Misselling liabilities under portfolio transfers
In 2006, a transferor and transferee entered into a portfolio transfer under Part VII of FSMA in respect of all of the transferor's general insurance business.
This included a portfolio of payment protection insurance (PPI). A dispute subsequently arose as to whether the scheme operated to transfer mis-selling liabilities imposed by the Financial Ombudsman Service FOS in relation to that PPI business.
In a judgment released earlier this month, Mrs Justice Andrews gave an important ruling that any practitioner should have firmly in mind when constructing a scheme. Holding in favour of the transferee, the judgment underlined several key considerations, as follows:
1. Getting the drafting right. In the scheme document, the term "Transferred Liabilities" was defined as "all liabilities of the Transferor (other than the Residual Liabilities and any liabilities under or relating to the Excluded Policies) under or attaching to the Transferred Policies and the Transferred Reinsurances … but excluding, for the avoidance of doubt, the Excluded Liabilities and the Life Component Liabilities".
The principal question was whether this language operated to transfer liabilities other than insurance liabilities relating to the book. This could have been achieved by spelling out the liabilities expressly (or at least using the expressions "liabilities relating to" or "liabilities in connection with") but the judge said that that the words "attaching to" did not - as a matter of construction - achieve this. The judge also pointed out certain apparent inconsistencies in the drafting, pointing out that the draftsman used a wider expression in the very same definition to exclude "liabilities under or relating to the Excluded Policies" from its ambit. From this the judge felt able to deduce that the draftsman's intention behind the definition was indeed more narrow than the transferor had asserted.
2. The value of extrinsic evidence. The judge was willing to look to surrounding documentation for guidance and this included the independent expert's report. Although not a formal legal document, the judge felt able to take it into account when assessing the intended scope of the transfer. In particular, the judge placed weight on the fact that the report made no reference to PPI mis-selling liabilities, or any reserves related thereto, This was enough to persuade the judge that the parties had not intended to such liabilities to transfer (and which duly stayed with the transferor).
3. The court's commercial approach. This case underlines the continuing tendency of the courts to adopt a pragmatic, commercial approach. Indeed the judgement includes a heading as follows: "Does the drafting make sense in context and commercially?" In this section, the judge made clear that it was unlikely that the transferee would have intended to agree (for nil consideration) to "face the prospect of having to pay out millions of pounds, most of which had been received by someone else, as well as substantial amounts of interest, for that other person's wrongdoing. It is inherently unlikely to have agreed to have done so, let alone tacitly". Although the judge did not say this, it may be relevant that the PPI scandal had not, by 2006, really kicked off, meaning that it would not have been a particular issue in the minds of either party at the time of the transfer.
4. Regulatory fines. It was generally accepted that if the FCA were to levy a fine on the transferor for mis-selling the PPI business, the responsibility for paying that fine would remain with the transferor, regardless of the transfer of any other related liabilities to the transferee.
The message is simple. Parties to a scheme (and the scheme document itself) must be crystal clear as to the scope of what it is to transfer and what is not. As a related thought, any insurer that is faced with mis-selling liabilities arising from a book of business that has been the subject of a portfolio transfer in the past may do well to go back through the scheme documentation to assess whether such liability did in fact transfer.