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Failed Judicial Review of PPI Mis-selling Redress Guidance, Contributed by Ben Trust and Henry Farris, Nabarro LLP

Tuesday, October 25, 2011

One of the most high-profile judgments of 2011 was given by Mr Justice Ouseley in the case of R (British Bankers Association) (BBA) v the Financial Services Authority (FSA) and the Financial Ombudsman Service (FOS).1 In this case the BBA sought, and failed, to obtain judicial review of a policy statement released by the FSA in relation to payment protection insurance (PPI). This case has been reported on extensively and is expected to have far-reaching implications in the financial services industry.


By way of background information, many banks and financial institutions have been selling PPI for some years and these sales have led to an increasingly large number of complaints from customers. The complaints are handled by the FOS which, in 2008 and after the volume of such complaints continued to increase, consulted with the FSA. The FSA has a statutory power to issue rules and guidance. Of particular relevance to this case is that it issues general statements of fundamental obligations to financial service firms called Principles.2 The sale of PPI (and other related products) is also governed by rules set out in the FSA's Insurance Conduct of Business handbook (ICOBS).3 These rules are more specific than the Principles and are actionable by private persons by reason of section 150(1) of the Financial Services and Markets Act 2000 (FSMA). The Principles are not actionable because, pursuant to section 150(2) FSMA, the FSA has made a rule providing that section 150(1) is not applicable to them. In August 2010 the FSA released a Policy Statement entitled "The Assessment and redress of Payment Protection Insurance Complaints" as a result of its consultation with the FOS. The FSA released the Policy Statement because it had "serious concerns about widespread weaknesses in previous PPI selling practices".4 The Policy Statement contained, amongst other things, guidance for financial institutions on how to resolve complaints from customers in relation to PPI sales and an open letter detailing the common failings in the selling of PPI The open letter also contained guidance on "root cause analysis," which may have the effect of requiring firms to seek to pay redress to customers who have not complained.

Grounds of Challenge

The BBA sought judicial review of the Policy Statement on three grounds.

— 1. Non-actionability

The BBA argued that the Policy Statement was unlawful because it treated the Principles as giving rise to obligations to customers from the firms, when those Principles were not actionable. It argued that section 150(2) FSMA precluded firms from having to offer redress to customers on the basis of merely an alleged contravention of the Principles. If this argument were correct, it would mean that it was unlawful for the FSA to require firms to compensate customers for breaches of the Principles when such breach would not be actionable under the statute (because of a breach of a rule) or at common law. The Judge rejected this argument as he construed the term "actionable" in section 150(2) FSMA more narrowly than the BBA did. He understood it to mean "giving rise to a cause of action in a court of law" rather than "capable of giving rise to obligations or compensation."5 Therefore section 150(2) FSMA did not prevent obligations arising between the firms and the customers, notwithstanding that a breach would not be actionable in a court of law. In respect of the FOS, the Judge went further and said that it would have been in breach of its statutory powers if it did not take the Principles into account when considering what was "fair and reasonable."

— 2. Conflict & Augmentation

In the alternative, the BBA argued that it was unlawful for the Policy Statement to entitle customers to redress under the Principles, as the Principles conflicted with or augmented the specific rules, established by the FSA in ICOB. Mr Justice Ouseley dismissed this argument because he held that, rather than contradicting the specific rules, the Principles were a pervasive and overarching framework to which the specific rules could be applied. In a particularly telling passage the Judge stated: The Principles are best understood as the ever present substrata to which specific rules are added. 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.6

— 3. Circumvention of the Statutory Procedure

The final argument (which was argued by Nemo Personal Finance Ltd (Nemo), an interested party) was that the wrong that the Policy Statement was intended to remedy, namely widespread mis-selling of PPI, must be remedied by exercising the specific power at section 404 FSMA. This provision provides for various procedural safeguards and gives the FSA power to take industry-wide action when it believes there has been a general failure to comply with rules. Importantly, section 404 provides safeguards for the firms involved. The BBA (and Nemo) were concerned that the "root cause analysis" approach adopted by the FSA was unlawful because it disregarded the section 404 procedural safeguards. The Judge also rejected this argument for a number of reasons. Although the regulatory framework and section 404 are similar and contemplate comparable circumstances, that is insufficient to deprive the FSA of the ability to act in relation to the mis-selling of PPI. There are also fundamental differences to the implementation of the regulatory framework and any scheme under section 404. For instance, the former are not universally applicable within the industry nor are they controlled by the regulator. Instead they seek to implement more effective management controls to ensure that customers are dealt with on an individual basis. Moreover, the Judge found that instead of section 404 being the only way in which a regulator can act, and thus diminishing the FSA's powers in circumstances such as these, "it is far more likely that Parliament would have added to the regulator's armoury."7

Conclusions & Context

The BBA did not appeal this judgment. Opinion on it is divided and, unsurprisingly, depends on perspective. It has been argued that this judgment gives greater regulatory uncertainty as firms may find themselves in a situation where they comply with FSA rules but are deemed to be in breach of the Principles. On the other hand this judgment provides comfort for the thousands of customers who were mis-sold PPI, in that the regulatory regime surrounding the selling of PPI is greatly enhanced by the application of the Policy Statement and they may receive redress without having to complain to the FOS. Ben Trust is a partner in the commercial dispute resolution team at Nabarro LLP. Ben acts for a number of quoted and unquoted companies, public bodies and other institutions. He has a broad practice and experience in both commercial litigation and arbitration, including financial services litigation, commercial fraud, professional negligence, and technology disputes. Much of his experience includes cross-border or international issues. Telephone: +44 (0) 20 7524 6234; E-mail: Farris is an associate in the commercial dispute resolution team at Nabarro LLP. He acts on a wide range of disputes, including litigation, arbitration and regulatory investigations. He has particular experience in financial services disputes. Telephone: +44 (0) 20 7524 6659' E-mail:
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