Toxic Invasion
Date: 27 February 2009
Authors: Rodney Gardner
Issue: Vol 159, Issue 7358
Categories: Features, Commercial, Banking, Competition
The Competition Commission (CC) has recently announced a ban on the sale of payment protection policies, at the point of sale, such requirements to be implemented by next year. Several banks have already agreed voluntarily to impose a ban now and it is thus apposite to consider the law and practice that is presently evolving with regard to such claims.
Claims management companies (CMCs) have been seeking refunds from banks for some time now on behalf of borrowers who have been sold single premium policies when applying for both secured and unsecured loans, many of the people affected being within the lower socio-economic groupings. The CC has found that policies being sold are uncompetitive, and CMCs have in the past had some success in gaining refunds on the grounds of unsuitability and/or ineligibility of the debtor.
The only way a CMC can advance a client’s claim, which is rejected, is to refer it to the Financial Ombudsman Service (FOS), which is a lengthy process and does not always result in decisions in favour of the complainant. Many claims have in the past been rejected because the FOS has no jurisdiction on the grounds that regulation by the Financial Services Authority only came into force on the 14 January 2005, and all loans prior to then could not be considered. Although the FOS now considers claims prior to 14 January 2005, its jurisdiction is still limited. The FOS has no jurisdiction in respect of claims for unenforceable loans, and claims for breach of fiduciary duty including claims for secret commissions paid on payment protection insurance (PPI) policies introduced and financed by the lender. As the Office of Fair Trading (OFT) found in its market study (October 2006) the average commission rate then paid was 65% of such premiums, and since the date of that report, commission rates if anything have increased. Moreover, most lenders now have their own associate or in-house general insurer.
Conditional fee
As a direct consequence of the limitations of the FOS, which stymies the CMC from providing satisfaction in a growing number of cases, more and more law practices have been approached with a view to accepting such work on a conditional fee agreement (CFA) basis, and usually involving a referral fee within the referral code.
The number of potential claimants who may be entitled to the return of part or all of the premium on a PPI plus other heads of claim for unenforceability and/or an account of secret commissions, is difficult to estimate precisely, but the OFT and CC’s findings and reports suggest that there are millions of loans, both secured and unsecured at any one time, in respect of which a majority are likely to include loans for single premium PPI; many such loans may well entitle the borrower to redress. Not only are there few solicitors experienced in consumer credit law, but there are also relatively few counsel, and although there appears to be a huge impetus for both solicitors and counsel to get up to speed, the banks on the other hand are well prepared and have teams in place, with a number of substantial commercial practices who have been largely successful in rebutting any of the claims to date. Banks are taking a robustly defensive approach as the volumes of claims increase, but the availability of claimants’ solicitors with equivalent legal prowess, is at present mismatched.
Identifying debtors
CMCs are able to identify substantial numbers of debtors where the value of the claim is above the £5,000 figure on PPI alone and the writer has come across a number of cases in which borrowers have been repossessed by lenders for mortgage arrears, but the amount of the reclaimable PPI alone in some cases, more than exhausts any arrears outstanding. Those distressed members of the public need specialist solicitors able to defend appropriate claims and counterclaim for a mis-sold PPI premium and/or advance other heads of claim, which can in a minority of cases include a claim that the loan itself is unenforceable. Many claimants are forced to take out PPI as a condition of the loan being granted, and apart from this being a misrepresentation, because banks maintain that all PPI is truly optional, in some cases, the compulsory sale of PPI may invalidate the loan.
The claimant will be able to take advantage, in many cases, of the “Unfair Relationship Provisions” set out in Consumer Credit Act 1974 (CCA 1974), s 140A, as well as the Unfair Terms in Consumer Contract Regulations 1999 (SI 1999/2083). In cases where the lender is regulated, breach of the Statutory Regime will allow the claimant to bring an action personally under Financial Services and Markets Act 2000, s 150.
It is axiomatic that practitioners need to be satisfied that they are going to win the overwhelming majority of cases if volume work is accepted on a CFA basis. Therefore, as a rule of thumb, cases which have a claim value of £5,000 or more in relation to the PPI premium (including agreement interest) are likely to fulfil that criterion . A solicitor must, of course, recognise all heads of claim, and that is why any issues of unenforceability and/or additional heads of claim such as an account of secret commissions, must be recognised.
Mischief
There is a growing mischief within the CMC industry, in that some CMCs, with substantial marketing budgets, are inviting members of the public to pay audit fees of a few hundred pounds upfront, with a view to seeing whether the loan itself can be written off . Invariably, the public are invited to submit only loan agreements entered into before the 6 April 2007, with reliance upon the onerous provisions then in force, by which the courts have no jurisdiction to order enforcement of a loan in breach of the “prescribed terms”. While such cases undoubtedly exist, it is misleading to suggest that the majority of loans entered into before that date, including credit card indebtedness, are likely to be written off because of failure to correctly state the prescribed terms. Indeed, it would be a grave mistake for practitioners to accept volume work on the basis that, across the board, the majority of consumer loans are capable of being written off, once the appropriate legal challenge is mounted.
Unfortunately, law practices are accepting such cases in volume, in part because a document purporting to be a legal opinion is produced purporting to “prove” that the claim is irredeemably unenforceable. Regrettably, there is scant evidence of loans being written off, despite some of these models having been around for some 18 months or so. The solicitor needs to understand CCA 1974 so that he can recognise whether an agreement is in breach of the prescribed terms, as well as the other heads of claim that may relate. While it is undoubtedly true that, across the board, some loans will be unenforceable, there are only a few reported cases in the higher courts in over 34 years of legislation.
Epidemic
The regulatory authorities and the SRA are concerned at the epidemic of toxic cases now being promoted by some CMCs, which usually involve credit card balances, and involve members of the public paying upfront fees, in the hope or expectation t hat such loans are likely to be written off. In summary, there are a great many disadvantaged people who have been mis-sold PPI and smaller percentages who also have a respectable claim for an account of secret commissions, or commissions not properly disclosed, as well as limited numbers of borrowers who may well wish to take advantage of breaches of the prescribed terms, with a view to walking away from liability for any further payments. Even when a loan is declared unenforceable, it does not mean that the underlying liability is cancelled, nor that the borrower can automatically require the removal of any default from the credit file and a fuller explanation as to the status of irredeemably unenforceable loans, is helpfully set out by the Appellate Judge giving the leading judgment in Wilson v Hurstanger Ltd [2007] EWCA Civ 299, [2007] All ER (D) 66 (Apr).
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