New front in PPI scandal

Posted: 16th December 2013

RCJBanks and other commercial lenders have good reason to worry after the way was opened for a Supreme Court test case that could greatly increase the already enormous financial consequences of the payment protection insurance (PPI) mis-selling scandal.

Lending institutions have to date had their potential liability to compensate customers limited by a Court of Appeal decision in 2011 to the effect that the widespread failure to disclose the existence of often very substantial commissions on the sale of PPI policies did not, by itself, make their relationship with relevant clients ‘unfair’, within the meaning of Section 140A of the Consumer Credit Act 1974.

That decision was reached on the basis that the Insurance Conduct of Business Rules (ICOB), which were introduced by the Financial Services Authority in 2005 in purported implementation of the Insurance Mediation Directive, did not require disclosure of commissions on the sale of PPI policies.

In dismissing an appeal by a disgruntled nurse who was sold PPI in respect of a £17,500 loan – but was not told that the lender would receive a 40 per cent commission – the Court of Appeal ruled that it was bound to follow the 2011 decision. However, in granting her permission to appeal further to the Supreme Court, the Court was scathing in its assessment of the current state of the law on the issue as well as prevailing industry standards at the relevant time.

The Court described the dismissal of the nurse’s case as a ‘dispiriting conclusion’ that was forced upon it by the 2011 precedent. Were it not so bound, the Court’s ‘visceral instinct’ would have been to find that the failure to inform the nurse of the existence of the commission was ‘beyond the pale’.

It was apparent, the Court observed, that the regulatory standards imposed on the industry at the relevant time ‘manifestly failed to prevent the abuse of point of sale single premium PPI, to an extent that it has since become a national scandal and has been prohibited for the future’.