The Supreme Court found that a failure to disclose a large commission payment on a single premium PPI policy made the relationship between a lender and the borrower unfair under section 140A of the Consumer Credit Act 1974. However, the consequences of the decision don’t just apply to PPI.
This decision, along with the Financial Ombudsman’s (FOS) duty to take into account case law when considering complaints, could open the door to a new wave of fresh claims for compensation and have other ramifications.
Here we lay out some of the possible implications for the industry.
Contrary to some recent reports, it is unlikely to affect cases already settled where the client has received a full refund of all premiums, as that would have included a refund of the commission.
It could open up a huge work load as the claims management companies could re-visit the cases where the claim has been repudiated, with them asking for disclosure of commission and then looking for the adviser to justify the level of commission taken or make a refund to the client.
Justified earnings?
It emphasises that commission on all products should be commensurate with the work involved and the premium paid by the client and should be fair. Brokers should ask themselves “if my client asks me what I earn, can I justify that based on the work I do?”
This commission principle applies to all general insurance products. Should advisers justify taking 30+% commission on a household policy just because the client is prepared to pay the increased premium to allow for this? It also opens up a potentially dangerous situation if the adviser uses a provider’s system that offers flex commission where you can increase it above the market norm. It is, however, only likely to impact firms who have taken an unfairly high percentage of the premium as commission and therefore won’t affect the majority of advisers.
Perhaps the FOS or Financial Conduct Authority (FCA) should publish some guidelines or be more prescriptive on what they consider reasonable commission, but then should the regulatory bodies dictate what commission levels should be paid? I would argue not, as the adviser and providers should be allowed to set their own levels, based on their costs/workload, and so forth. But the how would the FCA and FOS judge what was “excessive”?
Geoff Hall is MD at Berkeley Alexander
