This news is clearly unwelcome for financial services providers and has potentially wide-spread and costly implications. The BBA now has 21 days from the decision to appeal it though it is not yet certain whether it will do so.
The Judicial Review and the court’s judgment in relation to it is the latest stage of several years of FSA review and consultation in relation to PPI sales and complaints and FOS’s referral to it, under the wider implication process, of significant numbers of FOS complaints in relation to the product.
The culmination of FSA’s review and consultation saw the introduction, in December 2010, of new rules governing the handling, assessment and redress of PPI complaints, including guidance provisions requiring the consideration of policyholders who had bought the policies but not complained, as well as those who had, and a “common failings” letter setting out the common sales failings identified by the FSA during its reviews and the corresponding rules and/or principles it considered had been breached as a result.
While FSA consulted on these rules and the letter, it did not invoke the process under section 404 of the Financial Services and Markets Act 2000 (“FSMA”) in applying it across the industry.
The FOS, as well as referring the numbers of complaints it had received on PPI to the FSA, had introduced, in November 2008, guidance in relation to these complaints, setting out how it intended to review and assess them, including that it would take account of any breach of the Principles in reaching decisions on those complaints.
BBA’s challenge in a nut-shell
The BBA’s Judicial Review challenge centred on the FSA’s rules and the FOS guidance. It contended, first, that the FSA rules were unlawful on the basis that they were, in part, based on the breach of Principles that were not actionable and therefore did not provide the basis for redress. Furthermore, in bringing regulatory action against a firm, the Principles should not be used to augment a rule actually in force at the point of sale, nor be used in conflict with such a rule.
It further contended that, the FSA rules being unlawful in this way, the FOS guidance was also unlawful given it indicated that FOS would take account of Principles breaches in making decisions.
The final limb of the BBA’s challenge was that the FSA should have invoked the s.404 FSMA procedure in relation to the requirement on firms to consider the position of non-complainants.
The court’s Judgment
In summary, the court rejected the BBA’s challenge and found for the FSA and FOS on the following basis:
Principles and redress
FSA’s Principles were not actionable in the sense that their contravention did not give rise to a cause of action in the court by a private person.
However, the Principles could still be relied upon in relation to FSA action, which could include a requirement to provide consumer redress and consider non-complainants.
The Principles could also be relied upon by FOS in reaching decisions to uphold customer complaints and actual redress on the basis of its wide “fair and reasonable” jurisdiction, which requires it to take account of all relevant law, regulatory rules, guidance and industry practice.
Interface between Principles and rules
The FSA’s Principles could be used by FSA to augment a relevant existing FSA rule and could be relied upon where no rule governed the position (which the BBA had appeared to concede), but they should not be relied upon where to do so would conflict with the relevant existing FSA rule.
These requirements on the FSA did not affect the FOS who, because of its wide remit, would be able to uphold a complaint on the basis of a breach of Principle, both where a Principle augmented a rule or “filled the gap” caused by a lack of rule, but also where the firm had, in fact, complied with the relevant existing rule.
The court did hold, however, that if the FOS did this it would need to explain it and provide adequate reasons and should only do so in exceptional circumstances.
s.404 FSMA process for industry-wide consumer redress
On this point, the court held that the FOS’s power to require consumer redress beyond one firm was not restricted to the s.404 process and that the FSA was permitted to use alternative methods, including the introduction of rules and guidance as it had done here, to require such redress.
The court reiterated the point stressed by the FSA that the guidance provisions in relation to the consideration and potential redress of non-complainants were just that, guidance, and, therefore, not compulsory or enforceable.
Impact for the Industry
Progressing complaints following the Judgment
A number of firms had placed some or all of their PPI complaints on hold pending the outcome of the Judicial Review. The court’s ruling means that FSA’s rules and guidance, both in relation to the assessment and redress of current and future complaints and in relation to non-complainants, have been found to be lawful and must be complied with.
Any appeal brought by the BBA may mean that certain complaints can remain on hold but this is by no means certain and FSA may now move away from its previous limited carve out (that it might be appropriate to place on hold complaints directly affected by the matters being considered by the Judicial Review) and expect all complaints to be dealt with, notwithstanding the appeal. It is important to note that the FSA did not, previously, issue a formal waiver of compliance, instead indicating its “carve out” view by letter to a number of industry bodies.
The enforceability of guidance
The court’s comments in relation to the non-compulsory or enforceable nature of the guidance relating to non-complainants is helpful, but, as many firms will know, in practice FSA expects it to be complied with and is very likely to treat any noncompliance as a contravention of the relevant rule and take action accordingly.
Outside the PPI arena, a similar general provision is about to be brought in in relation to complaints and, therefore, this new general guidance will, of course, have a far wider impact on the industry.
The lack of a requirement to consider rejected closed complaints in the FSA’s rules and no discussion of this during the Judicial Review is helpful but firms need to be mindful of their obligation to treat their customers fairly and not interpret this too narrowly or apply it in a blanket fashion.
The impact of the court’s conclusions on the application of the Principles
The court’s conclusions in relation to the application and use of the Principles and that they give rise to consumer redress via FSA action or FOS awards has significant implications beyond the arena of PPI.
First, this means that the FSA can, as it has already been doing for a number of years, rely on a Principle to establish noncompliance where no contemporaneous rule existed to cover the alleged failing. It can also rely on a Principle to establish breach where the existing rule did not go far enough or where, in fact, it was complied with; while the industry will hope that this application will be used reasonably, it could be seen as the perfect compensation for poor drafting – allowing the FSA to take action when the relevant rules in force at the time simply did not cover the failings later alleged.
Furthermore, it means that FOS may be far more likely to award redress on the basis of a breach of Principles alone and, although FOS must give reasons if it decides to do so and this should only be in exceptional circumstances, do so even where the relevant rule has been complied with. While, again, the industry hopes this will not occur, it could mean FOS adopts a less rigorous approach in determining complaints; not properly ascertaining compliance with the relevant rules before deciding that a breach of Principle has taken place.
Wider implications of the court’s conclusion on the FSA’s consumer redress powers
The court’s conclusions in relation to the FSA’s powers to order consumer redress across an industry sector or the industry as a whole also have far wider reaching implications than simply in the PPI arena.
The court’s conclusions that the FSA’s powers in this regard are not confined to the s.404 process means that FSA may be more inclined to require this and on a more frequent basis. The lack of safeguards that the s.404 process provides means that FSA’s actions in this regard could go, effectively, unchecked without a clear means of challenge, even by way of Judicial Review.
As we have mentioned above, the fact that such requirements may be brought in by means of guidance provisions provides no safeguard at all, given that any non-compliance can simply be “hooked” to the relevant rule.
Impact on firms’ solvency and continued market participation
Finally, subject to any BBA appeal, the FSA’s rules in relation to PPI are likely to put significant strain on a number of firms’ solvency and potentially see a number not survive. Other firms may well take the view that continuing to operate in the PPI market is simply too onerous and financially perilous and cease conducting business at all. The consequent shrinkage in the market and lack of competition cannot be good, or fair, for consumers.
The FSCS, already hard hit with significant structured product claims over the last few years, will also be placed under severe pressure. The need to pass its costs on to the industry via levies will only serve to place all firms in the sector under greater financial pressure, even those who do not incur significant direct costs in complying with the new PPI rules. The very real potential impact on the PPI market is clear and cannot, again, be good or fair for consumers.