Sunday, 4 October 2015


The Financial Conduct Authority published a statement on 2 October 2015 indicating the rules it intended to make on how firms should pay redress to PPI customers in the light of the Supreme Court decision on Plevin dated 12 November 2014. It has taken nearly a year to do so. And it is hard to imagine an implementation of Plevin which was less favourable to consumers or more favourable to the banks.

The case
Susan Plevin took out a loan of £34,000 in 2006 to which was added £5780 premium for PPI. Of that premium £4910 was taken in commission by the firms that arranged it leaving £1630 as the actual cost of the insurance. So nearly 72% of the premium went in commission. None of those figures were revealed to her and she brought a claim in 2009 that the PPI deal was unfair because the amount of commission was not disclosed to her. The Supreme Court agreed. 

FCA scheme
The FCA proposes to make the following scheme, subject to consultation. It will apply to any PPI deal where a premium was paid on or after 6 April 2008, the date from which the law used in Plevin applies.

The FCA says it will only expect firms to pay limited redress under these rules which will consist of
  • the premiums minus what they would have been if the commission had been 50%
  • the interest paid on those premiums by the customer
  • 8% a year simple interest on that total
In my view the scheme contains two errors.

Amount of redress
First, the Plevin judgement makes it clear that where the commission on a product is excessive and the customer was not told the rate of commission that creates an unfair relationship between the buyer and seller. In those cases a court can make an order "requiring the creditor to repay in whole or in part any sum paid by the debtor " (para 9 of Plevin judgement). In Mrs Plevin's case the court held that if she had known the true rate of commission she would not have entered into the deal, either not buying it at all or finding a cheaper source elsewhere (para 18).

The implication is that PPI deals sold with excessive rates of commission were invalid and the customer should have their premiums refunded in full. And the court has the power to do that (para 9).

The FCA takes a  different view. It says that the redress in such cases is not the whole cost of the product but just the excess commission over an amount that is fair. In other words it allows the bank to turn the deal into a fair bargain retrospectively by giving up the excess commission.

Fair commission
Second, the FCA picks 50% as a fair rate of commission. In other words, if I pay £100 for a product and the person selling it keeps £50 for themselves and passes £50 on to the insurer that is fair. The FCA gives no indication where that figure comes from.

The Supreme Court said that "Commissions paid to intermediaries were high, typically between 50 and 80 per cent of gross premium" (para 1) and in Mrs Plevin's case the commission was 71.8%. The FCA could be taking the view that if the lowest rate of commission was 50% then someone who shopped around could not find a better deal than that so the rate of 50% is somehow 'fair'. The FCA told me that it was a 'matter of judgement' but in the Plevin circumstances the FCA view was that 50% was a reasonable rate of commission. 

Redress cut by five sixths
Under its proposed rules the FCA says the bank will only have to refund the difference between the unfair rate of commission and 50%. Commission on PPI sales averaged 67%. So on average the bank would have to repay just 17% of the premium. Under the normal rules that apply to redress it would then have to add any interest paid by the customer on that amount and then the standard additional simple interest on that sum of 8% a year.

Under the current PPI redress rules customers have all their premiums refunded. And under one interpretation of Plevin that would also be the case. Instead, under the FCA's Plevin scheme redress would be based on 17% of premiums, costing the banks on average just one sixth of the normal PPI redress.

The FCA points out that the Supreme Court did not rule on how much redress was due. Nor did it say the insurance was mis-sold. So again the FCA view is that this is a reasonable way to assess the redress. 

Time bar
Complex as all this is, the FCA plans to limit claims under these provisions to a period of two years from when the rules are made.

Next steps
Some of these matters may be addressed by the FCA in its Consultation Paper which is promised before the end of 2015. After that period of formal consultation it will make the rules probably in Spring 2016. The FCA stresses that the rules could be different depending what the consultation responses are.

8 October 2015
Vs. 1.10