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Class struggle

The Competition Commission’s finding that people buying payment protection insurance are being overcharged by 1.4bn a year follows action by the FSA against firms accused of misselling PPI.

PPI is usually sold at the same time as the loan it protects but the commission suggests that firms should be banned from selling policies at point of sale. Its findings have increased the prospect of class actions against financial services providers.

Class actions are procedural devices used in civil litigation to allow the claims of multiple litigants whose cases involve common issues to be determined together. They have been a notable feature of the US legal system but are relatively rare in the UK and have yet to take off for financial misselling claims. This may be about to change.

HFC Bank faces a potential class action for misselling, having been fined more than 1m by the FSA for failing to give appropriate advice to PPI customers. This evidence of regulatory censure will have been a crucial factor in the decision to attempt to pursue a class action against the firm.

The FSA has fined more than a dozen firms over PPI sales and more regulatory action is in the pipeline. Complaints to the Financial Ombudsman Service about missold PPI have also soared in the last year. Potentially, it is not only PPI providers which may be susceptible to class actions. In the economic downturn, disappointed investors will be looking to recoup their losses from the financial market generally.

In the UK, the most commonly used procedure for bringing collective action is a group litigation order. Since this was introduced in 2000, there has been relatively modest take-up. Unlike in the US, which is a very claimant-friendly jurisdiction, UK claimants are not included automatically. Those who want to pursue a claim have to opt in and unsuccessful claimants risk having to pay the defendant’s costs.

Such hurdles have led to controversial calls, most recently from the Civil Justice Council in a February research paper, to introduce an “opt-out generic collective redress regime” to improve access to these procedures.

Those seeking to bring financial misselling claims will also have to convince the courts that the claims have sufficient common issues to justify a group litigation order being made. In March 2006, the courts refused an application for a group litigation order for split-cap investors to bring misselling claims against their financial advisers on the basis that the claims related to personalised advice given to individuals and each should be assessed on its own specific facts.

Similar issues could arise in PPI misselling cases. There may be no express duty of suitability but sales generally resulted from a personal dialogue that should have taken account of customer circumstances. Claimants may argue their claims are based on common systemic failings such as lack of seller training but there may be insufficient common issues to justify case management by group litigation order rather than separate handling.

Yet it might not need many successful applications for group litigation orders to become a significant part of civil justice here. There is no official minimum number of claimants but the figure of 500 has been mentioned in connection with HFC Bank and a recent judgment considered that anything under 20 would not merit a group litigation order.

It is estimated that there are around 20 million PPI policies in force. The sort of allegations that claimants could make include:

l They were ineligible to claim under the scheme.

l They were not told that PPI was optional.

l Exclusions and limitations were not explained.

l The product did not meet the customer’s needs.

l Price disclosure was insufficient.

Legal bases of these claims are likely to include breach of contract and statutory duty, failure to exercise requisite care when making the sale and misrepresentation.

Being targeted for a class action carries high financial risk. Even if a case is defeated, reputational damage may be done but there is an argument that a defendant may welcome a group litigation order because it will lessen the cost and time of fighting a large number of claims, since issues will be dealt with together rather than at separate proceedings.

Unfortunately, a class action will not provide finality to defendants as more claims may follow from customers not part of the original action but who are encouraged by its success to mount their own challenge. On the plus side, an unsuccessful class action will make it unlikely that individual claims will then be brought.

A significant factor which may discourage disgruntled clients from considering court action is the availability of the FOS which will resolve complaints brought to it quickly and free of charge.

Nonetheless, in a rapidly developing civil justice system, firms should take precautions to minimise the risk of litigation. In keeping with regulatory requirements, complaints should be dealt with quickly and positively. Customers should be advised of their right to complain or, if dissatisfied with the firm’s response, to take their complaint to the FOS. Where a firm is aware that customers have been missold policies, it should consider arranging for the affected sales to be reviewed.

If a firm or the FOS upholds a complaint, the FSA expects clients to be compensated, whether or not they have complained.

Firms under FSA investigation should consider possible future civil disclosure issues when creating any documents or communicating with the FSA. When negotiating a disciplinary settlement with the FSA, they should consider how the wording of any public statement may affect subsequent legal claims.

This article gives an idea of regulatory expectations and suggests ways in which firms can act to make it less likely that a customer will join a class action to obtain redress. None of this is to say firms should offer compensation without just cause but they would be wise to take notice of any developments and keep the possibility of class actions thoroughly in view.

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