Payment Protection Insurance (PPI)

This is an updated version of an article written in February 2023. It has been updated following two recent decisions from the Supreme Court.

Payment Protection Insurance (PPI) is an insurance product that enables repayment of credit if the borrower is unable to service the debt due to a change in circumstances (e.g., sickness, loss of employment or death).

PPI was widely sold by brokers, banks and other credit providers as an add-on to the credit agreement (e.g. credit card, loan, mortgage, hire purchase, catalogue credit and overdraft).

In the UK 64 million PPI policies were sold. Whilst some date back to the 1970s the majority were sold  between 1990 and 2010.[1]

Complaints about the sale of PPI have resulted in lenders repaying more than £38 billion to borrowers.¹

The PPI complaints were originally focused on mis-selling but following the Supreme Court case of Plevin² in 2014 subsequent complaints have been in relation to non-disclosure of high levels of commission and profit share.

Plevin[2]

In Plevin, the Supreme Court considered that the borrower was aware that some commission would be paid to the broker since it was stated in the borrowers’ guide and there was no other way that the broker could be paid for their services in selling the PPI Policy.[3]

The Court held that it was not possible to state a precise or universal test when assessing whether a relationship between lender and borrower was unfair pursuant to s.140A Consumer Credit Act (CCA) 1974 since it must depend on the Court’s judgment of all the relevant facts.[4]

The Court also held that at some point commissions may become so large that the relationship cannot be regarded as fair if the borrower is kept in ignorance. Whilst the Court was unable to say where the tipping point may lie the commissions in Mrs. Plevin’s case (71.8%) were a long way beyond it.³

Following the Supreme Court decision the case was remitted to the County Court. On 2 March 2015 His Honour Judge Platts held that the borrower was only entitled to a refund of the entire commission element of the PPI premiums plus interest. This has become widely known as the Platts Method.

Financial Compensation Authority (FCA) Step 2 Methodology

As a result of Plevin, on 29 August 2017 the FCA Policy Statement 17/3 came into effect which imposed new obligations on lenders concerning borrowers PPI complaints.

The FCA Step 2 Methodology requires the lender to pay Redress to the borrower in respect of the non-disclosure of commission and profit share above 50% of the PPI premium. The sum to be paid is calculated as 50% of the commission and profit share plus contractual interest and simple interest at 8%.[5]

Prior to the deadline of 29 August 2019 borrowers were able to make complaints to the Financial Ombudsman (‘Ombudsman’) about the lender receiving high levels of commission. However, following expiry of the deadline complaints to the Ombudsman can only be made where the borrower is able to show exceptional circumstances such that they could not have claimed before the deadline.

County Court

PPI claims for non-disclosure of high levels of commission and profit share are being heard regularly at county courts across the country given that there is no universal test for fairness and the parties to the dispute are reluctant to reach a settlement where limitation is a determinative issue and there is judicial variation upon issues such as the appropriate method of calculating redress and compensatory interest.

Limitation

Considering that PPI policies were mainly sold between 1990 and 2010 it is unsurprising that limitation is often a live issue in PPI complaints since the primary limitation period is only six years.[6]

Smith v RBS[7]

The Supreme Court held that the relevant relationship was the relationship arising out of the credit agreement (which continued after the PPI policy came to an end) and the period of limitation begins to run when that relationship ends and expires after six years.[8]

Following the Supreme Court decision in Smith, limitation is not always a live issue since even where the PPI policies were cancelled (or otherwise ended) many years ago the credit agreements (for the credit card, loan, etc.) remain ongoing or ended less than six years before the date of issue of the claim.

Extension of the Limitation Period

A borrower may be able to extend the limitation period if it can rely upon section 32 Limitation Act (LA) 1980.

‘Section 32 Limitation Act 1980.

Postponement of limitation period in case of …concealment…

(1) …where in the case of any action for which a period of limitation is prescribed by this Act…

(b)       any fact relevant to the plaintiff’s right of action has been deliberately concealed from him by the defendant;

…

the period of limitation shall not begin to run until the plaintiff has discovered the … concealment … or could with reasonable diligence have discovered it…’

In Potter[9], the Supreme Court considered that the existence and amount of the commission in a ‘PPI Plevin Claim’ were facts which were relevant to the claimant’s right of action under section 140A of the 1974 Act, that the defendant had deliberately concealed those facts from her by consciously deciding not to disclose the commission to her (as the recorder held) and although section 140A was not in force when that decision was taken the defendant continued to withhold the information until shortly before proceedings were commenced. Given that reasonable diligence was not in issue it was held that the requirements of section 32(1)(b) were met.

The burden of proof under s.32 LA 1980 is on the borrower. When reasonable diligence is in issue unless the borrower can establish that it could not with reasonable diligence (excludes exceptional measures which the borrower could not reasonably have been expected to take[10]) have discovered the existence and amount of commission (and profit share) until a later date then the limitation period will not be extended.

In making a determination under s.32 the Court must treat the borrower as having a desire to investigate[11] and that they would become aware of the things that a reasonably attentive person in their position would learn[12], however, the borrowers personal characteristics such as naivete or inexperience in financial matters are irrelevant to the question of whether the borrower has demonstrated that they could not with reasonable diligence have discovered the existence and amount of commission (and profit share) received  by the lender.

The Court must also determine whether there was a ‘trigger event’, something which put the borrower on notice of the need to investigate, but there need be no single event since the requirement for reasonable diligence is a continuing one.¹³

Common triggers:

• PPI documentation: details of insurance being provided by a third party (inference of a commission being paid to the lender).
• Conversations with friends or family concerning PPI claims.
• Press articles or radio broadcasts concerning PPI and the lender receiving a commission.
• Competition Commission Report published on 29 January 2009.
• Court cases:
• • Harrison v Black Horse Ltd [2010] EWHC 3152 (QB).
  • Plevin v Paragon Personal Finance Limited[2014] 1 W.L.R. 4222.
• Complaint letters prepared by claims management companies who knew or ought to have known about Plevin.
• Lender’s redress letter which informed the borrower of the commission and profit share.

Compensatory Interest

Interest was very low for more than a decade[13], however, in recent times interest has quickly increased. There is a tendency for Court’s to award 1% to 2% compensatory interest, but this can be higher in individual cases such as where the date the PPI premiums were charged pre date the period of very low interest.

Taxation

Lenders typically retain 20% of the compensatory interest when they pay redress to the borrower[14]. However, the borrower may be able to reclaim such tax provided they have not exceeded their personal allowance in the tax year in which they received the redress payment.

Conclusion

Despite the deadline having passed for making PPI complaints in relation to high commissions and profit share to the Ombudsman, borrowers can still make a complaint to the Ombudsman if they can show that they could not have made a complaint before the deadline due to exceptional circumstances.

Borrowers can bring PPI claims under s.140A CCA 1974 in the County Court in respect of the high commissions and profit share received by the lender, however, if the claim is to succeed the borrower’s claim must be within the 6 year limitation period or the borrower must be able to discharge the burden under s.32 LA 1980 to extend the limitation period.

Article by Robert Whittock

[1] https://www.fca.org.uk/ppi/ppi-explained

[2] Plevin v Paragon Personal Finance Limited [2014] UKSC 61

[3] Plevin v Paragon Personal Finance Limited [2014] UKSC 61 [18]

[4] Plevin v Paragon Personal Finance Limited [2014] UKSC [10]

[5] DISP App 3.7A

[6] S.9 Limitation Act 1980

[7] Smith and Burell v Royal Bank of Scotland Plc [2023] UKSC 34

[8] Smith and Burrell v Royal Bank of Scotland Plc [2023] UKSC 34 [2]

[9] Canda Square Operations Ltd v Potter [2023] UKSC 41 [154]

[10] Hussain v Mukhtar [2016] EWHC 525 (QB) [40]

[11] Hussain v Mukhtar [2016] EWHC 525 (QB) [41]

[12] OT Computers v Infineon Technologies AG [2021] EWCA Civ 501 [47]

[13] 1% or below from 5 February 2009 to 5 May 2022

[14] Section 874 Income Tax Act 2007