Payment protection insurance
Many loans are covered by insurance against sickness and unemployment, known as PPI. If the insurance policy’s terms are met, it makes repayments towards contractual instalments. You should always check to see if repayments of a credit debt (secured or unsecured) are covered by insurance. Some policies only cover a set period and, in the case of joint agreements, for only one of the parties, often the first person named in the agreement.
The insurance may be paid for through the monthly repayments under the credit agreement, but it is not part of the credit provided under the agreement. If the client defaults, the policy often provides for it to lapse after, say, three missed payments.
In the past, PPI was often paid for with a single premium, which was then funded as part of the credit agreement and so interest was charged on it. If the client defaulted, they could still claim under the policy because the premium had already been paid. Single premium PPI was invariably purchased at the same time as the credit agreement was entered into. There was considerable evidence of PPI being mis-sold and the sale of single premium payment protection policies on unsecured loans was stopped in February 2009.
If a client suggests that taking out a single premium insurance policy was a condition of being given the finance, the whole agreement may be unenforceable if it was taken out before 6 April 2007 and it was a regulated credit agreement. If the agreement was taken out on 6 April 2007 or later, the creditor may need special permission from the court before being able to enforce the agreement (see here). In some cases, insurance companies refuse to pay – eg, if the client has an illness that started before the insurance policy began (a ‘pre-existing condition’) or was not employed when the policy was taken out. Some policies only cover people under 65 or exclude certain situations altogether – eg, voluntary redundancy. In other cases, delays in processing claims result in creditors applying default interest/charges and/or threatening enforcement action.
Many of the unfair relationships cases that have come before the courts relate to allegations of mis-sold PPI. If the client can establish that they were told that the finance was conditional on the insurance being taken out, the court will likely find the relationship unfair.
Sellers of PPI were usually paid a high rate of commission. The court can consider the seller’s failure to disclose this commission to the client, even though this is not a requirement of the FCA’s Insurance: Conduct of Business Sourcebook.1Plevin v Paragon Personal Finance [2014] UKSC 61 Following the Supreme Court’s decision in Plevin v Paragon Personal Finance (which held that an undisclosed commission of 71.8 per cent gave rise to an unfair relationship), the FCA ruled that when a creditor assessed a complaint about an undisclosed commission, failure to disclose receipt of a commission of more than 50 per cent of the PPI premium, it should result in the client being compensated.2Plevin v Paragon Personal Finance [2014] UKSC 61 This should be the amount of commission over the 50 per cent figure plus interest already paid by the client and a further 8 per cent a year simple interest. (The courts tended to award repayment of the entire commission.3McWilliams v Norton Finance [2015] EWCA Civ 18; Nelmes v NRAM [2016] EWCA Civ 491) Creditors should have contacted all clients whose complaints about the sale of PPI were rejected and who were eligible to complain about undisclosed commission in the light of the Plevin decision. Note: the final deadline for making new complaints about PPI to the Financial Ombudsman Service was 29 August 2019.
Clients who wish to complain about the misselling of PPI may still be in time to bring an unfair relationship claim against the creditor. In Patel v Patel, the High Court decided that the client’s cause of action was a continuing one which accrued from day to day until the relationship ended. It followed that an unfair relationship claim could be made at any time during the currency of the relationship arising under the credit agreement until the expiration of the limitation period after the relationship had ended.4[2009] EWHC 3264 (QB). Patel was considered in the county court at Manchester in Doran v Paragon Personal Finance Ltd, 1 May 2018. In that case, the claim was issued more than 13 years after the credit agreement and PPI policy were entered into but less than five years after the loan was repaid. The judge held that the claim had been brought within the six-year limitation period. The judge awarded a refund of the full amount of the PPI premium plus the interest repayments relating to that part of the loan. However, in Canada Square Operations Ltd v Potter (in which the claim was issued more than six years after the loan had been repaid) the court found that the lender ‘deliberately concealed’ how much commission it received on the sale of a PPI policy to the borrower with the result that, under section 32 of the Limitation Act 1980, the limitation period did not start to run until the borrower found out the amount of the commission.5[2021] EWCA Civ 339. See also, L Charlton, ‘PPI claims deliberate concealment will extend the limitation period’, Adviser online, 19 March 2021 In Smith & Burrell v RBS, which concerned a credit card agreement, the Court of Appeal held that the limitation period began on the date the PPI agreement was cancelled and the last payment made (2006) even though the credit card agreement was not cancelled until 2015. An unfair relationship claim brought in 2019 in respect of the PPI policy was, therefore, statute barred. This decision has, however, been overturned by the Supreme Court which confirmed that the limitation period only begins to run when the credit relationship ends. This did not end when the PPI was cancelled. The limitation period did not begin to run until the credit card agreement was cancelled and so the claim was brought in time.6[2023] UKSC 34 Clients may also benefit from the more generous compensation currently being awarded by the courts – ie, the refund of the full PPI premium (as in the Doran case) as opposed to only the excess above 50 per cent of the premium in accordance with FCA guidance.
However, the courts do not appear to be willing to allow a client to accept a lender’s offer of settlement and then make an unfair relationship claim to the court in order to re-open the settlement. In a recent case, the clients had made a claim for repayment of all PPI payments they had paid. In each case, the creditor offered a smaller sum, calculated by reference to the FCA rules and guidance discussed above, on the basis that acceptance of the offer would settle the clients’ claims. After accepting the offers and receiving payment, the clients brought unfair relationship claims in the County Court. The clients argued that there had been no binding settlement of their claims so that the court retained jurisdiction to consider the unfairness of the relationship. The County Court disagreed and the Court of Appeal dismised the clients’ appeals. Although the court agreed that it retained jurisdiction to consider the unfairness of a relationship, it was important that the courts should enforce compromises agreed in good faith between the parties. If the court was satisfied that the terms were fair and reasonable, then the compromise should be held binding. It could not be re-opened uness there was evidence that the creditor had taken undue advantage of the client’s situation. Further, FCA rules and guidance did not oblige the payment or offering of a specific sum. Rather they provided a process that was intended to lead to an offer of redress, if appropriate. Neither did they say or imply that a creditor could not attempt to achieve a binding settlement of potential or future claims when making an offer in accordance with those rules and guidance.7Harrop v Skipton BS; Self v Santander Cards [2024] EWCA Civ 1106 Motor car finance commission arrangements
Alert: In a 109-page ruling, the Supreme Court has given its judgment on the three combined appeals Hopcraft v Close Brothers; Johnson v FirstRand Bank t/a MotoNovo Finance; Wrench v FirstRand Bank t/a MotoNovo Finance [2025] UKSC 33. The Supreme Court has held that the Court of Appeal was wrong to find there was a fiduciary obligation of undivided loyalty on the part of the dealer when selecting and negotiating a finance package for a customer. The lenders’ appeals in the cases of Ms Hopcraft and Mr Wrench were, therefore, allowed (see paras 285-288). Mr Johnson’s case also included an allegation of an unfair relationship and this allegation was upheld by reason in particular of the size of the commission (55% of the total charge for credit), the failure to disclose the commission and the concealment of the commercial tie between the dealer and the lender (see para 340). The lender was ordered to pay the amount of the commission plus interest at an appropriate commercial rate from the date of the agreement.
Following the ruling, the FCA has said that it will be consulting on running a compensation scheme starting in 2026 and going back to 2007. The average amount of compensation awarded is estimated to be about £950. The FCA has also said that clients who have already complained do not need to do anything, but those who have yet to complain should contact their car loan provider rather than using a claims management company.
For more information about car finance commission arrangements, see the link below.
The operation of the motor finance market has been a subject of concern to the FCA for several years. An area of particular focus has been firm’s compliance with rules as to disclosure of commissions in CONC 3 and 4, in particular CONC 4.5.3R. Before the practice was banned by the FCA with effect from 28 January 2021, some lenders offering car finance allowed brokers (-ie, the person arranging the loan -eg, car dealers) to adjust the interest rates offered to clients. The higher the interest rate, the more commission the broker received from the lender. This practice was known as a Discretionary Commission Arrangement (DCA) and may have been applied to a client’s car loan without their knowledge. The FCA is currently investigating whether some car finance customers were charged too much for their loans and may, therefore, be entitled to compensation. In the meantime, the FCA has announced that firms’ time for responding to complaints about DCAs has been extended to 4 December 2025.
Johnson v Firstrand Bank t/a Motonovo Finance (a decision concerning non-discretionary car finance commission arrangements), concerned three linked cases involving motor cars bought on hire purchase. In each case, the dealer acted as a credit broker and earned substantial commission from the finance company. The Court of Appeal decided that it was unlawful for the dealers to receive a commission from the finance companies without obtaining the client’s informed consent to the payment. This in turn required the client to be told all material facts, including the amount of the commission and how it was to be calculated. In the case of Mr Johnson, the court ordered the finance company to pay compensation of the commission plus interest.8[2024] EWCA Civ 1282 Following the Court of Appeal’s decision in the Johnson case, the FCA also extended firms’ time to respond to complaints about types of car finance commission arrangements other than DCA until 4 December 2025 (this is likely to be extended further as a result of the recently announced FCA consultation). The lenders appealed to the Supreme Court which gave the FCA permission to ‘intervene’ (-ie, for permission to appear and assist the court) in order to explain its intentions when drawing up its CONC rules in the context of motor finance commission, in particular CONC 4.5 which concerns commissions. CONC 4.5.3R requires a credit broker to prominently disclose to the client, in good time before any agreement is entered into, the existence and nature of any commission payable by the lender to the broker where its existence or amount could affect the impartiality of the broker or, if made known to the client, could materially affect the client’s decision to enter into the agreement.
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