PPI covers consumers against repayments due on credit products and loans if the consumer cannot afford to pay because of an accident, sickness or death.
On 1st December 2010, the Financial Services Authority introduced new guidance on how PPI mis-selling complaints should be handled and compensation payments calculated (see: PPI: complaints handling and redress, an OUT-LAW Guide).
But in October 2010, the British Bankers Association (BBA) (many of whose members sell PPI policies) issued an application for judicial review of the approach taken by the Financial Services Authority (FSA) and the Financial Ombudsman (FOS) to PPI sales complaints.
The BBA said it was unlawful for the FSA to apply different sales standards than were in the FSA Handbook at the time the sales were made. The regulator, it claimed, was seeking to augment specific rules governing PPI sales and complaints handling - in particular, by a list of "common sales fallings" identified in an open letter to the industry.
It also argued that, under the Financial Services and Markets Act, there is already a statutory procedure for setting up a consumer redress scheme to deal with widespread mis-selling claims. The FSA's measures sought to circumvent this formal procedure and were therefore unlawful.
The FSA said there was no obligation to follow the statutory procedure and that the widespread problems concerning PPI mis-selling permitted it to act as it had done.
It maintained that firms have always been required to abide by the guiding principles for doing business. Obligations to treat customers fairly (Principle 6 in the Handbook) and to pay due regard to customers' information needs and communicate that information in a way that is clear, fair and not misleading (Principle 7) applied whether or not specific conduct of business rules were in place at the time the sale was made.
The BBA, however, said the FSA could not rely on the Principles in this way because they were not "actionable" – in other words, they did not give customers the right to pursue an action for compensation.
The court, however, disagreed. Whether or not actionable, the Principles were one of a number of things firms (and the FOS) should take into account when considering a mis-selling complaint.
"The Principles are best understood as the ever present substrata to which the specific rules are added," the judgment states." The Principles always have to be complied with. The specific rules do not supplant them and cannot be used to contradict them. They are but specific applications of them to the particular requirements they cover."
The fact that there is a statutory procedure for the Treasury to set up a consumer redress scheme was not sufficient to deprive the FSA of all power to choose an alternative remedy, provided one was lawfully available, which the court concluded it was. The BBA's application for judicial review was dismissed.
The FSA welcomed the ruling: "We believe this decision signals the end of years of poor complaint handling and will trigger a dramatic improvement in the way customers are treated when complaining."
The BBA said: "We are disappointed with today’s judgment and now need to consider the details of it very carefully as well as next steps, including whether it would be appropriate to apply for permission to appeal.
“Any complaints that are directly affected by the judicial review and therefore can not be decided will continue to be placed on hold until the next steps have been decided," it added. "We will continue to work closely with the FSA to ensure that all complaints are appropriately handled and customers are not disadvantaged."
Alexis Roberts, an insurance law expert at Pinsent Masons, the law firm behind OUT-LAW.COM said: "The High Court decision opens the doors for very substantial redress payments. Where a distributor is no longer trading for example or in relation to some historic sales, insurers may also be exposed.
"As well as redress payments, there will also be the substantial expense and management time involved in administering complaints and reviewing some old sales, so the redress payments themselves may just be one element of the cost consequences of this decision. All in all, this will be a disappointing decision for the sector."