PPI sale was "causative of loss" to consumer under Conduct of Business rules, says court

The judgment was based on the broker's failure to conduct "open and fair enquiries" about the level and length of cover required by the customers, Michael and Patricia Saville, in breach of the old Insurance: Conduct of Business sourcebook (ICOB) rules. The case was a rare example of a PPI claim being considered by the courts, as these are usually dealt with directly by institutions or by the Financial Ombudsman Service (FOS).

"The test to be applied to the issue of causation in an action for breach of statutory duty is to ask whether, if the duty had not been breached, the damage would have occurred," the judge said. "In this case, that question involves asking whether the Savilles would have purchased the PPI policy if Central [the broker] had not broken the ICOB rules."

"The Savilles submit, firstly, that the [county court] judge should have asked himself what the Savilles' response would have been to an enquiry 'How long do you want the PPI to last?', the answer would have been: 'For the full length of the policy'. The policy provided did not meet this aspect of the Savilles' demands and was therefore unsuitable in respect. If Central had complied with the rules, the evidence showed that Central would not have sold the policy," he said.

At the time that the sale took place, the Financial Services and Markets Act (FSMA) allowed consumers that "[suffered] loss as a result of the contravention" of the ICOB rules to sue a broker or insurer in the courts. The broker in this case had accepted that it was in breach of the rules requiring it to ensure that any recommended insurance policy met the "demands and needs" of the customer, as well as more specific duties to seek out and assess relevant information about the customer's requirements. However, it did not accept that the Savilles would not have purchased the policy had they been asked in an open and fair way about the length of the policy they wanted.

The Savilles contacted credit broker Central Capital in 2006 with a view to taking out a loan to refinance their existing credit commitments. They ultimately entered into a loan agreement for £54,500, repayable over 25 years, with lender FirstPlus. At the same time, they took out a PPI policy also through Central, with a five-year term. The premium added £13,347.05 to the cost of the loan.

The couple raised a number of claims in connection with the sale of the PPI policy, which were dismissed by the county court in 2013. These included their assertion that the broker had implied that the policy was compulsory, and that if they had wanted insurance at all they would have wanted the cover to last for the full period of the loan and not just for the first five years.

At the Court of Appeal, the judge said that the combined effect of the ICOB rules that were then in force was to create an "enquiry" phase, during which an intermediary must "take reasonable steps to discover the customer's demands and needs"; followed by an "assessment" phase, during which the intermediary must assess whether the cover it intends to recommend is suitable for those demands and needs.

"This involves an active comparison of the policy or policies it can offer with the demands and needs of the customer," the judge said. "If [the broker] concludes he has a suitable policy, he may recommend it. If, on the other hand, he concludes that the policy is not suitable, he may only recommend it in the limited circumstances provided for in [the ICOB rules] ... Further, when he makes the recommendation he must qualify it by expressly drawing attention to the demands and needs which are not met by the policy."

"Rather than dismissing the Savilles' evidence as irrational, which in my judgment it was not, the judge should, in accordance with the principles discussed above, have asked himself what the Savilles would have said if Central had made open and fair enquiries directed to the level (in particular the length) or cover. On the one hand the judge had the Savilles' evidence that they would have wished the cover to last for the entire period of the loan. He was by no means bound to accept that evidence, but he should have weighed it against such evidence as there was that the Savilles would in fact have only wanted a policy with a five year term," he said.

He said that any finding specifically on the suitability of the policy would have to be made by the county court. However, as he was able to allow the appeal by virtue of the breach of the ICOB rules, remission to the county court was not necessary.

"This case highlights the reality of failing to comply with the now long-standing requirement to demonstrate how customers' needs are being met," said insurance law expert Colin Read of Pinsent Masons, the law firm behind Out-Law.com.

"Understandably, compliance teams will want to draw their colleagues' attention to how courts can and are prepared to forensically sift through the evidence leading up to a transaction, what the customer understood and the range of options open to those customers," he said.