurer to reject the claim and it should have been clear to the firm that the exclusion or limitation was relevant to the complainant (DISP App 3.5.2G).
If the firm concludes the complainant may have reasonably expected the claim to be paid, and if the claim is worth more than the redress that would be due for any sales failing, the firm should pay the complainant the value of the claim plus interest as appropriate. If the claim is worth less than the redress, the firm should pay the redress. (DISP App 3.7.6E).
The final text also makes it clear that the firm may consider alternative forms of redress where this is fair and appropriate (DISP App 3.8.2E). In the example of an undisclosed exclusion or limitation (and provided there were no other significant sales failings), this might mean paying the claim as if the exclusion or limitation did not apply.
The FSA dismisses concerns that an intermediary handling a sales-related complaint might have problems finding out why the insurer turned down an earlier claim. Where a reasonable expectation is created, the regulator believes it should not be unduly difficult for the intermediary to obtain relevant information and views from the insurer.
Once a firm decides there has been a breach or failing, it should consider whether the complainant would have bought the PPI policy had no mis-selling occurred (DISP App 3.6.1E). If the answer is yes, then no redress will be payable (DISP App 3.7.1E).
In the absence of evidence to the contrary, however, the firm should presume the complainant would not have bought the policy if the sale was "substantially flawed".
Twelve examples are given of substantial flaws, including where the firm pressured the complainant into the purchase or did not disclose that the policy was optional. Many of the other examples mirror ICOBS requirements for suitability, eligibility and product and price disclosure (DISP App 3.6.2E).
If the firm decides the complainant would not have bought the policy, it should aim to put him in the position he would have been in had no sale occurred.
In such cases, the firm should pay a sum equivalent to a full refund of premium plus interest (DISP App 3.7.3E). Any rebate due, for instance because the customer cancelled a single premium policy, may be deducted. Similarly, if the firm has already paid a claim under the policy, this amount may also be deducted from the redress (DISP App 3.7.5E).
In addition, in the case of single premium policies where the premium was added to the loan, the firm should, where possible, arrange to have the loan restructured to remove the premium element. If the firm cannot arrange this, it should pay an amount based on the difference between the actual loan balance (or the balance on cancellation) and what it would have been if the PPI had not been added (DISP App 3.7.4E).
In the case of single premium PPI policies, the firm may choose to adopt a different approach, based on the presumption that the complainant would have bought a regular premium policy instead.
This alternative (or comparative) approach, however, only applies to specific sales failings:
(1) where the firm recommended a single premium policy which did not provide a pro rata premium refund, without ascertaining whether the complainant was likely to repay or refinance the loan early, or
(2) where the firm failed to disclose characteristics specific to the single premium policy, such as the premium being added to the loan and interest being payable on both or that the term of the cover was shorter than the term of the loan (DISP App 3.7.7E).
If the firm decides to follow the comparative model, it must not pick and choose complainants but should apply the same approach fairly for all relevant complainants in a relevant insurance book (DISP App 3.7.8E).
Broadly, the firm should pay the equivalent of the amount paid in single premium, less what the customer would have paid in regular monthly premiums (DISP App 3.7.10E). To help firms calculate the cost of an alternative policy, the FSA has provided a set comparison price of £9 per £100 of benefit payable.
Where the single premium was added to the loan, the firm should, where possible, arrange to have the loan restructured to remove the premium element. If the firm cannot arrange this, it should pay an amount based on the difference between the actual loan balance (or the balance on cancellation) and what it would have been if the PPI had not been added (DISP App 3.7.4E).
If the complainant expressly asks for the PPI cover to continue on a regular premium basis until the end of the existing policy term, future premiums should be based on the alternative regular premium price (DISP App 3.7.14E). The guidance sets out different ways in which future premiums might be collected.
The final text makes it clear that the remedies set out are not exhaustive (DISP App 3.8.1E). But if a firm applies a different remedy, it should satisfy itself that the remedy is appropriate and fair (DISP App 3.8.2E).
The policy paper gives as an example a situation where the firm failed to disclose an exclusion or limitation. The firm might decide that, if the consumer makes a claim under the policy, that claim will be dealt with as if the exclusion or limitation did not apply. But, the paper adds, this would only be fair and appropriate if there were no other sales failings that were particularly significant to that consumer.
"Consequently, we anticipate that such different approaches are unlikely to be appropriate in the majority of cases and will be the 'exception not the rule' for firms when dealing with a complaint satisfactorily".
In assessing redress, the firm should also take into account other, consequential losses, although the guidance makes it clear that these must be a reasonably foreseeable result of the firm's breach or failing (DISP App 3.9.2G).
Respondents to the consultation argued that the redress provisions would fall disproportionately on broker firms and that they failed to recognise the role of insurers and lenders in the manufacture, design, promotion and sale of PPI.
The FSA's view, however, is that, since such firms were primarily responsible for the sale of PPI, it is right that they should bear the brunt of redress claims.
"Distributors are responsible for maintaining a compliant sales process, and therefore should be responsible for redress, where a failing arose from the manner in which the product was sold. If brokers feel that undue pressure was placed upon them by lenders or insurers, they may separately have recourse to the court if they so choose."
The question whether a broker was acting as the agent of another party and whether that party should be responsible for its actions will depend on the contractual relationship between them and the factual circumstances of each sale. In such cases, the broker may have a claim against another party, but that does not alter its primary liability to the customer under DISP.
Overall, the FSA predicts that the total redress and administrative costs for general insurance intermediaries will be about £470 million. In March 2010, it estimated that between 5% and 10% of firms (about 100 in number) would fail as a result. In August 2010, it revised that figure to about 35 firms.
This, the paper states, is "an unavoidable consequence of these firms' own mis selling of PPI (and frequent undue dependence upon it in their business model) and not a reason to remove them from the scope of our provisions."
The new DISP provisions came into effect on 1st December 2010, but some firms put their PPI complaints handling on hold until the outcome of the judicial review hearing.
Following the BBA's announcement that it was not going to pursue an appeal, the FSA said:
"Banks must now get on with handling all PPI complaints and paying redress where appropriate - the FSA stands ready to work with them on the practical implications of this."
Lloyds Banking Group, Barclays, RBS and HSBC, the four biggest providers of PPI, have so far set aside £5.3 billion to meet PPI redress claims.
Meanwhile, the Competition Commission has published its final order implementing new rules on selling PPI insurance, including a ban on selling payment protection insurance at the same time as a loan or credit and new rules on marketing and the information to be provided to regulators.
The marketing and information rules will come into force in October 2011. All other elements of the package – including the point of sale ban – will come into effect in April 2012.
Contact: Alexis Roberts [email protected] (020 7667 0259)