Insights

Managing misselling

July 2014

Managing misselling

Claims regarding PPI may be starting to dwindle but the controversy provides some valuable lessons in how lenders should deal with misselling claims.

Payment Protection Insurance (PPI) has never been far from the headlines. Lenders have shelled out more than £12.9bn in compensation since January 2011, according to the Financial Conduct Authority (FCA), as claims management companies (CMCs) went after lenders on behalf on individual clients.

PPI claims, however, are on the wane as lenders have put aside the capital required to repay claims based on the initial premium. In contrast, CMCs are now turning their attention to other financial products on the market that have faced allegations of misselling or negligent advice.

Products or services include the rates of LIBOR, consolidated debt loans, interest-rate swap deals, child trust funds and interest-only mortgages. In the latter example, during the property boom around 2.6 million interest-only products were secured and are due for repayment over the next 30 years, 10% of which have no repayment plan in place. Up to 1.3 million borrowers may be facing a financial chasm of tens of thousands of pounds.

While each sector is different and requires different approaches, the experience from the volume of PPI claims during the last few years provides some vital guidance when facing claims over misselling.

Just the facts

If one thing has become clear from the PPI claims is that CMCs do not usually file thrifty cases. It is common for a PPI claim to comprise more than 25 pages, often skirting the exact facts of a case and instead focusing on wider macro-economic matters.

Such elaborate claims usually involve novel arguments in a bid to persuade the court that the claimant has suffered all sorts of wrongs as a result of the misselling, irrespective of the product. The danger is that many cases end up being presented as a jamboree of facts coupled with weird and wonderful legal scenarios which have been deployed in an effort to build a case. Indeed, those involved in defending PPI claims have become accustomed to seeing claimant law firms the length and breadth of the country stretching the common old pleading to the very edge of reason.

This does not always benefit the claimant either. At trial, they invariably attend court either confused, frightened or often both. It is worth remembering that the claimant has had very little communication with their solicitor and often the claim is built around general supposition rather than the bespoke scenario of the specific claimant.

As such, it is important to hone in on “just the facts” and look at the applicable legislation and regulations that govern the product or the sector and try to avoid long-winded claims or engaging in frivolous arguments, which costs time and money. Lenders must be able to assess when a misselling claim is genuine and, if so, the appropriate level of compensation. Lenders must then be able to analyse actions because the allegations may be much more generalised, coming from opportunistic claimant firms are able to know when a defendant is willing to fight a case and when they prefer to settle.

Lenders need to be able to assess both scenarios in order to know when claims are genuine and what the right level of compensation should be. They must also know when to contest the matter and not cave in when the notice of action comes through.

In the case of the PPI market, as it evolved, the Judiciary has been less rigorous in accepting allegations of misrepresentation, breach of fiduciary duty and unfair relationship. In fact, the two main claims emerging focus on:

  • Was the borrower led to believe that PPI was mandatory, and, if not, was the borrower provided with information (primarily around extra cost and necessity) that would have enabled the borrower to make an informed decision?
  • Was the lender’s documentation ICOB or ICOBS compliant; was it accurately completed and did it reflect the discussions with the borrower

Record keeping

Lenders must ensure that they keep a thorough and satisfactory record of all the relevant documentation. If a financial services company is able to prove that its documentation was accurate and compliant, then proving that the advice was not negligent and within the parameters of regulation should be easier to establish.

For example, one area of interest for misselling is interest rate swap agreement (IRSA), which were convoluted finance mechanisms sold by lendersto their small to medium businesses (SMEs) from 2001. IRSAs were packaged into loans where SMEs had to enter into interest rate swaps, which could often increase the amount or tenor of the loan. As part of this, rather like PPI, lender said IRSAs were protected but the allegation is that the advice did not warn customers what would happen if the interest rates collapsed.

The key here is whether the banks breached the legacy Financial Service Authority’s (now the FCA’s) rule on presenting information to customers on the costs.

It is also worth remembering that any misselling complaint has to be made to the Financial Ombudsman Service either within six years of the sale of a policy or within three years from when the customer was aware they had a case. Claims outside that timeframe do not need to be considered.

There are certain caveats to this, of course. When it comes to trust funds, for instance, they usually do not mature until the benefactor reaches 18, ergo the advice in question may actually have been provided 21 years ago. A similar scenario may occur in interest-only mortgages, instance, which were secured years ago but can be claimed against within three years of a customer becoming aware of a case.

It is unlikely that detailed records would stretch back that far so it becomes difficult to prove that misselling did not occur, leaving lenders potentially exposed to claims.

There is, of course, a certain standardisation in documentation that could offer some protection. For interest-only mortgages, the application form and mortgage offer will usually explain the product in detail and the risks. The form is not about protecting the customer from a bad deal, but informing them of their obligations and possible outcomes.

While there are common threads to misselling claims, expert advice needs to be obtained to make sure that the correct solution is offered. Whether it is documentation or advice, lenders have to be aware of the myriad of differences between the different products.

In the case of PPI, lenders had to ensure that documentation was ICOB or ICOBS compliant but for other sectors it will fall under different regulations, such as the Financial Conduct Authority.

For example, the legacy FSA’s investigation into the misselling of swaps claimed 90% of the transactions it looked out were not compliant with its guidelines. In addition, it made the distinction between “unsophisticated” and “sophisticated” businesses, believing the lenders did not explain the products or the risks fully to the former.  As such, lenders need to make sure that all documentation is clear to every customer.

For any lender, whether facing claims of LIBOR misselling or misleading consolidated unsecured credit loans, the PPI experience has shown just how expensive failure to comply can be.

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