Financial Mis-selling

The most high profile example of financial mis-selling has been the Payment Protection Insurance (PPI) debacle; providers of PPI were first fined for this as long ago as 2006. Household names such as Alliance & Leicester and EGG were fined in 2008 for “serious failings”/”serious breaches” in respect of their sale of PPI by telephone (in the case of A&L) or sale of credit card PPI (in the case of EGG). Customers who were sold single premium PPI policies on loans, mortgages or Hire Purchase agreements have been successfully claiming refunds for the last few years; also customers who have been paying for insurance on credit cards, many of whom were not even aware that this insurance was added or who were told or left with the impression that they would not the credit without taking out the policy. It seems that the vast majority of PPI policies sold by lenders or their brokers before mid 2008 were not only unsuitable for the customers and excessive in cost terms (generating substantial commissions for lenders and their brokers and massive profits for the underwriters), but also highly ineffective (claiming under the policies involved a cumbersome process and was/is in any event often unsuccessful). For more detail on PPI, please see our article on Payment Protection Insurance »

Although the mis-selling of PPI has generated the most publicity – especially since the unsuccessful challenge to the FSA by the British Bankers Association – PPI is by no means the only example of a financial product which was the subject of widespread mis-selling.

Mortgages and credit in general became much more easily available during the credit boom of the late 1990s, until the “credit crunch”, the first recognised victim of which was Northern Rock. On 31 October 2004 the Mortgage Conduct of Business ((MCOB) came into effect – this placed stringent requirements on those advising on the sale of mortgages, whether the lender itself or its brokers. However, it seems that there were ignored in many cases and the FSA has fined some of the main culprits (lenders and brokers). The principal Financial Ombudsman, Tony Boorman, said:

‘Certainly we see cases of mis-selling where we frankly find it extremely difficult to believe that a responsible lender, a responsible intermediary, could have in all conscience advised the customer that this was a sensible product, a sensible size of loan for them to take out given what that lender, given what that broker knew about the customer’s circumstances…’.

The Chief Executive of Citizens Advice, David Harker, has said:

‘The cavalier behaviour of some brokers and sub-prime lenders is seriously undermining home ownership and hitting the most vulnerable borrowers hardest. Our research suggests that many aspiring home owners have been mis-sold unsuitable and costly home loans that are doomed to fail from the start. Many sub-prime lenders are flouting the rules on responsible lending by granting loans when it’s clear the borrower will not be able to afford to repay it from the very outset, then getting tough immediately things go wrong. Far from providing housing security and a valuable asset, home ownership has proved a fast track to debt and homelessness for many vulnerable borrowers on low incomes.’

If the documentation eg the Fact Find and Key Facts prepared by the adviser indicates that he/she did not meet the advising and selling standards set out in MCOB, there is a potential claim that the mortgage in question was mis-sold. The redress (putting the customer back in the position that he/she/they would have been in had that mortgage not been sold to him/them) can be substantial and if the mortgage has come to an end or even if the customer has already had their home repossessed, this will not exclude the possibility of making a successful claim (but it should be pointed out that getting the mortgage “written off” will not be a realistic outcome).

Investments is another area in which products were commonly mis-sold. Those advising on investments – often Independent Financial Advisers (IFAs) – are bound by the provisions of the Financial Services Act 1986 which came into effect in April 1988. Investors can make claims up to 3 years after they became aware of the issue at hand. If it is shown that the investment adviser failed to take into account the circumstances of the investor and did not offer appropriate products or advise on the risks associated with the products recommended, the investor will have a potential claim for mis-selling. Examples of the products that were most commonly mis-sold include savings plans, PEPs/ISAs, unit trusts, income protection plans and lump sum investments. Although the fact that an investor’s investments did not perform as well as he/she would have expected or hoped is not a ground for bringing a mis-selling claim, evidence of improper or inadequate advice (which can be evidenced from the documentation prepared at the time of sale and can be obtained if an investor no longer has it) are grounds for a mis-selling claim. Redress is calculated on the same basis as mortgage (and PPI) claims that are upheld.

Some businesses that purchased property were sold interest rate swaps on the basis that they would be protected against an increase in interest rates. These are highly complex products with significant downside for the borrower if interest rates fall; frequently these risks were not explained adequately, or at all, and in any event such products should not have been offered to anyone other than “sophisticated investors”.

Claims for PPI, mortgage, investment or interest rate swap mis-selling can be taken on a “no win no fee” basis – for those that can be dealt with by the Financial Ombudsman (most of the claims) this will be under a contingency fee arrangement – if the claim is successful the solicitor/claims company is paid a percentage (usually 25%) of the amount recovered. If there are additional heads of claim and/or the amounts being claimed exceed the limit for Financial Ombudsman complaints, legal proceedings will have to be considered and the solicitor will usually conduct these under a Conditional Fee Agreement – the client keeps anything recovered and the solicitor seeks to recover its costs from the other side. Either way, the client does not have to pay anything if the claim is not successful.