Selling short

Had it been successful in its judicial review of the FSA and the Financial Ombudsman Service (FOS), the British Bankers’ Association (BBA) would have forced the financial regulator to look again at its approach to regulation.

FSA Headquarters
FSA Headquarters

The High Court, however, ruled against the BBA and roundly endorsed the regulator’s principles-based approach, also showing its approval for the regulator’s stance on the handling of payment protection insurance (PPI) complaints.

Today’s ruling, delivered by Mr Justice Ouseley, will be a blow to the BBA, which had instructed the country’s leading judicial review barrister, David Pannick QC, to fight its corner on PPI.

The insurance product, which is typically sold at point of product purchase, covers the risk of a borrower being unable to repay their borrowing.

Since its formation in 2005 the FSA has grumbled about how the banking community deals with PPI complaints. A report published by the watchdog in November 2005 called on PPI sellers to ensure their sales techniques met with FSA guidelines.

The regulator has repeatedly called on suppliers to address systemic issues with the product and issued layers and layers of guidelines.

In August last year the watchdog issued a policy statement on PPI to ensure that consumers with complaints were treated fairly.

The need to deal with the complaints handling service has become more acute. Since 2005, the FSA has received more than 1.5 million complaints about PPI. On average, banks have rejected some 60 per cent of PPI claims brought against them, although the FOS has gone on to uphold some complaints.

According to FSA general counsel Andrew Whittaker several appellant banks had neglected to deal with complaints in recent months, claiming that the outcome of the judicial review would be central to how they deals with such complaints.

That was never sanctioned by the FSA and, says Whittaker, the FSA will be watching closely to make sure complaints are handled properly going forward.

Should the banks decide not to appeal the decision, Whittaker says there will be a “substantial backlog” of consumer complaints.

The BBA launched proceedings in December after the FSA said that PPI sellers should consider complaints not just by reference to the detailed conduct of business rules that applied at the point of sale, but also to standards that are based on the FSA’s guiding principles for doing business.

Effectively, the BBA said, the FSA was retrospectively applying rules.

It challenged the watchdog on three key points: first, whether the FSA’s principles can be used as a basis for redress of complaints; second, whether specific rules should have provided guidance on the complaints handling; and, third, whether the FSA had broken statutory guidelines by applying the guidance retrospectively.

On all three points the High Court ruled in favour of the FSA. Ouseley J found that the banks had wanted to narrow the FSA approach to regulation.

Ratifying the implementation of  the principles-based approach to regulation he said: “High-level provisions were needed to provide the basic and enduring framework for financial services regulation; and it was thought undesirable to have to put in place rules which were highly prescriptive covering perhaps ineffectually all the circumstances to which every regulated activity gave rise.  Indeed, the industry did not want that.”

This was never going to be an easy challenge and the banking community will now have to think hard about whether it needs another fight with the regulator before it decides whether to appeal.

In the meantime, it can expect a rush of complaints as consumers wake up to the fact that they may have been sold a dud.

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