COLUMN: British bankers give up payment-protection appeal – the implications
By Adam Samuel, Thomson Reuters Accelus contributor. The opinions expressed are his own.
LONDON, May 13 (Thomson Reuters Accelus) – The British Bankers’ Association left it until the day before the last available one to appeal against its defeat in the Administrative Court, to throw in the towel in its payment protection insurance judicial review application.
Having lost on every point in front of Mr Justice Ouseley, the BBA’s undignified judicial review challenge to both the Financial Services Authority and the Financial Ombudsman Service’s material on PPI complaint handling is over.
By leaving the decision so late, the BBA managed to embarrass the Royal Bank of Scotland board, which seemed to suggest the day before that Lloyds TSB’s decision not to back an appeal made no difference to its fellow government-owned competitor. It will have annoyed both regulator and ombudsman to have been left hanging on in this way.
The most immediate implication of the BBA’s abandonment of any appeal was that the banks immediately re-did their provisioning. RBS and Barclays are both assuming a £1 billion payout to go with Lloyds TSBs’ £3.2 billion and HSBC’s more moderate £274 millionp. The other banks and major credit providers are presumably dusting off the numbers they should have prepared on the assumption that the BBA would give up or fail.
Strangely, the stalling tactics of the banks and the FSA’s failure to take decisive action while awaiting the court’s decision have damaged the banks financially. All compensation carries with it 8 percent simple interest on top of any loan interest charged due to the imposition of the PPI. The latter is typically a much higher amount. Essentially, the banks have been running a deposit account offering eight per cent interest for its PPI customers (although without the usual annual compounding).
The biggest short-term result is a huge boost to any efforts within the FSA to enforce its own complaint rules against the banks. Prior to the Administrative Court’s decision, the regulator had given the banks quite wrongly carte blanche to delay the resolution of any complaint affected by the judicial review. It slightly disingenuously suggested on the day of the court decision that it had not granted any waivers from the rules.
Unfortunately, this is not consistent with the regulator’s letter of January 21, 2011 to the various trade bodies. The impact in practice has been, as that letter indicates, namely that most of the banks have put their PPI complaint handling on hold while awaiting the court’s decision. The regulator has done nothing to alter that.
The Administrative Court did not rule that the FSA was right to impose its Appendix 3 to DISP or its description of common types of failings in PPI mis-sales. It just concluded that the regulator did not act unlawfully in doing so. Nevertheless, the regulator will feel vindicated or at least broadly bulletproof in taking enforcement action on the basis of those documents. It can now go straight after the banks that it knows put all PPI complaints effectively on hold during the waiting period in clear breach of the FSA’s DISP complaint handling guidelines.
Enforcement staff, though, should be annoyed that the January 21 letter will force them to distinguish between cases potentially caught by the judicial review application from those that are not. On the list of lessons learned should be an old legal maxim “everything is presumed to be in accordance with the law.” The FSA should have gone straight after the banks when they announced that they were defying the regulator pending resolution of their flawed judicial review application. Major trade bodies cannot somehow suspend the application of rules they do not like by going off to court, particularly with applications that looked as weak as this one did.
The other way of looking at these developments is that if the FSA does not go looking for a major bank scalp for its complaint handling (not mis-selling), it will look very weak when faced with such institutions. The FOS, which has been strongly requesting the regulator to take some action against these businesses, will feel even more let down. Relations between regulator and ombudsman scheme have never been close and the Gilad doctorate on FOS and the Hunt report (“the interaction between the FOS and the relevant regulators does undoubtedly need to improve”) both revealed widespread mistrust between the two organizations. The banks essentially threatened to bankrupt the FOS by not co-operating allowing cases to flood into the FOS and effectively force huge layouts in staff costs.
With the obvious threat from the regulator, the first task for firms is to decide whether there is any point in defending their single-premium sales. The Common Types of Failing document gives firms who sold single premium PPI few opportunities to argue that the sale was acceptable. Mr Justice Ouseley was unimpressed by the attack on the DISP Appendix 3.6.2E(4) and (12). These refer to failures to disclose significant exclusions and limitations, the absence of a pro-rata refund and any mismatch between the terms of the policy and the loan — all in a clear, fair and not misleading way.
He said: “Mr Flint contended that examples 4 and 12 or common failing 15 also required more than ICOB 5.3.1R in another way. ICOB 5.3.1R required, in an oral sale, that the relevant information be in the Policy Summary which the customer should be told it was important to read. Examples 4 and 12, and common failing 15, additionally required that any oral presentation be balanced. It should deal with limitations as well as advantages, describing the whole policy in balanced and fair terms. This was seen as a contradiction of the specific rules by Mr Flint, and if not, it was an augmentation of them where they had exhaustively provided for what information had to be conveyed on an oral sale.
“I disagree that it is a contradiction. The Handbook amendments and Open Letter do not require something to be omitted or done which the rules require or forbid. The specific rules are silent on the topic of how oral presentations should be conducted. There can be no contradiction of the specific rules unless they are construed as the exhaustive expression of all obligations. There is no justification for such a construction in the absence of clear wording giving effect to a clear purpose or intention of such an outcome. The overarching or underlying Principles are simply being applied where the rules do not cover the point.
“The nature of an oral presentation or sales pitch is not covered by the specific rules. ICOB 5.3.1R only requires the attention of the customer to be drawn orally to the importance of reading the policy summary. I do not see any contradiction at all between that ICOB rule and the common failing standard which deals with the problem, left unattended by the specific rules, of how far a salesman can go in explaining the advantages and value of the policy without explaining the drawbacks. Of course, it adds to the rules in the sense used by BBA. But this could not possibly be seen as an area of selling in which the rules had made specific provision for oral sales, intending to exhaust the scope of Principles 6, 7 or 9, leaving the whole regulation of what might be said to the operation of Principle 1. It is actually a very good example of why the FSA approach to the role of Principles is correct, and illustrates the need for an overarching framework from which the specific rules are drawn without exhausting the ability of the Principles to cover gaps in the regulatory framework to deal with new techniques, unforeseen circumstances, sales methods otherwise unregulated and changes to sales methods in response to specific rules.”
One important practical outcome of this is that the regulator can now use Principle 7 and its general view of disclosure even for pre-2005 sales to prevent firms from relying on written disclosure in an oral transaction. This is an add-on to the original ICOB. The tapes that most banks keep of their telephone sales demonstrate easily how unbalanced presentations of PPI tend to be. The judicial review case will make it all the more difficult to defend face-to-face transactions. Banks will not be able to argue plausibly that their face-to-face transactions were likely to be more balanced than their telephone ones.
The Common Type of Failings document is particularly severe on allegedly non-advised sales in line with a string of final notices each of which has concluded that it is impossible to sell PPI effectively in this way.
ROOT CAUSE ANALYSIS
The one area where the BBA came closest to success concerned the argument that the root cause analysis provisions of Appendix 3 was a Section 404 business review by the back door. By rejecting that argument, the court decision effectively enshrines in law the notion that a firm handling complaints must not limit itself to the points raised by the complainant. Appendix 3.4.3 requires firms who identify recurring or systemic problems in their sales practices to consider whether it ought to consider running a business review.
In the next few months, it will be interesting to see how many banks find themselves running such a review with or without a nudge from the FSA. This could change the provisioning landscape considerably. It is fairly apparent that the judge felt that there was sufficiently widespread misselling to justify a review under the old Section 404 in 2010.
He said: “I accept, and it was not really disputed by Mr Brindle, that factual circumstances had arisen in 2010 in which the FSA could have reported to the Treasury about the widespread misselling of PPI and asked for a scheme order, with reasonable prospects of it proceeding successfully through the whole statutory process. There was evidence of widespread misselling and that private persons had suffered and would suffer loss in respect of which firms were liable to make compensation payments, for breaches of actionable rules.”
The logical implication of this is an active review of single premium PPI sold to accompany personal loans and credit cards.
FUTURE FOR PRINCIPLES
The court essentially decided that since principles were rules like any other, the FSA could require firms to comply with them when handling complaints. It also decided that principles applied where more detailed regulation existed so long as the latter did not contradict the principles. Firms need to check more generally the various areas of regulation to see if a principle does not exist that could “supplement” the rulebook.
Up to this point, we have ignored the Financial Ombudsman Service. The application should never have been brought against FOS. By statute, it is empowered to reach fair and reasonable results. The BBA argument that the ombudsman cannot apply principles in view of the fact that the regulator has not designated such rules as forming the basis of a claim for damages under Section 150 FSMA never had a serious chance. There is Court of Appeal authority to say that FOS does not have to apply the law. Mr Justice Ouseley himself ruled in the first FOS judicial review case, N&P, that FOS could misapply the Banking Code and still reach a lawful decision on the basis of what it felt was fair and reasonable.
There are more serious implications for the banks here. They have treated the FOS appallingly over PPI, leaving thousands of cases to pour into the FOS without even the courtesy of a final response letter. Pulling the appeal at almost the last moment will be seen by the ombudsman as yet more brinkmanship. The banks have bad loan books on which they are extremely vulnerable at the ombudsman. Roughing her up was not sensible.
(Adam Samuel is an independent consultant on financial services regulation and practice.)
(This article was produced by the Compliance Complete service of Thomson Reuters Accelus. Compliance Complete (http://accelus.thomsonreuters.com/solutions/regulatory-intelligence/compliance-complete/) provides a single source for regulatory news, analysis, rules and developments, with global coverage of more than 230 regulators and exchanges.)