R (British Bankers Association) v Financial Services Authority and another
| Jurisdiction | England & Wales |
| Judge | Mr Justice Ouseley |
| Judgment Date | 20 April 2011 |
| Neutral Citation | [2011] EWHC 999 (Admin) |
| Docket Number | Case No: CO/10619/2010 |
| Court | Queen's Bench Division (Administrative Court) |
| Date | 20 April 2011 |
and
[2011] EWHC 999 (Admin)
Mr Justice Ouseley
Case No: CO/10619/2010
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
ADMINISTRATIVE COURT
Royal Courts of Justice
Strand, London, WC2A 2LL
Lord Pannick QC and Mr C Flint QC
Mr J Herberg and Mr S Pritchard (instructed by Freshfields Bruckhaus Deringer LLP) for the Claimant
Mr M Brindle QC and Miss M Carss-Frisk QC
Mr R Coleman and Mr J McClelland (instructed by SNR Denton UK LLP) for the First Defendant
Mr Hodge Malek QC and Mr J Strachan (instructed by Russell Cooke LLP) for the Second Defendant
Mr M Fordham QC and Mr P Luckhurst (instructed by Herbert Smith LLP) for the Interested Party
Hearing dates: 25 th, 26, 27 th and 28 th January 2011
Introduction
This case concerns part of the regulatory response to the misselling of Payment Protection Insurance policies, PPI. PPI policies provide insurance against the risk that a borrower will be unable to maintain loan repayments for example when unable to work; they may include life cover. The premiums may be paid regularly or as a single premium. The policies may be sold with or without advice, face to face, over the telephone or in writing. PPI is a profitable and widely purchased product. Its sales have generated tens of thousands of complaints by customers.
The Claimant, the British Bankers Association, is the leading association which represents the banks. Banks are among those who sell PPI policies. Nemo Personal Finance Ltd, the Interested Party, supports the claim. It sold over 15,000 PPI policies, directly and through brokers, between 2005 and 2009.
The First Defendant is the Financial Services Authority, FSA, the statutory regulator for the financial services industry. Its powers are governed by the Financial Services and Markets Act 2000, FSMA.
The FSA has a statutory power to make rules and to issue guidance. It has issued rules called Principles; these are general statements of the conduct required of the providers of financial services. The FSA has also made rules which deal with the manner in which insurance policies including PPI policies can be sold. These are brought together in the FSA Handbook which also contains its guidance.
The Financial Ombudsman Service, FOS, set up by the FSA pursuant to powers in the FSMA, handles complaints by consumers. It is the Second Defendant. Since 2006, a rapidly increasing and now very large part of its workload are complaints by customers about the way in which PPI policies were sold to them. It upheld 89 percent of the PPI complaints made to it in the year ended 31 March 2009. Its concern about the way in which PPI policies were sold was formally communicated to the FSA in July 2008.
On 10 August 2010, the FSA published Policy Statement 10/12 "The assessment and redress of Payment Protection Insurance Complaints." It comprises what the FSA describes as a "package of measures" stemming from its "serious concerns about widespread weaknesses in previous PPI selling practices" to the detriment of many consumers. The package includes amendments to the Handbook rules, guidance about how PPI sales complaints should be handled and the basis on which they should be decided, and an Open Letter identifying what the FSA sees as common failings in the selling of PPI policies; these failings have inaccurately been termed Standards by the BBA. The measures also include guidance on "root cause analysis", a mechanism whereby those who have not complained may also receive redress for losses suffered.
The Claimant challenges the lawfulness of that Statement. The Policy Statement is said to be unlawful because it treats the Principles as giving rise to obligations owed by firms to customers, leading to compensation being payable for their breach, when those Principles are not actionable in law. The FSA says that the fact that breach of the Principles does not of itself give rise to a cause of action in court has no impact on their relevance as obligations, breach of which can lead to compensation.
The BBA's main alternative argument on the lawfulness of the Policy Statement is that, since the FSA has made specific other rules governing the manner in which PPI policies are sold, designed to incorporate in their ambit the implications of the Principles to the extent that the FSA chose to do so, it was unlawful for the FSA to provide in its Policy Statement that a customer might be entitled to redress by reference to Principles which conflicted with or augmented those specific rules.
The FSA denied creating any conflict, but said that it was entitled to rely on the Principles as well as the specific rules when telling firms and customers on what basis firms should decide complaints about entitlement to compensation.
BBA contended that, to the extent that either of its two main arguments were correct as a matter of statutory construction, the Ombudsman was acting unlawfully in publishing and maintaining since November 2008 guidance on its website, the Online Resource, which stated that the Principles would be taken into account in its decisions as to whether compensation would be "fair and reasonable". The Ombudsman submitted that it was obviously entitled to have regard to the Principles in that way.
BBA's third main argument, on which Mr Fordham QC for Nemo made the main submissions, was that the FSA's Policy Statement was designed to address what it perceived to be widespread misselling of PPI policies. The FSMA had prescribed a specific statutory procedure in s404 for dealing with this, providing redress for non-complainants, but with safeguards for the firms affected. The informal procedure in the Policy Statement, the guidance on "root cause analysis", was therefore unlawful. The FSA's Policy Statement could not be used with the intent or effect of circumventing that specific statutory procedure with its safeguards or limitations. Moreover, the specific statutory scheme, which was what the FSA had to follow, could not be based on breaches of the Principles since they were not actionable.
The FSA submitted that there was no obligation to follow that specific statutory procedure, and circumstances permitted it to proceed as it had done.
Ground 1: The relevance of actionability
The statutory framework: the FSA
The Claimant's first submission concerns the relationship between the powers of the FSA to make rules and to prevent them being actionable, and the reliance by the FOS on those non-actionable rules in determining compensation claims.
The duties of the FSA are set out in s2 of the Financial Services and Markets Act 2000. Its regulatory objectives include market confidence, public awareness and consumer protection. Its general functions in s 2(4) are making rules, preparing and issuing codes, giving general guidance, and determining the general policy and principles by reference to which it performs particular functions.
S138 provides the general rule-making power, which covers regulated activities such as the selling of PPI policies by authorised persons such as the members of the BBA. The s138 rules are known as general rules. S155 requires the FSA to consult on draft rules, the publication of which must include an explanation of their purpose and a cost benefit analysis. Representations must be taken into account, and the FSA must publish a general account of the representations and its response to them. The rules are denoted in the FSA Handbook by an R.
An important consequence of contravention of a rule is provided for in s150 as follows:
"150. – Actions for damages.
(1) A contravention by an authorised person of a rule is actionable at the suit of a private person who suffers loss as a result of the contravention, subject to the defences and other incidents applying to actions for breach of statutory duty.
(2) If rules so provide, subsection (1) does not apply to contravention of a specified provision of those rules."
S150(2) is significant in the case since the Principles are FSA rules but the FSA has provided that s150(1) does not apply to them. Other consequences which apply to contraventions of the rules, including Principles, are public censure under s205, and financial penalties under s206. Those consequences are appealable to the Upper Tier Tribunal. The FSA may also seek from the court an injunction to prevent repetition of a contravention, s380, or a restitution order where someone has profited from a contravention or another has suffered loss in consequence; ss382 and 384.
S149 enables a rule to be made, known as an evidential rule, contravention of which does not give rise directly to any of the statutory consequences that follow contravention of other rules. Instead, contravention or compliance may be evidence of contravention of or compliance with some other provision of the rules. These evidential rules are denoted by an E in the Handbook.
The FSA may also give guidance consisting of information and advice about the operation of the Act and the rules, any matters relating to its functions, and for the purposes of meeting the regulatory objectives. It has to consult about guidance on rules as it would if it were issuing rules, unless urgency makes delay undesirable; s157. Guidance is denoted by a G in the Handbook.
The statutory framework: the Ombudsman
The FSA was required by s225 to set up an Ombudsman scheme: "under which certain disputes may be resolved quickly and with minimum formality by an independent person"; s225 (1). The Financial Ombudsman Service Ltd is the company set up by the FSA to perform that function. It has a compulsory and a...
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