PPI Complaints Deadline: FCA Gives Consumers Until 2018

6 10 2015

Marking the removal of a dark stain on the financial services industry, the end of the Payment Protection Insurance (PPI) saga is finally in sight. A cut-off point to the debacle appears to be in the offing and the eagerly-awaited decision of the Financial Conduct Authority (FCA) – aiming to “rebuild trust in the retail financial sector” – about further intervention in PPI complaints has finally descended upon us. The PPI problem is said to have already cost the industry £20 billion and further payments up to £33.5 billion had been predicted by some studies because of the Supreme Court’s judgment in Plevin v Paragon Personal Finance Ltd [2014] UKSC 61 (though more conservative estimates place this at £15 billion). The FCA has decided to consult, by the end of the year, on setting a deadline by which PPI complaints need to be made “or else lose their right to have them assessed by firms or by the Financial Ombudsman Service.” Because questions hover over the influence of industry lobbying on the FCA, the Chairman of the Treasury Select Committee Andrew Tyrie MP said that the FCA should provide “reasons for its change of mind” over the deadline, one which may be linked to George Osborne’s new “settlement” for the City. The FCA wants to bring “finality” to the conundrum and wishes to prompt many consumers who want to complain, but have not yet done so, into action, resulting in them potentially getting redress sooner.

Consumers’ PPI problem, which generated billions in annual revenue for lenders, represents the UK’s costliest mis-selling episode – an ugly chapter in the history of the banks, one the industry surely wants closed for good. A flood of claims is expected because of the deadline and five leading banks have earmarked significant sums of money to put the controversy to rest. The sums set aside are Lloyds £13.4 billion, Barclays £6 billion, RBS £3.8 billion, HSBC £2.6 billion and Santander £800 million. Adding this to the misconduct bill of £200 billion from 2010-2014 (calculated by the Conduct Costs Project) takes the total to over £226 billion. However, some reports suggest that worst of the fines and penalties are already behind the banks; but only time will tell, you never know what’s around the corner. It has been reported that PPI complaints are declining with only 883,043 complaints filed in the first six months of this year – a 16.6% decrease in comparison to the second half of 2014. Inevitably, the FCA’s announcement on a two-year time limit will result in a bombardment of PPI nuisance emails and texts to members of the public from claims management companies – which are mass recruiting new staff to deal with the situation – many of which retain a kickback for their services from the proceeds of successful claims. But the FCA argues that it will “bring the PPI issue to an orderly conclusion.”

As expected, the FCA’s twofold intervention turns on (i) the general handling of complaints and (ii) specific aspects of mis-selling thrown up by the Supreme Court’s judgment in Plevin. The FCA’s announcement is being met with open arms by the banks which are cheering the prospects of getting back to business as usual. PPI products purported to cover consumers for mortgages and credit cards in circumstances where the policy holder suffered from illness or was unemployed.

The good news for firms selling financial products is that they can look forward to overcoming a dark episode in their history and once again confidently sell financial products without fear of being caught up in a never-ending cycle of mis-selling which has been hampering their activities for quite a long time. It is anticipated that the consultation will not be opened before spring 2016 and the upshot is that PPI consumers – or victims of mis-selling should we say – will have until at least spring 2018 to complain. Notably, the regulator’s formal announcement is expected next spring after the consultation has been concluded.

Some comfort can be found in the fact that the consultation is accompanied by a proposed FCA-led communications campaign designed to prompt consumers to complain before the deadline expires. Plevin, and the proposed rules and guidance concerning the handling of PPI complaints, will be a part of the consultation process. This will include a proposed fee rule concerning the funding of the proposed communications campaign.

Complaints linked to the Supreme Court’s decision in Plevin will also be caught by the proposed deadline. The regulator will set out the full detail of these proposed rules and guidance, the evidence it has considered, its reasons for proposing the impending rules, and its assessment of their costs and benefits, in the consultation paper it proposes to publish before the end of the year.

Key Proposals: Subject to Change

In advance of the consultation, the FCA issued the following clues to clarify the widespread speculation as regards its intentions on PPI following the announcements of:

Deadline and Consumer Communications Campaign

PPI sales fell dramatically after early 2009. The current rules and guidance about PPI complaint handling have been in place since December 2010.

Since January this year, the FCA has been gathering evidence from firms, consumers (via online surveys and discussion groups) and other stakeholders about the PPI landscape and whether it is changing. Assessment has been made whether the current approach is continuing to meet the objectives of securing appropriate protection for consumers and enhancing the integrity of the UK’s financial system.

Officials say that the current complaints framework and the FCA’s supporting supervisory work has resulted in fair redress being paid to large numbers of consumers who were mis-sold PPI in the past.  Over £20 billion redress has been paid to over 10 million consumers so far: see, Monthly PPI refunds and compensation statistics (September 2015).

However, more recently, the large scale payment of redress has been accompanied by other trends. For example, evidence collected by the FCA indicates that:

  • a high and growing proportion of complaints are made via claims management companies, with fee costs to the consumers who use them;
  • a high and growing proportion of  complaints relate to older sales (pre-2005 and even pre-2000), where the documentary evidence held by firms and consumers is likely to have significant gaps and recollections and oral evidence are becoming increasingly stale;
  • a significant proportion of complaints made turn out not to have involved a PPI sale; and
  • a number of those consumers who told the FCA they intended to complain, also said that they had not yet got around to doing so. The open-ended nature of the complaints-led approach appears to contribute to this consumer inertia – i.e. it does not incentivise consumers to check whether they had or have PPI or progress complaints in a timely fashion.

Around three quarters of the consumers surveyed have heard of PPI as a product (74%), most of whom (77%) say they are aware of problems or issues with it.

The FCA considers that there is a case for intervening further in PPI and that introducing a deadline and running a communications campaign would:

  • prompt many consumers who want to complain, but have not yet done so, into action, resulting in them potentially getting redress sooner, and giving some of them the opportunity to pay off costly debt; and
  • bring the PPI issue to an orderly conclusion, reducing uncertainty for firms about long-term PPI liabilities and helping rebuild public trust in the retail financial sector.

The FCA also considers that such an intervention may encourage more consumers to complain directly to the firms, rather than using and paying claims management companies.

Overall, the watchdog inclines to the view that a deadline and communications campaign would help bring finality and certainty in a way that advances the FCA’s operational objectives of securing an appropriate degree of protection for consumers and protecting and enhancing the integrity of the UK financial system.

Plevin

The FCA has also decided to consult on rules and guidance about how firms should handle PPI complaints fairly in light of the Plevin judgment concerning a claim under section 140A of the Consumer Credit Act 1974 about the non-disclosure by a lender of the level of commission on a PPI contract.

Dealing with unfair relationships, sections 140A-C were inserted in the Consumer Credit Act 1974 by the Consumer Credit Act 2006. Section 140A provides the court with wide powers under section 140B in connection with a credit agreement where it considers that the relationship between a debtor or creditor arising out of the agreement (or the agreement taken with any related agreement) is unfair because of various things, including anything done (or not done) by or on behalf of the creditor. Sections 140A-C came into force on 6 April 2007. However, an order may be made under section 140B only in relation to an agreement under which sums were (or could become) payable on or after 6 April 2008.

The proposed deadline would also apply to the handling of these complaints.

The FCA considers that the proposed rules and guidance would reduce uncertainty and enable firms to continue to take a fair and consistent approach to handling PPI complaints, whilst making it easier for the FCA to act if it becomes concerned that firms are not handling PPI complaints appropriately. Rules and guidance would also provide a clear approach which the Ombudsman could take into account when considering relevant PPI cases.

Scope

The proposed rules and guidance would only apply to PPI complaints where a claim could be made against a lender under section 140A. That means that sums must have been payable (or capable of becoming payable) under the underlying credit agreement (which the PPI covered or covers) on or after 6 April 2008. The proposed rules and guidance on PPI complaints would not apply to complaints about any other financial products or services, even where these are, or connected to, credit agreements under section 140A.

Where a complaint from a consumer against the firm that sold the PPI would be upheld under the current PPI complaint handling rules and full redress paid, the proposed rules and guidance would not require a firm (whether seller or lender) to consider the complaint further and so would not result in any further redress being paid to the complainant. However, the FCA’s proposed rules and guidance would be relevant, where:

  • the complaint would be rejected by the seller under the existing PPI complaint handling rules and guidance; or
  • the seller would conclude (in respect of some single premium PPI) that paying ‘alternative redress’ was appropriate (‘Alternative redress’ refers to the ‘Alternative approach to redress: single premium policies’ set out at 3.7.7E-3.7.15E in the current DISP App 3 rules and guidance); or
  • the complaint is made against a lender that did not sell the PPI to the consumer.

Unfair Relationship

The proposed rules and guidance would say that a firm should presume, when assessing a relevant complaint in respect of a PPI policy covering a credit agreement under section 140A, that a failure to disclose a commission of 50% or more gave rise to an unfair relationship under section 140A.

For this purpose, and regardless of the precise details of firms’ external business arrangements or internal business models and structures, the FCA proposes to define “commission” as the proportion of the total amount of premium paid in respect of the PPI contract that was not due to be passed to the insurer.

The proposed rules and guidance would also consult on providing for this presumption to be set aside in certain limited circumstances.

The FCA proposes also to consult on limited circumstances where the non-disclosure of commission of less than 50% could be regarded as giving rise to an unfair relationship under section 140A.

Redress

The proposed rules and guidance would require a firm to pay redress where it concludes that an unfair relationship under section 140A has arisen. The FCA will consult on the key elements of redress being:

  • the difference between the commission the customer paid (e.g. 72% of the premium, as in Plevin) and 50% of the premium paid – i.e. 22% of premium in this example; plus
  • the historic interest the customer has paid on that portion of the premium (ie the interest paid on the 22%); plus
  • annual simple interest at 8% on the sum of 1 and 2.

This is redress that would not be paid under the existing rules and would thus be a direct financial consequence of our proposed rules and guidance.

The proposed rules and guidance will also provide for firms to consider, when they have identified that an unfair relationship within the meaning of section 140A was created by the non-disclosure, whether, in the particular circumstances of the case, they need to pay more redress than under this approach.

Financial Impact

The FCA will include its assessment of the costs and benefits of the proposed rules and guidance in its consultation. However, to provide some initial context and indication of their potential financial impact, the regulator notes that:

  • most PPI complaints concern either single premium personal loan PPI or credit card PPI
  • around 75% of PPI complaints currently are upheld as mis-sold under the current rules and guidance and, in almost all cases, paid full return of premium and historic interest;
  • around 42% of all single premium personal loan PPI or credit card PPI sold falls within the scope of section 140A CCA
  • the average commission on PPI was around 67% (for 12 large distributors in period 2002-2006, per the Competition Commission’s Report of January 2009) (See the Competition Commission’s report ‘Market Investigation into Payment Protection Insurance’ (January 2009), Appendix 4.4, Table 2 Income from PPI as % Gross Written Premium for distributors 2002-2006)
  • The FCA does not propose to require (or otherwise expect) firms to proactively review PPI sales falling within the scope of section 140A CCA or to proactively review against the new rules and guidance previously rejected PPI complaints.

Next Steps

The FCA will publish its consultation paper on the deadline for PPI complaints and on rules and guidance in light of the Plevin decision before the end of 2015. The consultation paper will include full details of the various proposed rules and guidance summarised above, the evidence we have assessed, its reasons for proposing them, and the regulator’s assessment of their costs and benefits. The FCA’s proposals will be subject to a full consultation process and as such what it has set out in its statement may not represent the final position following that consultation. The FCA will consider any comments on its statement as part of the consultation process.

The FCA will continue to monitor firms’ handling of PPI complaints under our current rules. We expect firms to deal with PPI complaints promptly and fairly. The FCA will take action where firms fail to do so.

What Should Consumers Do?

Consumers who are unhappy about PPI should continue to complain to the firms concerned and to the Ombudsman if they are not satisfied with the response. Making such complaints is free to consumers and most people should not need to use a claims management company to assist them. Consumers who intend to complain about PPI should do so as soon as possible.


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