BBA v FSA – Principles-Based Redress in Action
One of the most talked-about cases this year, the judgment in British Bankers Association v Financial Services Authority and Financial Ombudsman Service  EWHC 999 has attracted huge attention from the press. But although there have been hectares of coverage of the implications of the judgment for customers who bought Payment Protection Insurance (“PPI”) policies, there has been less comment on the wider regulatory implications for financial services companies.
First, some factual background. It’s well known that PPI policies sold by firms have generated huge numbers of customer complaints. FOS has been deciding increasing numbers of complaints not resolved by firms, and issuing along the way an Online Resource – an important feature of which is the FOS’ statement that the Principles would be taken into account when the FOS made decisions as to whether compensation would be ‘fair and reasonable’ under section 228 (2) of the Financial Services and Markets Act (“FSMA”). In August 2010 the FSA published a Policy Statement “The assessment and redress of Payment Protection Insurance Complaints.” The Statement included guidance on how PPI sales complaints should be decided; a list of what the FSA saw as “common failings” in the selling of PPI policies; and guidance on a mechanism for those customers who had not complained to receive – potentially – redress for perceived losses.
The BBA and Nemo Personal Finance brought judicial review proceedings challenging both the FSA’s Policy Statement and the FOS’ Online Resource.
Ground 1 – the non-actionability of the Principles
The first ground of challenge was that the FSA’s Statement and the FOS Online Resource had the effect that compensation was payable for breaches of the Principles for Businesses laid down by the FSA, even though those Principles were not actionable in law (the FSA having so provided under section 150 (2) FSMA). By requiring firms to have regard to the list of ‘procedural failings’, the FSA was therefore unlawfully making non-actionable Principles actionable (paragraph 48). And if the FOS could award redress to a customer on the basis of the Principles even when a firm had not breached any specific rule, the effect again was unlawfully to make non-actionable Principles actionable (except in the case of complaints worth more than £100,000) (paragraph 67).
Ouseley J rejected the argument. He held that the FSA’s decision under section 150 (2) that breach of the Principles should be non-actionable simply prevented a cause of action for breach of statutory duty arising in respect of the Principles (paragraphs 71-76). That did not prevent the Principles from giving rise to obligations between firms and customers. And the FOS was entitled to take the Principles into account when deciding what was fair and reasonable in all the circumstances of the case – indeed it would be a breach of the FOS’ statutory duty under section 228 (2) FSMA to reach a view on a complaint without taking the Principles into account (paragraph 77). And whether or not the Principles had been formulated, the FOS would in any case be bound to consider essential points such as whether the customer was given clear, fair and not misleading information, and whether the policy was a suitable one for the customer (paragraph 78).
Ground 2 – Rules versus Principles
The Claimants’ second ground was that, since the FSA has made specific rules governing the sale of PPI policies (the Insurance: Conduct of Business Rules – “ICOB Rules”), it was unlawful to apply or interpret the Principles – or to interpret the ‘common failings’ list in the FSA’s Open Letter – in such a way as to contradict or augment those Rules. (An example given during the hearing was that while the ICOB Rules make detailed stipulations about customer communications at time of sale, the ‘common failings’ list appeared to require firms to have done more than this.) Provided a firm complied with the ICOB Rules, it should not be held to have breached any provision leading to redress by way of the Principles, if those rules were intended to implement those Principles (paragraph 98). And the FOS should not use the principles to augment or contradict the obligations owed by firms to customers under the ICOB Rules, except in exceptional circumstances (paragraphs 99-100).
The FSA agreed that it would not seek to enforce the Principles where to do so would conflict with specific rules, rather than augmenting them (paragraph 130). The FOS however did not accept that it could be prevented from upholding a complaint on the basis of what was fair and reasonable, even where there was a conflict between a specific rule and a Principle (paragraph 152).
Ouseley J rejected the Claimants’ claim on this ground as well. He held that the Principles were best understood as “the ever present substrata to which the specific rules are added.” Principles always had to be complied with and the specific rules were simply specific applications of the Principles to the particular requirements that they covered (paragraph 162). And he did not consider that the Principles contradicted the rules in any of the examples that the BBA and FSA had asked him to decide. As for the FOS, Ouseley J held that the width of its duty to decide what is fair and reasonable meant that the FOS was entitled to award compensation where there had been no breach of a specific rule and only the Principles were relied on; indeed the FOS would be entitled to require the payment of compensation for breach of a Principle that contradicted a specific rule (paragraph 184).
Ground 3 – exclusive procedural remedy
The third ground of challenge was that section 404 FSMA (and, for the future, the new s.404A) makes specific provision for schemes to be established to review past business in certain specified circumstances. The Claimants’ argument was that where those circumstances arose, that procedure, which included safeguards for firms, and which did not permit reliance on the Principles to found redress, had to be followed. Thus the FSA’s decision to issue a Policy Statement and Open Letter Standards, and provide for redress to customers who had not complained in that way, rather than by way of a section 404 FSMA scheme, was unlawful. Ouseley J also rejected this argument. He held that section 404 was not intended to provide the only way of proceeding in such cases, but to add to the regulatory armoury (paragraphs 250-253).
The wider implications
So what are the wider implications of the judgment for financial services firms, and where does it leave the role of the Principles in regulation of financial services? The Claimants decided not to appeal against the judgment. It remains to be seen whether, and if so how, the proposed Financial Services Act will alter the position (the Bill is currently out to consultation). But for the time being, although the case only concerned PPI complaints, the reasoning may be applicable to many types of complaints which are subject to the regime. It is now clear that as regards customer complaints, it is not enough for firms to ensure that they comply with all the specific Rules; a complaint may be upheld on the basis of a breach of the Principles. And the judgment as a whole emphasises the extent of FOS’ power to interpret the Principles, to the extent that there is a real risk that FOS may become, de facto, the maker of the rules. Although the judgment in Heather Moor v FOS  EWCA 2701, had already established that the FOS is entitled, exceptionally, to uphold a complaint even where a firm has complied with the rules, the BBA judgment may go somewhat further, in its suggestion that that this need not be confined to ‘exceptional’ cases (although still expected to be “very infrequent”: paragraph 185). Indeed, the FOS may require firms to pay compensation if a Principle contradicts a specific Rule. In those cases, Ouseley J held that the FOS will have to decide which one of the conflicting provisions is the dominant provision (paragraph 184), and will have to give adequate reasons (paragraph 186). And as Ouseley J also said, although a decision may theoretically be lawful as a matter of construction of the rules, it may not be fair or reasonable on its properly reasoned application to the facts (paragraph 186). All in all, the decision gives rise to continuing uncertainty about financial services firms’ regulatory obligations, both in respect of FOS-led customer redress obligations and FSA imposed redress.
Acting for the claimant
David Pannick QC, Charles Flint QC, Javan Herberg QC and Simon Pritchard
Acting for the respondent
Monica Carss-Frisk QC
Acting for the intervener
Michael Fordham QC and Paul Luckhurst