The biggest court case involving misselling claims relating to single premium payment protection insurance policies ('PPI'), Harrison v Black Horse Ltd, settled last month on better terms than would have obtained had the appeal been successful.
Harrison, the only case that was to be heard on appeal by the Supreme Court, has huge significance for both claimants and banks and has been a considerable hindrance for the few claimant law firms pursuing redress through the courts for PPI misselling on behalf of consumer borrowers.
While huge publicity has been given by claims management companies (CMCs) seeking business from consumers to handle claims within the Financial Ombudsman Service (FOS) remit, little attention has been given to the pioneer law practices that started litigation.
The Ombudsman approach was initially seen as overwhelmingly successful. But more recent statistics show that the number of complaints being upheld by the FOS dropped from 89 per cent in 2010 to only modestly above 50 per cent.
Inevitably, CMCs charge contingency fees of 25 per cent or more plus VAT '“ a sum which is deducted from damages. For this reason, many consumer organisations, along with FOS, believe that complainants should bring the complaint themselves, and if rejected pursue the matter through the mediation process of the FOS. Nonetheless, the majority of consumers appear to instruct a CMC and sometimes a law practice to act on a contingency fee. Because no costs are ordered by the FOS, consumers suffer a reduction from the value of any win by reason of the fees charged.
The advantage of pursuing a claim through litigation is that on a successful outcome, the solicitor, who will invariably act on a conditional fee basis, will agree to limit costs to those recovered from the defendant.
It is not always appreciated that claims within litigation include a claim for relief under the Consumer Credit Act 1974 (CCA), a relief that the Ombudsman is not able to consider on individual complaints. Many CMCs have been criticised for making claims for PPI refunds where no PPI was in place. This, in part, has arisen because the CMC does not always bother to obtain the loan agreement and PPI documentation.
No causative loss
Mr and Mrs Harrison had a straightforward and apparently strong claim against Black Horse, claiming relief under section 140(A) '“ (D) CCA as well as under section 150 Financial Services and Markets Act 2000 (FSMA) for breach of the Insurance Code of Business Rules (ICOB).
The case was in respect of two loan agreements, both including PPI, the later one rescheduling the earlier one, which was paid off before running its full course. The principal basis for the claim was that the lender selling PPI breached its obligations in respect of ICOB in several material particulars, including the fact that the term of the loan was 20 years and the term of the PPI policy was only five years.
They also claimed relief under the Unfair Relationship Provisions of section 140(A) '“ (D), arguing the price of the policy was excessive and that Black Horse admitted it had failed to disclose that 87 per cent of the single premium of £10,200.00 was commission retained by Black Horse. The claim for relief in respect of the first agreement was abandoned at trial after acceptance of the defendant's argument that it was time-barred. (Later authority suggests that the first agreement was within time).
The judge at first instance held that there was no unfair relationship, nor breach of ICOB, and the matter went to appeal before His Honour Judge Waksman QC, sitting as the Mercantile Judge of the High Court.
He dismissed the appeal and held that while there was a breach of ICOB in relation to the mis-match between the term loan and policy term, it was not causative of any loss. He similarly held that the failure to disclose the substantial commission was not causative of any loss, which he deemed a requirement for the purposes of weighing that fact with other factors, in considering whether there was an unfair relationship.
The matter progressed to the Court of Appeal, limited to the consumer credit claim. Again the appeal failed and the case was on its way, with consent, to the Supreme Court, when the settlement came about.
Settlement offer
Recently, and somewhat out of the blue, Black Horse wrote an open letter to Mr and Mrs Harrison stating that on a review of the originally rejected complaints, it was now accepted that the mismatch between the term of the loan agreements and the term for the PPI policies allowed for a reconsideration so that the Harrisons would be compensated in full. The company made a full offer of redress for £33,000 (the correct amount for both PPIs). This open admission, alone with the powerful grounds of appeal, is likely to have influenced the decision by Black Horse in entering into the following agreement:-
a) Reversing the trial judge's dismissal of the claim;
b) Reversing the costs orders at trial and on the failed two subsequent appeals;
a) Agreeing to pay the Harrisons' costs of all the proceedings in relation to the original county court action through to settlement, other than recovery of ATE premiums.
The settlement was approved by the Supreme Court on 31 August.
The significance of this volte face by Black Horse must not be overstated. The consequences of the unsuccessful appeal before Judge Waksman, compounded by the Court of Appeal upholding his decision, means that effectively the litigation of such claims has been brought to a halt with the following results:
1. All ATE insurers withdrew cover for the bringing of such claims as long ago as 2010 and only a handful of claimant practices were allowed to continue cover.
2. Almost all pending claims were subject to stays, originally until after the Court of Appeal decision and then until after the decision of the Supreme Court, which was not expected to hear the matter until the autumn of 2013.
3. Since Harrison, the small number of claims that went to court were more often than not viewed by judges in the light of the Court of Appeal's judgment, which usually most of them failing at trial.
4. Settlements by lenders have been put on hold and actions either defended or stayed accordingly.
It is not always appreciated that the FOS has no jurisdiction to entertain complaints in relation to loan agreements entered into before regulation by the FSA, namely, 14 January 2005. The only exceptions relate to claims which were subject to a self-regulatory regime such as GISC, which did not apply widely.
Binding precedent
So, despite the settlement in Harrison effectively reversing the earlier rulings in the case, these judgments remain in place and the ratios in the decisions by the High Court and Court of Appeal remain effective. As a result, the position following HHJ Waksman QC's judgment appears to be:-
1. Any identified breach of ICOB must be proved to be causative of a loss to the claimant for the purposes of statutory relief pursuant to section 150 FSMA.
2. Failure to disclose commission and the likelihood of a material conflict being present was not causative because the sales process was not flawed, and there was no causal link between the actual loss, inducement and the process actually used.
3. Any coextensive duty of care owed is coterminous with any claim for relief pursuant to section 150 FSMA.
4. Any loss arising from failure to disclose commissions, to the extent that this supports a claim for unfairness under section 140(A) CCA, must also be causative. This and point 3 above appear to be in tension, however, with High Court decisions in other cases (see Richard Bevin v Datum Finance Limited [2011] EWHC 3542 (Ch) where the judge ruled that, under section 140(B)(9), once an allegation of an unfair relationship is made, the onus is on the defendant to prove to the contrary). Moreover, Mr J Ouseley in British Bankers Association v Financial Services Authority [2011] EWHC 999 (Admin) disagreed with 3 above. Questions of causation, therefore, do not necessarily appear to arise.
5. The ratio of the Court of Appeal judgment is on its own reading, a very narrow based one:
i) There is no requirement to disclose commission pursuant to ICOB.
ii) The failure to disclose commission does not being about an unfair relationship, particularly when the lender has complied with its statutory ICOB requirements notwithstanding the high rate of such commission.
Pursuing claims after Harrison
Practitioners may still continue pursuing claims, without falling foul of the ratios established by the High Court and Court of Appeal, so long as care is taken. However, defendants will doubtless rely on the Court of Appeal decision and obiter, and it may be very difficult to win before a judge at the county court level.
It is a matter of regret that the Supreme Court will not now be able to deliver a wide-ranging judgment offering guidance on the application of the unfair relationship provisions of the Consumer Credit Act. No doubt, in due course, there will be another opportunity to take matters through to the Court of Appeal or Supreme Court.
In this case, the Harrisons succeeded to a greater extent than had the Supreme Court decided in their favour '“ the settlement includes redress in respect of both the first agreement PPI along with the second agreement PPI.
In this case, it is most likely, that Black Horse recognised the mismatch between the term loan and the policy, to the effect that Black Horse was required to presume that the Harrisons would not have purchased the payment protection contracts without evidence to the contrary.
Therefore, as there are 12 items requiring the firm to determine the effect of a breach or failing, a failure to apply any such items correctly, may in itself, support a claim for unfairness within the relationship, pursuant to section 140(A) CCA.
As a simple overview, it seems anachronistic that huge numbers of claims have succeeded before the Ombudsman, who has to apply the law in reaching decisions, while the outcomes for claimants within litigation have so far been singularly unsuccessful (considered in Dylan Andrew and Ors v Barclays Bank Plc and Ors [2012] EWHC B13).
This legal arena has some way to go, and in the meantime there are other claims, surfacing in some volume, such as structured collars and other hedging instruments. The banks will remain vulnerable to financial irregularity claims for some time yet.
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