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BBA abandons PPI judicial review

13 May 2011

The BBA statement - that the banks will not appeal the judicial review decision in BBA v FSA & FOS - refers to "matters of important principle which we will be taking forward in other ways with the authorities".

The judgment would have been far more significant, of course, if the BBA had succeeded.  It has, though, served to clarify the application of s.150 FSMA, the hierarchy of rules and principles, and the retrospective application of principles to old versions of the rules, and the interplay of root cause rules and s.404.

The meaning of the word 'actionable' in s.150 is restricted to 'giving rise to a cause of action in court' and the section does not otherwise limit the effect of the principles or prevent them creating obligations owed by firms to their customers.  The principles are confirmed as being relevant to complaints handling and to the exercise of the FOS' jurisdiction in deciding what is fair and reasonable.  It is well established that FSA enforcement actions are based on breaches of principles.

The Court decided that the principles always have to be complied with, whilst the specific rules are but the application of the principles to the particular requirements they cover.  The FSA has always been clear that the principles remain the over-arching source of firms' obligations.

The Court found that compliance with specific ICOB/S (or predecessor) rules did not displace the requirement to comply with the principles.  The Judge said the change in PS10/12 "is one of emphasis in the expression of what has always been the FSA and FOS approach".  This will embolden the FSA in its approach to PPI and other thematic issues but will, by the same token, alarm firms.  Not only has the Court established that firms can be held to 'augmented' standards based on the principles beyond those imposed by the rules, but also - contrary to important principles of legal certainty and causation - firms may be able to understand the standards they are required to achieve only in hindsight.  This ought to be the priority amongst the BBA's 'matters of important principle' to take up with the authorities.

Root cause rules were also given further backing.  The Court accepted that the FSA could have considered a s.404 industry-wide review but that did not mean firms could not instead be required to carry out root cause analysis of their own.  The Court described the revised rules in PS10/12 as a "logical extension to the existing DISP provisions".  As I warned in December's FSU, root cause rules are becoming increasingly important and I anticipate the FSA will seek to back up this message with enforcement activity in the coming year.