Payment Protection Insurance claims - encouraging news

Updated June 2011

The popular perception from the industry's much-publicised withdrawal of its case with the Financial Services Authority in relation to the Payment Protection Insurance (PPI) complaints-handling guidance is that customers are always entitled to compensation. That is not necessarily so.

The FSA’s hotly disputed PPI complaints-handling guidance states that firms should consider whether their conduct breached “the duty of care or any other requirement of the general law”. Three recent cases have shown that the courts will take a robust attitude to customers' claims against firms arising from PPI. Firms should have regard to this attitude of the courts in considering the legal duties owed to PPI claimants.

What is PPI?

In essence, PPI is an indemnity insurance policy that will fund a customer's loan repayments in certain circumstances, usually in the event of redundancy, for a limited period of time.

It is useful for lenders as added security for their lending.

What is the legal basis for a claim?

'Mis-selling' is not a legal term of art.

To be successful at law the customer needs to establish one or more of the following causes of action:

• That the firm acted as fiduciary.
• That the firm acted in breach of contract (usually on the basis that it was negligent).
• That irrespective of contract the firm owed the customer a duty of care and was negligent in selling the PPI.
• That the firm misrepresented the PPI arrangements and has induced the customer to enter into the PPI contract.

The consequence of any successful allegation of the above is that the firm is potentially liable in damages.

The most serious allegation is that the firm is a fiduciary, because fiduciaries have stricter obligations imposed on them than under contract or in negligence. It may mean that the firm is obliged to account to the customer for any profit made in selling the PPI policy in addition to damages.

How have the courts approached these issues?

Three recent cases (listed below) have shown that the courts will need considerable persuading before they will accept one or more of those allegations.

In particular:

• There will need to be exceptional evidence to establish a fiduciary duty on the firm. Merely offering PPI as a product without recommendation is insufficient to impose a fiduciary duty.
• As long as the firm is operating fairly and within the law and FSA rules it is unlikely that a claim in negligence will succeed.
• Clear evidence is required to show what statements the firm made that could be construed as a misrepresentation and how it was relied upon by the customer.

What can we do to help?

We suggest that financial services firms examine claims in relation to PPI very carefully, and not simply concede. In particular, firms should consider the nature of the legal duties owed to customers in the particular circumstances.

We have considerable experience in dealing with PPI claims. We will be pleased to:

• undertake a preliminary analysis of individual cases;
• represent you in specific claims.

The three cases referred to are:

• Lawson and Lawson v Black Horse Ltd., Unreported, 15 April 2011;
• Carson and Hazell v Black Horse Ltd., Unreported 18 April 2011;
• Barnes and Barnes v Black Horse Ltd., [2011] EWHC 1416 QB 31 May 2011.

For further information or advice, please contact Suzanne MacDonald.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at June 2011. Specific advice should be sought for specific cases; we cannot be held responsible for any action (or decision not to take action) made in reliance upon the content of this publication.

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