IN THE MATTER OF CONSULTATION PAPER CP15/39:
RULES AND GUIDANCE ON PAYMENT PROTECTION INSURANCE (November
2015)
OPINION
1. I am asked by We Fight Any Claim Limited (“WFAC”) for my Opinion as to the
lawfulness of:

a consultation process embarked upon by the Financial Conduct Authority
(“FCA”) called Consultation Paper CP15/39: Rules and Guidance on Payment
Protection Insurance (November 2015)(“the Consultation Paper”);

the proposals in the Consultation Paper, insofar as they may become FCA rules.
Opinion summary
2. In my Opinion, the consultation process is probably unlawful because the Consultation
Paper:

does not contain sufficient information to enable consultees to provide informed
comment about the extent to which the proposed communications campaign will
succeed in making consumers aware of their rights in relation to mis-sold PPI;

does not contain sufficient information to enable consultees to provide informed
comment about the extent to which the proposed communications campaign will
reach persons who share a “relevant protected characteristic”, for the purposes of
section 149 of the Equality Act 2010;
1

fails to provide an adequate “explanation”, as required by section 138I(2)(d) of
the Financial Services and Markets Act 2000, of the FCA’s reasons for believing
that its proposals are compatible with its “general duties” including, in particular,
its “consumer protection objective”.
3. In addition, it is my Opinion that many of the proposals in the Consultation Paper would
probably be unlawful, as rules, because:

the decision to introduce a revised time limit for PPI has been reached in breach of
the Public Sector Equality Duty, at section 149 of the Equality Act 2010 and is
incompatible with the FCA’s “general duties”, in particular its duty appropriately
to put into the scales its “consumer protection objective”;

the rules purport to give effect to section 140A of the Consumer Credit Act 1974,
as considered in Plevin, but impose a time limit that excludes complaints based on
a tranche of PPI sales to which section 140A applies;

the selection of undisclosed commission of 50% as the “tipping point” that, in
general, renders a creditor/debtor relationship unfair, is based on a misunderstanding of case-law, disregards relevant considerations, fails to apply the
Plevin principle and is inconsistent with the FCA’s “general duties”, in particular
its “consumer protection objective”;

the proposed levels of redress are inconsistent with both the FCA’s “general
duties” and the principle that the object of a complaints process is to remedy
injustice, as is the guidance that firms need not re-open complaints that must now
be regarded, in the light of Plevin, as having been wrongly rejected;
2

the application of the same redress principle, and the same reduced complaints
period, to Norton Finance claims, is unexplained, inconsistent with the FCA’s
“general duties” and irrational.
The scope of the consultation
4. Paragraph 1.1 of the Consultation Paper summarises the scope of the consultation
exercise as follows:
1.1 This consultation paper sets out, and asks for views on, our proposals for:
• a new rule that would set a deadline by which consumers would need to
make their payment protection insurance (PPI) complaints or else lose their
right to have them assessed by firms or by the Ombudsman service
• an FCA-led communications campaign designed to inform consumers of the
deadline
• a new fee rule on funding this consumer communications campaign
• new rules and guidance on the handling of PPI complaints in light of the
Supreme Court’s decision in Plevin v Paragon Personal Finance Ltd
(‘Plevin’)
• the proposed deadline also to apply to PPI complaints falling within the
scope of the proposed rules and guidance on Plevin.
5. The importance of the consultation, for both consumers and financial institutions, is very
high: the Financial Services Ombudsman (“the Ombudsman”) has estimated that about
£50BN of PPI has been mis-sold over the last 10-15 years and said “This is why people
are calling this the biggest mis-selling scandal in financial services history”1; (ii) only
about £21BN of redress has been paid (paragraph 2.15 of the Consultation Paper); (iii)
about 16.5M PPI complaints have been made since 2007 but “it is clear that a majority of
the PPI policies sold have not been complained about” (paragraph 2.6 of the Consultation
Paper).
1
See http://www.financial-ombudsman.org.uk/contact/PPI-your-case.html.
3
The statutory framework
6. The FCA is required to undertake public consultation before it makes rules, by virtue of
section 138I of the Financial Services and Markets Act 2000 (“the Act”). Section 138I
also requires, inter alia, that the FCA publishes (i) a draft of the proposed rules; (ii) a cost
benefit analysis; (iii) an explanation of the purpose of the proposed rules; and (iv) an
explanation of the FCA’s reasons for believing that making the rules is compatible with
its duties under section 1B(1) and (5)(a) of the Act.
7. Section 1B(1) and 5(a) of the Act comprise a set of interlocking provisions that impose a
variety of “general duties” on the FCA when discharging its “general functions”2
including, summarised briefly, the duty:

to act compatibly with its “strategic objective” of ensuring that the “relevant
markets” function well (section 1B(1), (2) and 1F of the Act);

to act compatibly with its “operational objectives”, which include “the consumer
protection objective”, “the integrity objective” and “the competition objective”, as
further defined (section 1B(1), (3), 1C, 1D and 1E);

to discharge its general functions so as to promote “effective competition in the
interests of consumers”, so far as compatible with the “consumer protection
objective” and “the integrity objective” (section 1B(4));

to discharge its general functions having regard to the “regulatory principles in
section 3B”, which include that (i) burdens or restrictions imposed on a person, or
activity, should be proportionate to the expected benefits (section 3B(1)(b)); and
(ii) as a general principle consumers should take responsibility for their actions
(section 3B(1)(d)).
2
These include the FCA’s function of making rules and codes, promulgating guidance and determining its
general policy and principles.
4
8. In my Opinion, as a matter of statutory construction, section 138I(2)(d) of the Act
requires the FCA:

to undertake a reasonable level of inquiry into whether a proposed rule change is
compatible with its “strategic objective”; its “operational objectives”, in
particular its “consumer protection objective”; and the “regulatory principles”;

to provide a rational explanation as to why proposed rules are so compatible.
The law on consultation
9.
Unless displaced or modified by statutory provisions, there is a legal minimum
standard which, if not met, usually renders a consultation process unlawful and any
consequential decision liable to be quashed. The public authority in question must:

undertake consultation when the proposals are still at a formative stage;

give consultees sufficient reasons for the proposal, so as to permit intelligent
consideration and response;
10.

give consultees adequate time for consideration and response;

take the products of consultation conscientiously into account3.
The underlying principle is that of procedural fairness. Accordingly, precisely what is
required is always context sensitive4. For example,
3
R (Moseley) v Haringey LBC [2014] UKSC 56, [2014] 1 WLR 3947, at paragraph 25.
5

when a proposal may deprive someone of an existing benefit or advantage, or
affect their enjoyment of legal rights, the standard of fairness required may be
higher5; and

a clearer explanation of the proposals may be required from the public
authority, when the consultees lack relevant expertise but the proposal is likely
to impinge significantly upon them6;

one should not focus too narrowly on particular words used in the cases. For
example, whereas the “classic” formulation of what is required speaks of the
provision of “sufficient reasons for any proposal to permit of intelligent
consideration and response”7, other cases use slightly different language and
speak of, for example, “telling them enough (which may be a good deal) to
enable them to make an intelligent response”8.
11.
Sometimes, fairness and/or the statutory context can require public authorities to
consult, not only on their preferred option but, also, on any realistic alternatives9.
The PSED (public sector equality duty)
12. The PSED is imposed by section 149 of the Equality Act 2010 (“the 2010 Act”):
149 Public sector equality duty
(1) A public authority must, in the exercise of its functions, have due regard to the
need to—
4
Moseley, at paragraph 24.
5
Moseley, at paragraph 26.
6
Moseley, at paragraph 26.
7
Moseley, at paragraph 25.
8
R v North and East Devon HA ex p Coughlan [2001] QB 213, at paragraph 108; approved at paragraph 25 of
Moseley.
9
Moseley, at paragraphs 27-28, 39-41.
6
(a) eliminate discrimination, harassment, victimisation and any other conduct
that is prohibited by or under this Act;
(b) advance equality of opportunity between persons who share a relevant
protected characteristic and persons who do not share it;
(c) foster good relations between persons who share a relevant protected
characteristic and persons who do not share it.
13. Like the duty to consult fairly, this is a duty of process rather than result; unlike the duty
to consult fairly, this duty is an ongoing duty, which continues after consultation has
ended, throughout the decision-making process and beyond. Accordingly, some
breaches of the PSED may be remedied at a later stage; but not all. For the reasons
given below, in my Opinion the PSED imposes minimum requirements on a
consultation process that cannot be remedied at a later date, after the decision has been
made, to:

“engage with” persons who share a “relevant protected characteristic” (age,
disability, gender re-assignment, marriage and civil partnership, pregnancy and
maternity, race, religion or belief, sex and sexual orientation);

enquire into and explain in concrete terms how such persons may be affected by
the proposals, what mitigating steps are proposed and what the justification is for
proposals that may adversely affect those who share a “relevant protected
characteristic”.
14. Thus, the PSED meshes with the duty of explanation at section 138I of the Act, in the
sense that it underlines that the FCA is required, in the Consultation Paper, to describe
and justify the potential impact of its proposals on persons who share a “relevant
protected characteristic”, having enquired into that issue, in a manner that engages with
persons who share such characteristics.
7
Consultation: the minimum legal requirements in this case
15. Given (i) the important adverse financial implications for consumers, many of whom lack
expertise on PPI; (ii) the expansive requirements of section 138I of the Act; and (iii) the
potential adverse impact on consumers who share a “relevant protected characteristic”,
my Opinion is that a relatively high standard of consultation was required, such that the
FCA was under a legal duty to:

undertake reasonable enquiries into whether its proposals are compatible with,
inter alia, the “consumer protection objective”, including by engaging with
persons who share a “relevant protected characteristic” and considering how they
may be affected;

explain clearly and in concrete terms, with reference to the material produced by
its enquiries, what mitigating steps are proposed and why, in its opinion, its
proposals are compatible with its duty to protect consumers, in particular
consumers who share a “relevant protected characteristic”.
The 1st proposal: the 2-year deadline
Introduction
16. The 1st proposal is to reduce the time limit for making complaints about PPI from 6 years
to 2 years10 but to mitigate any consequential unfairness by undertaking a consumer
communications campaign, aimed at, inter alia, prompting consumers who wish to
complain, to take action.
10
The proposal is to amend the FCA’s Handbook of rules and guidance, by qualifying paragraph 2.8 of its
Dispute Resolution: Complaints module. As currently drafted, paragraph 2.8 precludes the Ombudsman
considering a complaint referred to him more than 6 years after the event complained of or, if later, more than 3
years after the date the complainant became aware, or ought reasonably to have become aware, that he or she
had cause for complaint; unless the complainant referred his complaint to the respondent financial institution
within those periods and has written evidence that the complaint was received. The FCA propose to qualify
those provisions, in PPI cases, by replacing the 6 year/3 year periods with a straight 2-year period, when the
complaint expresses dissatisfaction about the sale of PPI, or matters relating to the sale, including where there is
a rejection of a claim on the grounds of ineligibility or exclusion.
8
17. In my Opinion, the Consultation Paper is probably in breach of the statutory consultation
requirements imposed by section 138I of the Act, of the common law requirements that
apply to consultation in general and of the PSED in that FCA (i) has failed to undertake
necessary enquiries into how its proposal might affect consumers, in particular those who
share a “relevant protected characteristic”; and (ii) has failed to develop a reasonably
detailed outline of its proposed consumer communications campaign; so that (iii) the
Consultation Paper fails to include a rational explanation as to why the FCA believes that
this proposal is compatible with the FCA’s “consumer protection objective”, in particular
in relation to persons who share a “relevant protected characteristic”; and (iv) the
Consultation Paper fails to include sufficient information so as to permit consultees to
embark upon informed, intelligent consideration and response.
18. One of the starkest examples of the FCA’s failures may be found at paragraph 5 of Annex
3 (the Equality Impact Assessment), where the FCA admits that whilst “we did not find
evidence that the proposed deadline will have particular impacts on protected
groups……we acknowledge that our research focused on individuals of specific interest
because they had taken out a PPI policy – it did not focus on protected groups”. In other
words, the FCA has, on its own admission, failed to “engage with” persons who share a
“relevant protected characteristic” and failed to enquire into, and consider, with
appropriate care, how such persons (for example, elderly persons, who are bound to
comprise a significant proportion of PPI consumers) stand to be affected by what is
proposed and how that should be addressed. In my Opinion, this is a fundamental breach
of the PSED that undermines the lawfulness of the consultation process.
19. At the outset, it is useful to recollect the scale of the problem. According to the FCA, at
paragraph 1.10 of the Consultation Paper, notwithstanding the furore surrounding PPI in
recent years, 26% of all the consumers they surveyed had never heard of PPI; and 43% of
all the consumers they surveyed were unaware of any problems or issues with PPI. The
FCA fails to estimate the number of consumers that its proposed communications
campaign will need to reach, but plainly they will be substantial: (i) the Ombudsman has
9
estimated that about £50BN of PPI has been mis-sold over the last 10-15 years11 and said
“This is why people are calling this the biggest mis-selling scandal in financial services
history”12; (ii) only about £21BN of redress has been paid (paragraph 2.15 of the
Consultation Paper); (iii) about 16.5M PPI complaints have been made since 2007 but “it
is clear that a majority of the PPI policies sold have not been complained about”
(paragraph 2.6 of the Consultation Paper); (iv) even though firms have sent 4.8M letters
to high-risk PPI customers who have not complained, only 1.6M of them subsequently
complained, thus far (paragraph 2.13 of the Consultation Paper).
20. The Ombudsman has stated that “No one knows for certain how many more people will
complain about PPI”13; however, even on the basis of the figures set out above, (i) the
number of consumers with viable claims must be at least 17M; and (ii) of those 17M, at
least 7.3M do not know that they may have a claim arising out of their purchase of PPI.
The point is, on any view, there remain many millions of consumers who may well have
PPI claims but who do not know that and, therefore (i) cannot be even averagely
financially astute or knowledgeable about current affairs; (ii) must be particularly hard to
communicate with, in a way that prompts them to act in their own interests.
Lack of meaningful detail in the proposed communications campaign
21. The issue is whether the Consultation Paper provides sufficient detail about the proposed
communications campaign so as to permit consultees to reach an informed view and
provide an intelligible response, on the question of whether the proposed campaign will,
to a reasonable extent, mitigate the adverse effects of the new deadline, by prompting
those who have been mis-sold PPI, but who have not yet complained, to do so.
22. The information provided about the consumer communications campaign is to be found at
paragraphs 1.18 – 1.21 and 3.19 – 3.34 and at Annex 3: essentially, there is to be a
11
Sales of PPI have, however, taken place for much longer than this and were the subject of concerns expressed
by
Which
and
CAB
in
the
late
1990s:
see
http://www.publications.parliament.uk/pa/jt201213/jtselect/jtpcbs/c860-ii/c86001.htm.
12
See http://www.financial-ombudsman.org.uk/contact/PPI-your-case.html.
13
See http://www.financial-ombudsman.org.uk/contact/PPI-your-case.html.
10
communications campaign in the media, using the television, outdoor advertising and
internet; also, something as yet unspecified will be done in relation to harder to reach
protected groups. There are 2 major gaps in the Consultation Paper.
23. First, the FCA does not explain which PPI problems “relating to the sale” the
communications campaign will address: for example, will consumers merely be informed
that they may have a claim if they were not informed that commission would be paid, and
of the amount; or, will they also be informed that they may have a claim if they were not
told that PPI was optional; or if they were not informed about the types of exclusions and
limitations in the PPI?14. These last 2 examples of “non-disclosure” will also amount to
“substantial flaws” in the sale of PPI but many consumers cannot be expected to
complain unless the FCA draws that to their attention.
24. Second, the FCA (i) has not inquired into, and does not explain, why previous attempts to
engage with consumers have failed; (ii) does not provide any meaningful detail as to what
the communications campaign will involve; and (iii) fails to explain why this proposed
campaign will be effective notwithstanding earlier failures. But these are critical issues:

the Consultation Paper itself (on page 19) refers to the attempts already made to
prompt consumers to complain, by way of media news stories, advertisements,
letters from their PPI firm, cold calls from claims management companies
(“CMC”) and informal advice from friends or family. With the exception of
14
It is clearly established that relatively few PPI policies do, in fact, pay out, in that the average claims ratio is
14% (see below). The reason is thought to be that most PPI exclude or limit liability for absences from work
caused by the major causes of such absences (in particular, back problems, stress and mental disorders). The
Dispute Resolution module of the FCA Handbook states, in Annex 3, that a failure to disclose optionality, cost or
exclusions and limitations is a “substantial flaw” in the sale, creating a right of redress. The CAB said in their
2003 report “In Too Deep”, at https://www.citizensadvice.org.uk/global/migrated_documents/corporate/in-toodeep.pdf, that “Even when a claim is made, few CAB clients surveyed were successful. Claims were not
successful in 85 per cent of those cases where the credit had PPI cover and a claim was made. In relation to only
15 per cent of debts (1.7 per cent of all the debts in this survey) where PPI was present were claims successful.
Reasons for insurers rejecting the claim included common exclusion clauses such as pre-existing medical
conditions, mental illness and disputes over medical conditions”.
11
repeated calls from a CMC, or advice from a trusted source15, none of these
methods appear, so far, to have been successful in prompting the millions of
adversely affected consumers to bring a complaint, but these seem to be the very
methods that the FCA envisages employing in the future;

the Consultation Paper also refers, at paragraphs 2.13 and 2.14, to the fact that
some firms sent 4.8M letters to high risk PPI customers with only 1.6M
subsequently complaining (although, of those who complaints, 97% had to be
redressed). The content of those letters is not publicly known and the process met
with little success: but why?
25. For these reasons, the Consultation Paper does not, in my Opinion, provide consultees
with sufficient information to enable them to make informed representations on a critical
issue, whether the proposed communications campaign will be effective in mitigating the
consequences of reducing the time limit for making most types of PPI complaint.
The communication strategy and the PSED
26. In my Opinion, there is an obvious risk that some categories of persons who share a
“relevant protected characteristic” will have made relatively few PPI complaints in the
past and will be harder to reach by the FCA’s proposed communication campaign, or any
communication campaign, than others. For example, it is an obvious risk that (i) elderly
people (who are bound to comprise a significant proportion of potential complainants);
(ii) disabled people; and (iii) members of some BME groups may well, for reasons
connected with their “relevant protected characteristic”, be less able and/or likely to
complain about PPI mis-selling, the other persons who do not share that “relevant
protected characteristic”.
15
Page 19 of the Consultation Paper states that “common prompts to making a PPI complaint included contact
(usually repeated calls) from a CMC, or new information supplied by a trusted source such as a close friend or
family member”.
12
27. As noted above, the Consultation Paper recognises, in places, that persons who share a
“relevant protected characteristic” may have suffered, and despite the communication
campaign may continue to suffer, disproportionate difficulty in recognising the need for,
and taking, effective action in response to PPI mis-selling. However, the FCA appears to
be in two minds as to whether this issue does, in truth exist, and has done nothing to
investigate and consider how to address it.
28. For example:

on the one hand, the Equality Impact Assessment, at Annex 3, states that “4. Our
initial assessment is that the proposal does not have a potentially discriminatory
impact on any of the groups with protected characteristics as we have designed
the proposal to avoid this” and “5. We also did not find evidence that the
proposed
deadline
will
have
particular
impacts
on
protected
groups……..However, we acknowledge that our research focused on individuals
of specific interest because they had taken out a PPI policy – it did not focus on
protected groups”. It is, indeed, clear from the FCA’s own account of its
consumer research, that this research did not involve any attempt to engage with
persons who share a “relevant protected characteristic”, to assess the extent of
their difficulties or to evaluate how they might be overcome;

on the other hand, there are references in the Consultation Paper to the need to
take special measures to communicate effectively with “vulnerable consumers, or
consumers with relevant protected characteristics” (paragraph 3.26); and the
Equality Impact Assessment says that “6. Our initial assessment is that the
proposed deadline probably does have potential to present a greater risk of
adverse outcomes to some vulnerable consumers ………. and some consumers
with protected characteristics….. if we do not take these risks and characteristics
into account in the design of our communications campaign”.
13
29. In my Opinion, it is plainly the case that there is a real risk that persons who share a
“relevant protected characteristic” will have been at a significant disadvantage in the
past, and are especially likely to be adversely affected by the proposed new deadline.
However:

the Consultation Paper both accepts and rejects that proposition;

despite having undertaken extensive consumer research, the FCA has done
nothing to enquire into the extent to which, and the reasons why, persons who
share a “relevant protected characteristic” have not complained in the past about
PPI mis-selling;

nor has the FCA done anything to investigate what steps are most likely to
succeed in prompting to make PPI complaints members of this group who have
suffered financial loss.
30. In my Opinion, these failures undermine the lawfulness of the consultation exercise in
two respects.
31. First, whilst the PSED mainly bears on the policy decision itself, which is yet to be made,
as noted above it also applies to the process that precedes and succeeds that point. Thus,
in R (W) v Birmingham City Council [2011] EWHC 1147 Admin, (2011) 14 CCLR 516,
Mr Justice Walker held that Birmingham CC had failed to discharge the DED16, when
reaching a decision to restrict its eligibility criteria for adult social care services,
essentially because it had failed to assess, in concrete and practical terms, what was the
likely impact of this policy change. Mr Justice Walker also held that this failure meant
that the earlier consultation process had also been unlawful:
16
The DED (disability equality duty), at section 49A of the Disability Discrimination Act 1985, was a
predecessor to the PSED.
14
178 The decision to consult “on broad options” required consideration of a subsidiary
question whether to go beyond generalities in assessing the likely impact of the
proposed course upon individuals with “substantial” needs. At the very least it seems
to me that in order to pay “due regard” the Council when deciding to consult “on
broad options” needed to consider whether its answer to the subsidiary question was
consistent with its duty under s 49A …………..
179 I readily accept that throughout the process the Council was giving consideration
to how to address the needs of the disabled. In that sense its decisions taken in
relation to adult social care were decisions which were relevant to its performance of
the s 49A duty. That is not the same thing, however, as doing what s 49A seeks to
ensure: namely to consider the impact of a proposed decision and ask whether a
decision with that potential impact would be consistent with the need to pay due
regard to the principles of disability equality (see agreed propositions viii, ix, x and
xxi)………….
189. It is common ground that a consultation process must provide consultees with
sufficient reasons in support of particular proposals to allow an intelligent response to
be made………….My conclusion as to the failure to comply with section 49A
inevitably carries with it a conclusion that the Consultation Paper was inadequate.
Just as the decision making process failed to address the right questions, the same is
true of the Consultation Paper process……….”.
32. Accordingly, the general principle is that a consultation process will be unlawful if it fails
to set out, in practical and concrete terms, how the measures proposed may affect persons
who share a “relevant protected characteristic” and how any potential adverse
consequences for such persons will be mitigated.
33. On that basis, it is my Opinion that:

this is a case where what is proposed is likely adversely to affect large numbers of
vulnerable persons who share a “relevant protected characteristics”; therefore
“the due regard [required] is necessarily high” (see proposition (x) from the
Birmingham case – “In a case where the decision may affect large numbers of
vulnerable people, many of whom fall within one or more of the protected groups,
the due regard necessary is very high”);

consequently, this is a case where the PSED required particular care to be taken to
investigate and ascertain, in concrete and practical terms, what difficulties are
15
faced by persons who share a “relevant protected characteristic” in making PPI
claims; how the proposed rule changes may affect them; what mitigating steps can
be or need to be taken; and whether the proposals are justifiable - and to provide
that material to consultees to enable consultees to provide an informed response
as to whether what is proposed seems reasonable, in the light of the PSED;

that duty is breached in that, as things stand, the Consultation Paper manifests no
more than an ambiguous, contradictory and very general (cf. concrete and
practical) appreciation (such that anyone applying common sense could achieve)
that there may be a problem that needs to be looked at, in the future;

one concrete difficulty is this. The FCA is not proposing to require firms “to
proactively review relevant sales against our proposed rules and guidance” on
the basis that “consumers should take responsibility for their decisions” (see
paragraph 29 of Annex 4). The principle of “consumer responsibility” is one of
the “regulatory principles” at section 3B of the Act. In my Opinion, it means no
more than that properly informed consumers should take responsibility for their
financial choices and that principle is being mis-applied here;

furthermore, and in any event, how can consultees give intelligent consideration
and provide an intelligent response to this aspect of the proposal, without a
reasonable amount of concrete information about the extent to which the proposed
communication campaign, will disclose and explain possible grounds of mis-sale
and complaint, or be effective in relation to persons who share a “relevant
protected characteristic”?
The statutory duty of explanation
34. As noted earlier, section 138I(2)(d) of the Act requires the draft proposed rules, the
subject matter of the Consultation Paper, to be accompanied by “an explanation of the
FCA’s reasons for believing that making the proposed rules is compatible with its duties
16
under section 1B(1) and (5)(a)”. As the FCA accepts17, and as is obvious, this requires an
explanation from the FCA of its reasons for believing that the proposed rules are
compatible with its duty to protect vulnerable consumers, including those who share a
“relevant protected characteristic”. This is required by section 1B(1) and (3) and section
1C, which defines one of the FCA’s objectives as being the “consumer protection
objective”, which is defined as “securing an appropriate degree of protection for
consumers”, including by having regard to “the needs that consumers may have for the
timely provision of information and advice that is accurate and fit for purpose”.
35. In my Opinion, the explanatory material in Annex 4, even read with the Equality Impact
Assessment at Annex 3 (which is not necessarily a course that the Court would find
appropriate) does not discharge the duty at section 138I(2)(d), for the following reasons:

whilst Annex 4 sets out various headings, under which consideration is given to
aspects of the FCA’s “general duties”, there is no heading for, and no substantive
consideration is given to those aspects of the “consumer protection objective” that
are obviously of critical relevance: “securing an appropriate degree of protection
for consumers” and “the timely provision of information and advice that is
accurate and fit for purpose”;

Annex 4 does explicitly consider (twice) the objective of consumer protection
known as “The general principle that consumers should take responsibility for
their decisions”. This objective is said to justify the FCA’s proposed rule changes
on the basis that the principle of consumer responsibility ought to exonerate firms
from having “to proactively review relevant sales against our proposed rules and
guidance”. However:
o as noted above, this is based on a mis-application of the regulatory
principle of “consumer responsibility”, which in my Opinion means that
17
See footnote 82, on page 73 of the Consultation Paper.
17
consumers must be properly informed, so that they can do that which they
ought to do, which is to take responsibility for the financial decisions that
they make on a properly informed basis;
o the FCA’s double consideration of this regulatory principle underlines its
failure to consider the “consumer protection objective” and its critical
components, as set out above; and
o the explanation provided is inconsistent with both the PSED and with
section 138I of the Act in that, without having taken steps to ascertain to
what extent persons who share a “relevant protected characteristic” have
been, and will remain, unable effectively to complain about PPI misselling, it is impossible to say that those consumers can be expected,
reasonably, to “take responsibility for their decisions” so as to obviate the
need for more pro-active communication methods than are currently
proposed;

I am not convinced that it would be proper, in the particular circumstances of this
case, to read Annex 4 as somehow incorporating Annex 3, given the clarity of the
statutory requirement at section 138I(2)(d) to provide “an explanation” and the
importance of what is at stake. Even if, however, that step was taken, and one was
prepared to read Annex 3 in a generous manner, as providing an additional,
implicit explanation as to why the proposed rule changes were compatible with
the FCA’s “consumer protection obligation” it is arguable, in my Opinion, that
Annex 3 does not provide such explanation because:
o Annex 3 states, in contradiction of itself, that the proposed rule change
will, and also will not, adversely affect vulnerable consumers including
persons who share a “relevant protected characteristic”;
18
o Annex 3 contains no evidential basis for either proposition (“we
acknowledge that our research………did not focus on protected groups”).
36. In short, because the FCA has failed to assess the extent of the difficulties faced by
persons who share a “relevant protected characteristic” and produce a plan to mitigate
those difficulties, it has been unable to discharge its statutory duty to provide, as part of
the consultation process, an explanation of its reasons for believing that its proposals are
compatible with, inter alia, its “consumer protection objective”.
Conclusion on the consultation process
37. Accordingly, for the reasons set out above, in my Opinion the Consultation Paper is in
breach of the PSED, the general common law requirement that consultees are provided
with sufficient information to allow them to provide an informed response and the
statutory duty to provide an explanation of the reasons why the FCA considers that it
proposals are compatible with its “general duties”.
Implications for the final policy decision
38. The last thing any public authority wants to do, is to start a consultation process all over
again but there reasons why that is the course the FCA probably needs to take, in this
case:

first, the courts will quash decisions produced after an unlawful consultation
exercise unless satisfied that “the decision would inevitably have been the
same”18. If a court takes the view that this consultation process was unlawful, it
would be difficult for the FCA to satisfy the court that its decision “would
inevitably have been the same”;
18
R (South West Care Homes Ltd) v Devon CC [2012] EWHC 1867 Admin, at paragraph 51. The Senior
Courts Act 1981 now provides, at section 31(2A), that the High Court must refuse to grant relief “if it appears to
the court to be highly likely that the outcome for the applicant would not have been substantially different if the
conduct complained of had not occurred”, unless there is an “exceptional public interest” in granting relief.
Section 31(2C) imposes a similar restriction on the grant of permission to apply for judicial review. It remains to
be seen how the Court will approach this restriction on its traditional function. In any event, the hurdle for the
public authority remains very high, once it is established that a decision-making process was unlawful.
19

second, if the FCA wishes to make a final decision in the light of the consultation
responses, adopting its current proposals, it will have to face up to the difficulties
outlined above, which means that, as things stand, the decision-makers will not
have sufficient information to make a lawful decision and, in particular a decision
that complies with the PSED;

of course, the FCA may, in the interim, seek to address that deficit by urgently
commissioning additional research into these issues with a view to having the
relevant information in its possession, by the time the decision-makers come to
make a decision; but it may then face a legal challenge because it has reached a
decision on the basis of what is likely to be a substantial amount of new
information, on which the consultees will not have had the opportunity of
comment; rather underlining the inadequacy of the consultation process.
Substantive Issues
The new 2-year time limit
39. The status quo is that all PPI claims share the same time-limit for bringing complaints
with all other complaints about financial services, of 6 years from the event complained
of or, if later, 3 years from the date that, the firm complained about can establish, the
complainant became aware, or ought reasonably to have become aware, that he or she had
cause for complaint (see footnote 10, above). A fixed time limit of 2 years, based on a
communication campaign whose terms, content and timing remain unclear, is
significantly more restrictive.
40. At first blush, it seems surprising that the FCA would single out one type of financial
product for more restrictive treatment. It seems all the more surprising that PPI has been
singled out in this way, given the uncontroversial fact that PPI has been mis-sold on a
vast scale over many years, that millions of consumers have suffered a financial loss that
has not been remedied and that millions of consumers are not aware of their right to
redress. At first blush, one might well consider that to change the status quo, so as to
20
impose a tighter time limit on this group of consumers, would be particularly difficult to
justify.
41. One must acknowledge that, as the FCA suggests, it has to balance the interests of
consumers against its strategic objective of “ensuring that the relevant markets…..
function well”¸ an aspect of which may tilt towards removing the financial uncertainty
that some firms may face as a result of their PPI liabilities hanging over them19.
42. There are few who would not have sympathy with this objective, or dispute that,
ultimately, it is a matter of reasonable judgment for the relevant expert body, the FCA,
how best to weigh this important consideration against the protection of individual
consumers. In my Opinion, however, in part for the reasons canvassed earlier, the FCA
has not properly balanced the scales, so as to undertake a proper balancing exercise:

there is nothing in the Consultation Paper to suggest that the FCA has done
anything more than accept at face value representations by financial institutions
that the “long tail of complaints” is undermining their confidence and ability to
make financial plans. There is nothing in the Consultation Paper to suggest that
the FCA has investigated these representations to ascertain how cogent they are
and what sort of weight to give them. In the absence of such analysis, one does not
have to be a cynic to form the conclusion that the financial institutions that stand
to benefit from these proposals may receive a windfall that is obviously desirable
from their point of view, but unnecessary. That seems to be inconsistent with,
rather than consistent with, the FCA’s strategic duty of ensuring “that the relevant
markets function well”, let alone its operational objectives;

as noted above, in plain breach of section 138I of the Act, the FCA has failed to
put into the scales the consideration that, in this context, is probably the most
important consideration of all, the “consumer protection objective” and, in
19
See paragraph 10, in particular, of Annex 4 to the Consultation Paper.
21
particular, its components “securing an appropriate degree of protection for
consumers”, “the needs that consumers may have for the timely provision of
information and advice that is accurate and fit for purpose” and “the general
principle that those providing regulated financial services should be expected to
provide consumers with a level of care that is appropriate having regard to the
degree of risk involved…. and the capabilities of the consumers in question”20;

the FCA has erred by only taking into account, and also by mis-applying, in my
Opinion, the component of the “consumer protection objective” that provides that
an “appropriate” degree of protection for consumers must take into account “the
general principle that consumers should take responsibility for their actions”.
This clearly means that the properly informed consumer has to take responsibility
for their financial choices. In my Opinion, it does not mean that a consumer who
has made choices in the absence of proper information, who has suffered a
financial loss and who is not aware of their remedies, must be treated as being
“responsible” for their lack of awareness and any failure to bring a complaint;

neither does the FCA appear to have factored in the “the integrity objective”, in
particular the need to protect the financial system from “market abuse” and “the
competition objective”, because it is unfair to PPI firms that acted properly, if
firms that mis-sold PPI retain the fruits of their misconduct;

the FCA has, fairly plainly in my Opinion, breached the PSED by failing to
undertake any specific enquiry into the situation of those who share a “relevant
protected characteristic”;

more widely, the FCA has failed to develop a communication campaign that
demonstrates how and to what extent the “consumer protection objective” will be
met. Indeed, if the FCA was confident that its communication campaign would
20
Section 1C of the Act.
22
result in firms being able to demonstrate that consumers knew, or ought
reasonably to have known, that they had cause for complaint, then there would be
little if any need to reduce the time limit from 3 to 2 years, and no need to make
the time limit “absolute”
43. Accordingly, based on the relatively limited information provided, in my Opinion the
proposed change to the time limit for bringing complaints has the appearance of being
incompatible with the FCA’s “general duties” and, whilst in principle some change might
be justifiable, the explanation put forward by the FCA does not justify its proposals. In
my Opinion, the FCA has not shown that the proposed rule change is compatible with its
“general duties”.
The “Plevin” rule change
44. In Plevin v Paragon Personal Finance Ltd [2014] UKSC 61, [2014] 1 WLR 4222 the
Supreme Court held that the relationship between a creditor and non-commercial debtor
was unfair, for the purposes of section 140A of the Consumer Credit Act 1974 (“the 1974
Act”), if the creditor kept the debtor in ignorance of a commission so large that it was
unfair not to disclose it. Paragraph 18 of Plevin is key: “at some point commissions may
become so large that the relationship cannot be regarded as fair if the customer is kept in
ignorance. At what point is difficult to say, but wherever the tipping point may lie the
commissions paid in this case are a long way beyond it…………… 71.8%............Any
reasonable person……..who was told that more than two thirds of the premium was going
to intermediaries, would be bound to question whether the insurance represented value
for money, and whether it was a sensible transaction to enter into. The fact that she was
left in ignorance in my opinion made the relationship unfair”.
45. This formulation raises 2 problems for the FCA, in relation to its endeavour to make rules
that give practical effect to Plevin:

from what date should consumers be permitted to make complaints in reliance on
the Plevin principle?; and
23

where, in general, is the “tipping point” to be found/what is the starting point, in
terms of the level of undisclosed commission that makes the relationship unfair?
The date issue
46. Plevin construes section s140A of the 1974 Act and, therefore, defines the meaning that
section 140A has always had, since it came into force.
47. Paragraph 5.13 of the Consultation Paper states that the proposed rules and guidance will
apply if the PPI states that it covered, or covers, a credit agreement where sums under it
are payable, or capable of becoming payable, on or after the 6 April 2008. I am not clear
whether this is a typographical error and the Consultation Paper intended to refer to the 6
April 2007, or whether the 6 April 2008 is deliberate and chosen to reflect the end of the
“transitional period” (see below). In any event, the date is incorrect.
48. In my Opinion, the proposed new rules and guidance will be unlawful if they exclude
applications made by debtors or sureties in respect of credit agreements entered into on a
date when section 140A of the 1974 Act had effect. Section 140A has effect in relation to
credit agreements:

entered into on and from the 6 April 2007, which is when section 140A came into
force (see paragraph 3 of The Consumer Credit Act (Commencement No.2 and
Transitional Provisions and Savings) Order 2007); and, also, credit agreements -

entered into before the 6 April 2007:
o providing the application for redress is made after the 6 April 2008; and
24
o so long as the credit agreement has not become a “completed agreement”,
that is, an agreement under which no sum is, will be or may become
payable -
(see section 69 of the Consumer Credit Act 2006, read with paragraphs 1 and
14(2) of Schedule 3 thereto).
49. In this respect, the Consultation Paper is not clearly expressed, but my reading of
paragraphs 5.13 and 5.72 is that, even if the new rule will apply to credit agreements
entered into on and after the 6 April 2007 (rather than the 6 April 2008), it will not apply
to credit agreements entered into before the 6 April 2007, which remain “not completed”
as at the 7 April 2008; which in my Opinion is unlawful. (It is notable that Ms Plevin’s
credit agreement was entered into in March 2006, albeit that her payments under it were
to continue for 10 years).
The tipping point issue
50. The Supreme Court does not spell it out, but I believe that the intention of paragraph 18
of Plevin was to provide a legal framework, and a factual “ranging shot”, in the
expectation that the County Court and Court of Appeal would “fine tune” what types of
facts and levels of undisclosed commission give rise to an unfair relationship, on a caseby-case basis, in the light of a concrete examination of all the facts of particular cases in
the round. That approach is understandable and to be expected given the way that courts
work in this jurisdiction, but the difficulty with it is that:

paragraph 18 of Plevin seems to proceed on the basis that simply the existence of
a non-commercial debtor means that the non-disclosure of relatively high levels
of commission makes the relationship unfair; which seems to indicate that there is
some “objective” level of undisclosed commission that creates an unfair
relationship;
25

whereas it is understandable and to be expected that the FCA will provide rules
and policy guidance to promote consistent decision-making, in everyone’s best
interests, they have been left with remarkably little to go on, by the courts.
51. The FCA’s first and, it appears primary, justification, for selecting 50% as the “tipping
point” is the case-law (see paragraph 5.53 of the Consultation Paper), but that is an
erroneous approach:

Lord Sumption on behalf of the Supreme Court, at paragraph 18 of Plevin,
described an undisclosed commission of 71.8% as “a long way beyond” the
tipping point, positing (as I read this paragraph) that an amount of commission
that was bound to lead the debtor into questioning whether the insurance
represented “value for money” would exceed the tipping point. There is no
support here for a 50% “tipping point”, on the contrary – Lord Sumption simply
directs attention to the criterion to be addressed when, in future, consideration is
given to assessing where the “tipping point” lies, in a particular case;

in Yates v Nemo Personal Finance (Case No: 9HG00904, at Manchester County
Court), HHJ Platts concluded that a creditor/debtor relationship had been unfair
based on a number of factors, one of which was that the level of commission on
the PPI sale was 57.45% (see paragraph 27). It is plainly the case that HHJ Platts
did not intend this conclusion to be read, nor can it be read, as an endorsement of
50% as the “tipping point”.
52. Accordingly, whilst it could not be said that the cases of Plevin and Yates were irrelevant
considerations, in my Opinion it is arguable that the FCA has failed properly to
understand their import which, of itself, would make a decision based on that misunderstanding, liable to quashed.
26
53. The FCA next takes into account, at paragraph 5.54 of the Consultation Paper, albeit only
as “context”, the fact that the average PPI commission retained by the 12 largest
distributors in the years 2002-6 was 67%.
54. In my view, however, it is arguable that the figure of 67% is of no relevance to
determining where the “tipping point” lies given that, as Lord Sumption put it on behalf
of the Supreme Court, in Plevin, the Competition Commission’s inquiry21 (“the Inquiry”)
“found that the market for PPI sold as a package with loans was characterised by limited
competition and low levels of substitutability, and that these factors resulted in high
premiums relative to what would be expected in a well-functioning market” (paragraph
1). (In 2002-6, as I understand the Competition Commission, the vast majority of PPI
policies were sold as a package).
55. In other words, it is irrational to take into account, as a helpful guideline, a figure
produced by a distorted, artificial insurance market characterised by excessive premiums.
56. The FCA next takes into account, at paragraph 5.56, “the genuine distribution costs
(including a reasonable profit margin) of the major PPI distributors” which, according to
the FCA, basing itself on the Inquiry, “were only around 16%”.
57. This is plainly a relevant consideration to take into account, albeit that it is by no means
the only indicator of whether a resultant premium is “value for money” but, in my
Opinion, it is probable that the conclusion derived from this consideration is not
compatible with the FCA’s “general duties” at section 1B of the Act; nor its duty to
provide an “explanation” at section 138I of the Act; and it is not rational, insofar as it
leaps from the premise that the average costs and reasonable profits of PPI distributors
were 16%, but that it would be reasonable and lawful to allow firms to divest consumers
of an undisclosed commission of up to 50%:
21
Market
investigation
into
payment
protection
insurance
(29
January
2009)
at
http://webarchive.nationalarchives.gov.uk/20140402141250/http://www.competitioncommission.org.uk/assets/competitioncommission/docs/pdf/non-inquiry/rep_pub/reports/2009/fulltext/542.pdf.
27
“our proposed figure of 50% for presuming unfairness already provides very
substantial headroom for a firm to have had genuinely higher than average
distribution costs before it affects that firm”.
58. Taking the figure of 16% (for distribution costs plus a reasonably profit) at face value, for
present purposes:

neither paragraph 5.56 of the Consultation Paper, nor Annex 4, provide the
explanation, required by section 138I of the Act, as to why a 50% “tipping point”
is compatible with all the FCA’s “general duties”, including in particular its
“consumer protection objective”. The statement about “headroom”, in paragraph
5.56, set out above, seems aimed at placating financial institutions by reassuring
them that, notwithstanding a 50% “tipping point”, they will still be entitled to
make huge profits; and is not an explanation as to why that state of affairs is
compatible with the FCA’s “general duties” or reasonable. There is nothing of
substance by way of further explanation in Annex 422;

my understanding is that the 16% figure has been extrapolated by the FCA (and
reasonably so) from detailed, complex calculations in the Inquiry, which betoken
a reasonable profit margin of fractionally over 10%, within that 16%. If that is
right, then the proposed rule change is on the basis that sellers of PPI, who have
average distribution costs of 14.5%, such that a reasonable profit of 10% added to
those costs adds up to about 16% of the total premium, are entitled to recover their
distribution costs and make an undisclosed profit of up to 244%, without their
relationship with the debtor becoming unfair for the purposes of section 140A of
the 1970 Act. Granted that it would be too austere to suppose that the reasonable
consumer would question whether PPI was value for money simply because it
went further than covering the seller’s costs and providing the seller with a
reasonable profit margin of 10%, the FCA’s proposal that a profit margin of up to
22
And, it may be noted, that paragraph 54 of Appendix 4.4 of the Inquiry indicates that there are no significant
differences between the distribution costs of different PPI distributors.
28
244% would not be regarded as questionable by the reasonable consumer, in my
opinion, cries out for explanation and, unexplained as it is, is incompatible with
the FCA’s “general duties”, disproportionate and irrational.
59. There are, in addition, other considerations that seem highly relevant but which, for no
apparent reason, the FCA has disregarded:

“actual” average distribution costs and profits;

the average distribution costs, claims ratios and reasonable profit levels in other
insurance sectors;

claims ratios in the PPI sector;

the point at which the “reasonable consumer” would regard the “value for
money” of a PPI as questionable.
“Actual” average distribution costs and profits in ££
60. I understand it, the tables at Appendix 4.4 of the Inquiry show that the average
distribution cost for a PPI product is about £100.00, irrespective of the value of the
underlying credit transaction23.
61. If that is correct, then whilst the FCA’s extrapolation from Appendix 4.4 of an average
distribution cost/reasonable profit of 16% seems right, it does not reveal the full extent of
the profits made as a result of PPI mis-selling. According to Appendix 4.4, the average
PPI commission has been £690.00, which betokens a premium of £1,030.00 (based on
23
See figures 4 – 7 of Appendix 4.4 and paragraph 54 of Appendix 4.4.
29
average commissions being 67% of the premium); the average cost of sales has been
£100.00 which, subtracted from the commission, leaves £590.00; the FCA proposal will
require £175.00 to be repaid (50% of the premium of £1030.00 is £515.00; £690.00 less
£515.00 is £175.00); so that, ultimately, on these figures, the FCA will allow the firm
concerned to keep £540.00 on a sale that it cost £100.00 to make.
62. In my Opinion, it is probably unlawful of the FCA to fail to take into account the “actual”
distribution costs and profits in ££ because such costs and profits are plainly relevant.
One might well ask rhetorically, how could that not cause the “reasonable consumer” to
doubt the “value for money” of the transaction? Or, to put it another way, how can it be
consistent with the FCA’s “general duties” to allow firms not to disclose and, indeed, to
keep, levels of profit that high.
The average distribution costs, claims ratios and reasonable profit levels in other insurance
sectors
63. The rates of commission payable on other sorts of consumer insurance are as follows:

motor insurance: 10%24;

home and contents: 25 – 35%25;

buildings, medical and pets: 20%26.
64. Again, the precise figures do not matter. In my Opinion, it is arguably both irrational and
incompatible with the Act for the FCA to fail to investigate and consider average levels of
24
See paragraph 6.54 of the Office of Fair Trading’s Payment Protection Insurance: Report on the market study
and proposed decision to make a market investigation reference (October 2006) (“the OFT report”), at
http://webarchive.nationalarchives.gov.uk/20140402142426/http://www.oft.gov.uk/shared_oft/reports/financial_
products/oft869.pdf;jsessionid=526BB8BD402D4C14782FDD592A85BB38.
25
See paragraph 6.49 of the OFT report.
26
See paragraph 6.49 of the OFT report; see table 4.3 of the Inquiry.
30
commission in other sectors of consumer insurance, so as to reach a properly informed
view as to what levels of commission the “reasonable consumer” would regard as calling
into question the fairness, or “value for money” of the transaction.
Claims ratios in the PPI sector
65. As is well-known, the “claims ratio” (the proportion of premiums likely to be expended
on meeting claims27) is a highly relevant indicator of “value for money” and, probably,
the most reliable indicator there is. That is this view to which the FCA itself has
subscribed to in earlier reports on GAP (guaranteed asset protection) insurance, home
emergency insurance, travel insurance, gadget insurance and personal accident
insurance28, wherein it concluded that, in the absence of any commonly available measure
to assess the value for money of general insurance products, the publication of claims
ratios29 was the remedy that would best enable consumers to assess the “value for money”
of the add-on insurance products offered to them.
66. Again, the precise figures do not matter for present purposes, but some of the relevant
claims ratios are as follows30:
27

motor: 78%;

liability: 66%;

accident and health: 65%;
For example, a low claims ratio indicated that the product is not value for money.
28
See paragraph 3.33 of General Insurance add-ons: Final Report – Confirmed Findings of the Market Study
(July 2014), at https://www.fca.org.uk/your-fca/documents/market-studies/ms14-01-final-report and paragraph
4.45 and paragraph 4.45 of General Insurance add-ons: Market Study – Remedies: Value Measures (June 2015)
at https://www.fca.org.uk/news/dp15-04-general-insurance-add-ons.
29
On their own, or in combination with ancillary indicators of value, such as claims frequency, claims
acceptance rate and average claim pay-out package; generated via a standard calculation method.
30
See table 4.3 in the main body of the Inquiry and paragraph 4.50.
31

property: 54%;

PPI: 14%.31.
67. In addition, the OFT Report32 indicates the following claims ratios:

medical: 80%;

pets: 72%;

buildings and contents: 54%.
68. These figures indicate that in general PPI is particularly poor value and that an important
aspect of its poor value is not simply that the commission is invariably excessive but that
the claims value is exceptionally low. A claims ratio of 14% of GWP (gross written
premium) betokens an overall level of profit of 71.50% (86% minus average distribution
costs of 14.5%33), less the insurance underwriting costs. Whilst reference to the claims
ratio underlines the substantial level of profits being made on the insurance, as well as on
the commission, the fundamental point from the consumer’s perspective is that 86% of
the money they pay for PPI will be swallowed up in costs and profits (largely profits).
69. It seems reasonable to ask why the FCA has failed to take into account the claims ratios
for different PPI products, as a relevant indicator of their value, or lack thereof, from the
31
Table 4.3 includes reference to pecuniary loss, with a claims ratio of 34%, but I have excluded this because (i)
it appears to be an outlier; and (ii) many of the components of pecuniary loss have no relevance to consumer
expectations.
32
See
paragraph
6.49,
at
http://webarchive.nationalarchives.gov.uk/20140402142426/http://www.oft.gov.uk/shared_oft/reports/financial_
products/oft869.pdf;jsessionid=526BB8BD402D4C14782FDD592A85BB38.
33
See above.
32
consumer perspective; and to consider whether publication of the claims ratio, rather than
the percentage of the commission, was required, to avoid an unfair relationship, for the
purposes of section 140A of the 1974 Act. PPI is another form of consumer add-on
insurance and there seems no reason to treat it differently; on the contrary, it is in my
Opinion arguable that, as the FCA itself appears to believe, and indeed the Competition
Commission also34, the claims ratio is a truer guide to value than the level of commission
because of the ability of firms that are part of groups to allocate premium as they fit
between the distribution and insurance firm. In such manner, the distribution arm may
receive a lower commission, whereas the insurance arm may receive a higher profit; but
the value, or lack of value, to the consumer, remains exactly the same. Requiring firms
only to disclose levels of commission that exceed a particular “tipping point” will never
truly explain to consumers the “value for money” of the transaction and, in some cases,
such limited disclosure will positively disguise the true level of profit being made,
overall.
70. At paragraph 5.71 of the Consultation Paper, the FCA explain that it has chosen to
disregard, inter alia, the issue of claims ratios, because that issue was not raised in Plevin
and the purpose of the Consultation Paper was “simply to ensure the fair and orderly
handling of PPI complaints in the light of Plevin”. The decision in Plevin is obviously the
trigger for the consultation and is plainly a relevant consideration but, in my Opinion,
having chosen to promulgate rules and guidance as to when a creditor/debtor relationship
is unfair for the purposes of section 140A of the 1974 Act, the FCA’s “general duties”
require it to take into account all the considerations that are relevant to that issue, whether
or not the lawyers in a particular case raised those considerations in court, in the context
of that particular case. The whole point of being a regulatory body is that one is able and
indeed required to take a wider view, unconstrained by the exigencies of litigation that
may limit the courts to a narrower view.
71. Indeed, in this respect, the FCA’s approach seems contradictory. At paragraph 5.70, the
FCA purports to justify its approach to redress, which diverges from the approach taken
in the Plevin case, on the ground that, in the Plevin case, the court had been limited to
34
See paragraph 4.50 ff of the Inquiry.
33
determining the issue raised before the court. It seems difficult to understand why the
FCA considered that it was appropriate to view the issues more widely than in Plevin, and
on that basis to provide for considerably less redress than was awarded in Plevin, but also
that it was not appropriate to view the issues more widely than Plevin, that directly bear
on the critical question, which is whether an unfair relationship arose.
The point at which the “reasonable person/ consumer” would regard the “value for money”
of a PPI as questionable.
72. There are 2 questions here:

what level of commission (or claims ratio) would cause actual consumers to
question the “value for money” of a PPI product offered to them?;

who is the “reasonable person/consumer” and would they take a different
approach?
73. The FCA surveyed 20,000 consumers about their views on PPI and, also, conducted
discussions or interviews with a further 210 consumers who were recent or potential
future PPI complainants35. The FCA then explained the Plevin decision to 36 consumers
most of whom “said they would have guessed commissions were between 10% and
50%”36. This is, however, a very small sample of consumers. Not only that, 12 members
of this small group had already indicated an intention not to complain for reasons
unconnected with whether or not their PPI had represented “value for money”. It is not
clear whether these consumers were specifically asked what level of commission would
have caused them to question the “value for money” of the transaction; and it is not clear
what the answers actually were and how many individuals gave them: for example, it is
not clear how many “most” of the sample were and whether they all said that they
expected commission to be between 10 and 50%, or whether some said 10%, some said
50% and others said something in-between; and it is not clear what the others said, who
35
See paragraph 2.17 of the Consultation Paper.
36
See paragraph 2.48 of the Consultation.
34
were outside of the “most” category. Nor is it clear whether they understood there were
additional costs and profits on top of the commission.
74. It would be interesting to know this further detail but, as things stand, in my Opinion the
lawfulness of the FCA’s Consultation Paper and decision-making process is undermined
by its failure to undertake a proper sampling exercise or ask a meaningful and
representative sample of appropriately selected consumers, when they were undertaking a
relatively large survey in any event, what they thought the “tipping point” was. In my
Opinion, this results in a failure to take into account an obviously relevant consideration;
indeed, one might say that it manifests a failure to inquire into the very question that
Plevin directed attention to, which is when would the (reasonable) consumer question the
value for money of a transaction?
75. The FCA could have followed a different path and, instead of, or in addition to,
undertaking research into the views of real consumers, it could have asked itself what the
notional “reasonable person/consumer” would regard as a level of commission (or claims
ratio) sufficient to cause them to question the “value for money” of the transaction. In my
Opinion, the FCA’s “general duties” at section 1B of the Act, and its “explanation duty”
at section 138I require the FCA to put itself in the shoes of the “reasonable
person/consumer” and ask itself what level of commission (or claims ratio) would cause
such a person to question the “value for money” of the transaction; that assessment being
highly relevant to where the “tipping point” is, and possibly determinative.
76. As to the characteristics of the “reasonable person”, in this context, in my Opinion, it is
probable that such a person is “fair-minded and informed”37, i.e., informed about PPI
average claims ratios (and so forth) and distribution costs, the comparative figures for
commission, claims ratios (and so forth) and also the distribution costs associated with
comparable consumer insurance products. In my Opinion, if the FCA had approached the
question in this way, it would have been unlikely to conclude that the “reasonable
37
As per the test for apparent bias, see Magill v Porter [2001] UKHL 67, [2002] AC 357, at paragraph 103.
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person” would not question the “value for money” of PPI until the commission reached
50% of the premium, irrespective of the claims ratio.
77. If one reads through Q9 and paragraphs 5.49 to 5.62 of the Consultation Paper and Annex
4, one sees that the FCA weighs up a number of relevant considerations, albeit that, as set
out above, the FCA also disregards a number of relevant considerations. But nowhere
does the FCA go to the heart of the matter. It fails to grapple head-on with the ultimate
question, which is what level of commission (or claims ratio) the FCA itself thinks would
cause a “reasonable person” to baulk at PPI, looking at matters from the perspective of
the “reasonable person”. In my Opinion, this is an essential, and possibly the
determinative, consideration; but the FCA has skirted around it and failed to demonstrate
any basis for choosing the starting point of 50%, founded upon an appraisal of the point at
which the reasonable, properly informed consumer would question the “value for money”
of the PPI.
Level of redress
78. The starting point proposed by the FCA, at paragraphs 5.63 to 5.71 of the Consultation
Paper, is the difference between 50% of the premium and the amount of commission
actually charged. Even if an undisclosed commission in excess of 50% of the premium
were the right “tipping point”, and even on the basis that the FCA is right to discount the
actual result in Plevin (a complete refund), for the reasons given by the FCA, in my
Opinion this proposal is illogical and inconsistent with the principle that redress for
maladministration should aim to make good the loss suffered and put the consumer in the
position they would have been in, but for the maladministration:

some consumers would have decided not to proceed with the PPI, had they known
the true facts. For these consumers, the only proper redress would comprise a
complete refund; however, the Consultation Paper sets out no proposal for
identifying such persons and redressing the loss they have suffered;
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
other consumers may have decided to proceed with PPI, but will have shopped
around for a better value deal. I understand that, in the malfunctioning PPI market,
good value deals were either impossible, or at least very hard, to find, so that a
consumer will not necessarily have been able to find a significantly better deal
than the one on offer; although, having said, it strikes me that the effect of large
numbers of properly advised consumers searching for, and demanding, better
value deals would likely have resulted in a more competitive market. All in all, it
strikes me as being arguably unlawful and inconsistent with the FCA’s “general
duties” for it not to consider, in this sort of case (where the consumer wanted
some sort of PPI in any event), a level of redress that brings the actual commission
received down to a reasonable level, the starting point for which, on the FCA’s
own approach, is 16%, not 50%.
Previously rejected complaints
79. At paragraph 5.88 of the Consultation Paper, the FCA states that, in its view, it would be
“retrospective and wrong” to require firms to re-open complaints rejected by them that
might now he upheld, in the light of Plevin, the reason being that such complaints will
have been determined in accordance with the FCA’s then rules.
80. In my Opinion, this approach disregards the true effect of Plevin, which is declaratory of
the law on unfair consumer relationships, as it has stood since the coming into force of
section 140A of the 1974 Act on the 6 April 2007 (see “the date issue”, above).
Requiring firms to re-open complaints that must now be regarded, in the light of Plevin,
as having been wrongly rejected, does not amount to the application of a retrospective
rule; it simply requires decisions rejecting complaints, that were unlawful at the time they
were reached, to be re-considered, so as to remedy injustice suffered by consumers.
McWilliam v Norton Finance
81. In this recent case, the Court of Appeal held that there had been a fiduciary relationship
between an independent credit broker and a consumer who was reasonably financially
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competent, but not a “financial sophisticate”. Consequently, the broker had to account to
the consumer for (i.e. pay back) the whole of the undisclosed commission.
82. A brief survey of the literature this decision has engendered suggests that it is not
irrational for the FCA to take the view that it ought to wait for further case-law to spell
out the implications of McWilliam, for example, in relation to in-house credit
arrangements and arrangements where the level of undisclosed commission is
significantly lower than the 45% in that case, before it introduces comprehensive rules
and guidance. Even on that conservative basis, however, it is in my Opinion unlawful,
being inconsistent with the FCA’s “general duties” for the FCA:

not to require independent credit brokers to repay the whole of any undisclosed
commission, unless they are satisfied that the consumer was a “financial
sophisticate”;

to subject all claims based on an asserted fiduciary relationship to the 2-year
deadline considered above. If, as the FCA indicates it considers to be the case,
these claims are relatively new, complex and uncertain in their scope, such that
they should continue to be considered under DISP Appendix 3, then there is no
obvious justification for rendering them subject to the 2-year deadline, even if
such deadline could be justified in Plevin-type cases. The FCA puts forward no
justification for this, at all.
Comparisons
83. In the health and social care field there have, in recent years, been 2 major instances of
maladministration caused by unlawful decision-making, which have resulted in relatively
unsophisticated individuals handing over substantial amounts of money to public
authorities: (i) for a period of years, the Secretary of State for Health failed properly to
articulate the distinction between “NHS continuing care” (free from charging) and adult
social care (chargeable), with the result that very large numbers of individuals paid for
adult social care when they ought to have received free NHS care; and, also (ii) for a
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period of years, many local social services authorities charged mental patients for
residential accommodation provided as an after-care service, when in law no charge could
be made.
84. In a series of decisions, the relevant Ombudsmen set out a robust programme designed to
ensure that full redress was paid to as many of those who had suffered loss, as was
practicable. A common feature of these decisions was the advice given (which was, in
effect, binding) that the relevant public authorities “should now put mechanisms in place
to identify those persons improperly charged, or improperly deprived of financial
assistance, and establish arrangements for reimbursing them or their estate”38. The
proactive and determined approach of these Ombudsmen seems consistent with the
recommendation of the Committee on Banking Standards (“CBS”), in June 2013, that the
FCA should require firms to send letters to all customers they could identity as having
been sold PPI, who had not already complained, alerting them to their potential losses
(see paragraph 3.38 of the Consultation Paper)).
85. I note that the FCA has rejected the CBS’s recommendation, and adopted a very different
approach from the Ombudsmen referred to above, on the basis of representations made to
them by the firms concerned, that they have “gaps in their records” that would render
such a process uncertain, administratively inconvenient and expensive. It may strike
many that as surprising that the FCA has accepted such a weak excuse, apparently
without investigation or analysis, and has expected a significantly lower standard from
financial services companies, than the CBS, and required significantly less of financial
services companies than the Ombudsmen required from health and social care authorities.
3838
Special Report: Advice and guidance on the funding of aftercare under section 117 of the Mental Health
Act 1983 (LGO 604, 07/03), at page 5; see also, in similar terms, paragraph 39 of The Health Service
Ombudsman’s Report on NHS funding for long term care (13 February 2003) and paragraph 12 of The Health
Service Ombudsman’s NHS funding for long term care: follow up report (HC 144)(16 December 2004).
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Conclusion on the substantive issues raised
86. This Opinion is not designed to cover every issue where the approach of the FCA is, or
may be, unlawful thus far. It is, however, my Opinion that, for the reasons set out in detail
above, the FCA:

is in breach of the PSED on the time limit issue;

has failed to test the case made by the financial institutions for a reduced timelimit or to place the interests of consumers in the scales and, accordingly, has
failed to provide a lawful justification for the proposed limit;

has misunderstood the case-law and failed to take a number of relevant
considerations into account, in provisionally evaluating the “tipping point” as
being an undisclosed commission of 50% or more;

has reached provisional conclusions that are erroneous in law on the date issue,
the level of redress and previously rejected complaints.
STEPHEN KNAFLER QC
1st FEBRUARY 2016
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