The Court of Appeal has recently overturned the first instance decision in this case involving assessment of loss caused by breaches of statutory duty in respect of claims under the Financial Services and Markets Act 2000, in the context of the old Insurance Conduct of Business Rules.
In 2006 the Claimants obtained a loan to refinance existing indebtedness through the Defendant credit broker. The Claimants entered into a loan agreement in the sum of £54,500 repayable over 25 years and also took out a contract of payment protection insurance (‘PPI’) for a term of 5 years.
The Claimants subsequently issued proceedings raising a number of claims in connection with the PPI agreement. In particular, the Claimants made the following allegations:
That the Claimants did not want PPI, however the Defendant impliedly represented to them that PPI was compulsory should they wish to enter the loan agreement and the Claimants therefore obtained PPI on this basis; and
In the alternative, the Claimants submitted that, had they wished to obtain PPI, they would have sought cover for the full term of the loan agreement and not just a period of five years.
It was accepted by the parties that the Defendant had breached provisions of the Insurance Conduct of Business Rules (the ‘Rules’) in force at the relevant time, including duties to investigate customer requirements and ensure suitability of a recommended insurance policy.
The Decision at First Instance
District Judge Harrison did not accept the Claimants’ submissions that they had not wanted PPI and found their evidence as to the required term to be contradictory. In particular, the Judge rejected the Claimants’ claim for breach of statutory duty on the basis that causation had not been established because they had purchased the PPI policy in full knowledge of its term.
The Claimants appealed the decision, claiming that the issue of causation had been approached incorrectly. The Claimants submitted that, had the Defendant enquired as to the appropriate term of the PPI policy in accordance with the Rules, the Claimants would have advised that cover was required for the term of the loan. The PPI did not therefore meet the Claimants’ needs and was unsuitable.
Court of Appeal Decision
The Court of Appeal confirmed that the test to be applied to the issue of causation in an action for breach of statutory duty is to ask whether, if the duty had not been breached, the damage would have occurred.
The Judge at first instance should have asked himself how the Claimants would have responded if the Defendant had made ‘open and fair’ enquires in respect of the level of cover. The Judge at first instance had placed too much reliance on the fact that the Claimants were aware that the term of the policy was 5 years. The Court of Appeal instead concluded that the fact that the Claimants knowingly purchased a 5 year policy did not establish that 5 years would have been the Claimants answer to the necessary enquiry as to the term of PPI required.
It was held therefore that the Defendant’s breach was causative of the Claimants’ loss as they would not have purchased the PPI policy had the Rules been complied with.
This case reinforces the test to be applied to the issue of causation. The focus of the test is not specifically the knowledge of the parties at the time of the alleged breach of duty but to follow the line of enquiry as to whether, if the duty had not been breached, the damage would have occurred.
The case acts as a warning to financial institutions to ensure strict compliance with regulatory procedures to avoid potential mis-selling claims.
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