38. PPI and financial mis-selling
Information on the work of the PPI Team and recovering compensation where the insolvent has been a victim of financial mis-selling cases.
These FAQs are intended to be a useful introduction to the subject of financial mis-selling and PPI in particular, or to be used as a training tool, but should not be seen as a replacement for the more detailed advice given elsewhere in the chapter.
What is PPI?
Payment Protection Insurance (PPI), sometimes called ‘loan protection’, is an insurance policy typically sold when a personal loan or some other form of personal credit is granted. The policy is designed to provide monies to meet the repayments of the loan in the event of the unemployment (or similar) of the borrower.
How is a PPI policy paid for?
PPI is usually a policy paid for in full and up front by the loan company, with the loan company granting a further loan for payment of the PPI policy.
Therefore the resultant monthly loan payment is actually made up of a proportion of:
- capital repayment of the main loan;
- interest on the main loan;
- capital repayment of the PPI loan;
- interest on the PPI loan.
The exception to this is where PPI is obtained on a store card or credit card. The PPI premium is then usually calculated on the outstanding balance on an ongoing basis.
What is PPI mis-selling?
In many cases PPI policies have been sold in circumstances where the individuals to whom they were sold would not have been able to benefit from the policy. Where, for example, they were too old to qualify or already insured, or where the policy was not properly described on sale, or where they did not realise they were buying PPI.
Is a PPI claim a bankruptcy asset?
A PPI claim is a bankruptcy asset provided that the act of mis-selling occurred prior to the date of bankruptcy.
What should I do if the bankrupt cannot remember if a PPI policy has been taken out?
If the bankrupt cannot recall whether a PPI policy was purchased, the official receiver should make enquiries of any secured creditors using the MP2 mortgage letter.
If the bankrupt suspects that they held a PPI policy in respect of an identified unsecured debt the questionnaire at Annex A should be sent to the bankrupt to complete with as much information as possible.
If the bankrupt neither recalls nor suspects that they held a PPI policy in relation to an unsecured debt, then no further enquiries should be made.
Does the right of set-off affect the official receiver’s ability to claim PPI monies?
Set-off relates to cross-claims. Where the institution liable to pay compensation to the bankrupt (their trustee) holds a provable debt in the bankruptcy, the two competing claims may be set-off against each other to give a net liability/asset.
By way of example, if the financial institution is liable to pay compensation of £2,000 but holds a provable debt of £5,000, the institution’s claim is reduced by means of set-off to £3,000 (£5,000 - £2,000).
In reality, most financial institutions are not taking advantage of the provisions relating to set-off.
The bankrupt paid off the loan/credit card before the bankruptcy, does the official receiver still have an interest in the PPI policy?
Yes. The PPI mis-selling complaint is a separate matter from the loan/credit card it was taken out to protect. Provided the mis-selling took place before the date of the bankruptcy any complaint will vest in the trustee.
Is the entitlement to any PPI mis-selling payment different where PPI was mis-sold in relation to a credit card instead of a loan?
No.
Where PPI has been mis-sold in relation to a credit card, the PPI policy is usually paid for monthly as a percentage of the outstanding card balance.
The date of the mis-selling of the PPI policy is the relevant date for deciding if the complaint vests in the trustee. Where the account was taken out prior to the bankruptcy order, the PPI policy will most likely also have been taken out at the same time.
The bankrupt’s spouse (or other solvent third party) paid off the loan/credit card after the bankruptcy. Does the official receiver have an interest still?
Yes. Where, post-bankruptcy, a third party repays a provable bankruptcy debt in full, perhaps under a guarantee arrangement, and subsequently a PPI complaint is accepted, it is possible that some or all of the compensation payment may be due to the third party. This would be appropriate if the loan creditor could have applied set-off at the date of the bankruptcy order.
What if the bankrupt or their partner has already made a claim under the policy and received payment from the PPI policy?
If the bankrupt or other policy holder has already made a claim on, and received payment out of, the PPI policy for loss of income (for example), this does not prove that the policy was validly sold and it is possible that a compensation payment may still be made. The official receiver should use their discretion on a case-by-case basis as to whether to pursue such cases beyond the initial questionnaire.
Where can I direct the bankrupt for further information on PPI and bankruptcy?
The bankrupt may be directed to the guidance on GOV.UK
What are the other types of mis-selling that I might encounter in dealing with an insolvency?
Examples of this would be in relation to Interest Rate Hedging Products (IHRP) or in relation to unfair charges or interest payments.
How are these matters dealt with in practice?
The PPI Team will handle all claims once the official receiver has obtained the initial information.
38.1 Introduction
This chapter provides guidance on dealing with claims for financial mis-selling, which can be valuable assets in an insolvency. Most claims in this area are in relation to the mis-selling of Payment Protection Insurance (PPI), but there are others such as in relation to Interest Rate Hedging Products (IHRP) or in relation to unfair charges or interest payments.
38.2 Mis-sold PPI policy complaint process
The Financial Services Authority (FSA) receives general complaints regarding the financial industry, and issues guidance to that sector.
Where an individual believes they have been mis-sold a PPI policy, a specific complaint is made firstly to the financial institution involved. Where a satisfactory solution is not found, the individual may then raise the complaint to the Financial Ombudsman.
The FSA have set a date of the 29th August 2019 as the final date in which a new claim for the mis-selling of PPI may be made. The banks will only consider new claims up to this date. Any claims submitted after this date will be deemed out of time.
38.3 Financial institutions to identify potential claimants
Guidance from the FSA requires banks to analyse past sales of PPI for the purpose of identifying and compensating policy holders, without the need for the policy holder to first commence a complaint.
38.4 Where a payment has already been made from PPI policy
Even where a successful insurance claim has been made on the policy in the past, it does not mean that the policy was not mis-sold at the time the loan was taken out. For example, a complaint of mis-selling may be on the basis that the bankrupt did not want or know that they were purchasing PPI. However, any payout received under the policy is likely to be taken into account when calculating any compensation.
38.5 PPI policy - sold through a broker or agent
Where a PPI policy has been sold through a broker at the same time as a loan was obtained (whether secured or unsecured), it is possible that the complaint for mis-selling will be against the broker rather than the loan provider.
38.6 Vesting of PPI complaint in trustee
The right to pursue a complaint for a mis-sold PPI policy entered into before the bankruptcy order and the right to receive related compensation from that complaint, will vest in the official receiver, as trustee of a bankrupt’s estate [section 306]
An insurance policy (PPI is a type of insurance policy) taken out by a bankrupt prior to the date of the bankruptcy order, comprises property which forms part of a bankrupt’s estate [section 436]. Case law has held that damages in a personal injury claim are not property but that payment out of an insurance policy which covers the same type of injury is property [Cork v Rawlins [2001] EWCA Civ 202]. By analogy this will also apply to a PPI policy so that any payment from the policy will form part of the bankrupt’s estate.
Any complaint arising from the sale of the insurance policy is property, as the right to make a complaint can be said to be “an interest arising out of or incidental to” that property [Re Rae [1995] BCC 102]. It is, essentially, a right of action.
38.7 Relevant date for deciding if PPI complaint vests in official receiver as trustee
The relevant date to decide whether any PPI complaint forms part of the bankruptcy estate is the date that the PPI policy was mis-sold. Provided the date that the mis-selling of the PPI policy took place pre-dates the bankruptcy order date, any complaint will form part of the bankruptcy estate.
38.8 Complaint for mis-selling of PPI commenced prior to date of bankruptcy order
Where a bankrupt has commenced a complaint for mis-selling of a PPI policy prior to the date of the bankruptcy order, the complaint is one that vests in the official receiver, as trustee. The official receiver should not agree to the bankrupt continuing any complaint. The official receiver, as trustee, may choose to continue the complaint if it is considered that it has merit.
The official receiver should firstly notify the financial institution of the official receiver’s interest and give consideration to continuing with the complaint, passing the matter to the PPI unit (see below).
38.9 Lenders to check for bankruptcy prior to paying out PPI compensation
Financial institutions have been asked to check if an individual has been the subject of a bankruptcy order before making a compensation payment in respect of a mis-sold PPI policy. However, this is not always happening in practice. Where a bankruptcy order has been made, the financial institution should contact the relevant official receiver to ascertain if the compensation payable under the PPI complaint is a bankruptcy asset.
38.10 Bankrupt makes post bankruptcy payments
Where a PPI policy has been sold at the same time as a loan and the bankrupt has made payments towards a PPI loan after the date of the bankruptcy order, any mis-selling complaint in relation to the PPI policy will still form part of the bankrupt’s estate. This is most likely to happen with a secured debt e.g. on a bankrupt’s family home.
A secured loan is a bankruptcy debt and a bankrupt is released from the loan on discharge [section 281; 382]. A bankrupt may choose to continue the secured loan repayments, e.g. where continuing to reside in the property, but any claim that the bankruptcy estate has received ‘unjust enrichment’ from the bankrupt’s continued repayments is incorrect. The bankrupt’s motivation to continue repayments is a desire to retain the property and they are not forced (to their detriment and the trustee’s benefit) to continue paying the loan.
The continued repayments also represent a repayment of the loan granted for the purchase of the PPI policy and not the PPI policy itself.
38.11 Amount of compensation may be set-off in bankruptcy
Any compensation paid in relation to a mis-sold PPI policy will usually comprise reimbursement of all PPI premiums paid, together with any interest charged (where the premium has been added to the loan).
However, where a mis-selling complaint relates to a debt that is still in existence at the date of the bankruptcy order, the amount due in compensation may be off-set against outstanding debt owed to the same institution. This is the case even where the debt that the PPI was taken out to cover has been repaid.
38.12 Bankruptcy order annulled
Where a bankrupt has obtained an annulment of the bankruptcy, then any compensation payable as the result of a PPI mis-selling would be payable to the former bankrupt and not the bankruptcy estate.
38.13 Annulment – payment in full
It is possible that the payment of PPI compensation might result in sufficient funds becoming available to meet a bankrupt’s debts in full. If this is the case, the bankrupt should be informed of this possibility so that they may obtain independent advice and decide whether to apply for an annulment of the bankruptcy order.
38.14 Information to be obtained from bankrupt
In order that a PPI complaint can be successfully pursued it is essential that all relevant information with regards to any PPI policy taken out is obtained from the bankrupt as soon as possible after the making of the bankruptcy order.
Where it is identified that the bankrupt has a PPI policy with regard to a loan, even if that loan is now repaid, the bankrupt should be requested to provide an account of the purchasing of the policy by answering the questions on the appropriate questionnaire (see below).
38.15 PPI information to be obtained at initial enquiry stage or vetting interview
The bankrupt should be asked to provide confirmation as to whether or not any PPI policies have been taken out at the initial enquiry stage or (where initial enquiries are not made) as part of the vetting interview. Where a PPI policy is identified at the initial enquiry stage, the official receiver should send the PPI questionnaire (Annex A) to the bankrupt with the interview pack.
The questionnaire should only be sent out with the interview pack where a PPI policy has already been identified. PPI questionnaires should not be sent to a bankrupt speculatively. Where possible the official receiver should complete the PPI questionnaire at the vetting interview on behalf of the bankrupt to prevent any misunderstanding about who has the right to any subsequent compensation.
38.16 Separate questionnaire required for each PPI policy
A separate questionnaire should be completed for each PPI policy held. The questionnaire is derived from the questionnaire held on the Financial Services Ombudsman’s website and should not be altered.
38.17 PPI information to be obtained at interview
Where the bankrupt confirms that they have a PPI policy at the interview stage, the examiner should note the bankrupt’s response regarding any PPI policies held in the interview record or preliminary examination. The official receiver should ensure that either;
a) the completed questionnaire(s) have been returned by the bankrupt (if previously sent), or
b) the questionnaire(s) is completed during the interview
Where possible, the official receiver should complete the PPI questionnaire at the vetting interview on behalf of the bankrupt to prevent any misunderstanding about who has the right to any subsequent compensation.
38.18 Failure of bankrupt to provide information
Where the official receiver considers that the bankrupt may have a PPI policy prior to their bankruptcy and the bankrupt fails to complete or sign the PPI questionnaire, this should be treated in the same way as any other failure by the bankrupt to provide information, with early discharge not being proceeded with and an application to the court for suspension of the bankrupt’s discharge being considered.
Each case should be reviewed on its own merits as to the materiality of the failure to co-operate with the official receiver.
38.19 Seeking information from secured lenders
If the bankrupt cannot recall whether a PPI policy was purchased, the official receiver should make enquiries of any secured creditors using the document production mortgage letter. To obtain information with regards to any PPI policy taken out by the bankrupt, additional paragraphs should be inserted into this mortgage letter, see Annex B for the text to insert and guidance on how to insert it.
38.20 Letter to mortgage lender
The letter to the mortgage lender should seek to establish:
a) details of any PPI policy sold in connection with the borrowing
b) details of the PPI provider including their address and policy number
c) if any PPI policy exists, whether any complaint has been commenced with regards to its potential mis-selling
d) where the lender is the PPI provider, a copy of the policy
38.21 Response to MP2 mortgage enquiry letter
If the mortgage lender responds to the mortgage enquiry letter confirming that the bankrupt holds a PPI policy which has not previously been disclosed, arrangements should be made with the bankrupt for the questionnaire to be completed and the bankrupt’s consent to the enquiries being made obtained. If the bankrupt cannot recall the necessary information and that is not possible, the questionnaire should be issued to the bankrupt for completion with as many details as possible, and the case file updated). Provided the bankrupt’s consent is obtained on the questionnaire, then that, along with the details provided by the mortgage lender which may include a copy of the PPI policy, should be sufficient for the complaint to be progressed.
38.22 Bankrupt cannot recall if PPI policy obtained – unsecured lender
Where a bankrupt cannot recall whether they took out a PPI policy and there is no evidence to suggest that they did, e.g. copies of credit agreements, credit card statements, etc. no further action should be taken.
38.23 ISCIS and initial PPI information
Where the bankrupt indicates that they hold a PPI policy and the PPI questionnaire has been sent/given to the bankrupt for completion, the case file should be updated. In particular note should be added to the case on the date the questionnaire is sent in order that it may be chased for return.
Completed questionnaires should be forwarded to the relevant bank and the case file. As above a note should be added. Any resultant correspondence may then be transferred to the PPI Team
38.24 ISCIS asset recording
The official receiver office should not add the PPI to the asset screen on ISCIS. Upon receipt of the correspondence the PPI team will update the ISCIS asset tab and take appropriate action, depending on the case status.
38.25 PPI team to deal with all PPI matters
As part of the recommendations from the asset realisation group in late 2013 a dedicated PPI team was set up to deal with all PPI compensation claim enquiries and to streamline the process of realising those claims. This has now been extended to other mis-sold financial products, including interest rate hedging products.
All initial enquiries need to be completed by the official receiver, such as the completion of new questionnaires (as outlined above). These should be forwarded to the relevant bank by the official receiver’s office. Any resultant correspondence may then be transferred to the PPI team to act.
If correspondence is received from a claims management company (CMC) the PPI team will deal with these and make payment of their fees. The OR office should not negotiate with the CMC but pass the matter through to the PPI team.
Upon receipt of the correspondence the PPI team will update ISCIS and take appropriate action, depending on the case status.
38.26 Contact Details for the PPI Team
All post (emails and direct correspondence) should be emailed across to the following email address ([email protected])
Alternately a telephone line has been set up through the IEL for the following telephone numbers
Main Enquiry Line for PPI – 0113 200 6096
Postal Address – PPI Team Manchester PO Box 16665, Birmingham B2 2JX.
38.27 Telephone Calls on PPI
If you receive a telephone call on PPI you should inform them that there is a specialist team that deal with PPI. The calls can then be passed to the PPI Enquiry Line.
If they have already spoken to the IEL, can’t get through, or they are reluctant to call again, take their number and let them know that a member of the PPI Team will call them back. This can be emailed through to the RTLU North east email address above.
38.28 Ongoing correspondence from the financial institution, bankrupt or CMC
Banks often send in enquiry letters, reassessment letters and claim forms. They are also received from the Financial Ombudsman. These are likely to appear in your DNQ. These can be copied and emailed to the PPI Team
If the letter has arrived by fax this can be scanned and emailed direct to the RTLU North East Inbox.
If an email arrives from the bank then this should be forwarded direct to the [email protected] to respond.
38.29 What will the PPI Team do with the cases?
If post is received on an open case that is still being worked on by an official receiver command, then the post can be forwarded to the PPI Team to deal with. There is no need to reassign the case to the PPI team until all other administration is concluded. An asset can be opened in ISCIS to allow the PPI Team to monitor the work. The PPI Team will also deal with any CMC costs, complaints or queries regarding the PPI.
If the case is closed on ISCIS, or is reopened due to the PPI, then the case should be reassigned on ISCIS to the PPI Team office and an asset opened in ISCIS
If the PPI realises sufficient funds for a distribution the case will be prepared and transferred to the LTADT distribution team by LTADT the PPI team. If the case does not generate sufficient for a distribution the PPI team will close the case in the normal manner.
38.30 IRHP (Interest Rate Hedging Products)
In a similar way to PPI claims for the misapplication of interest rates on certain types of financial product vests in the trustee or is property of the company to be dealt wit by the liquidator. The most common of these is the compensation being paid against IRHPs
There are some issues with these cases whereby the Official Receiver may be liable for the tax on the compensation and where HMRC need to calculate their claim in the proceedings.
It was decided that whilst the tax situation was being investigated all cases with IRHP would be gathered under one roof, in this case the PPI Team to allow them to liaise with HMRC regarding the tax applicable to the case prior to any distribution.
38.31 If the company is dissolved
Where compensation is payable to a company and it has been dissolved, consideration will need to be given to applying to have the company resorted to the register in order to deal with the potential asset. If the company is dissolved the Official Receiver will need to make the decision to restore before the case is transferred to the PPI Team. It will not be possible to restore a company that has been dissolved for more than six years.
38.32 Other Miss-sold financial products.
The PPI Team will deal in a similar manner to PPI and IRHP any notice from banks, debtors and Claims Management Companies (CMC) that deal with all other mis-sold financial products.
The PPI Team is currently in negotiation with the banks to deal with these in one office location and they are currently dealing with mis-sold bank accounts for a number of the banks in this way. Previous examples of mis-selling and compensation claims of a type which the PPI Team can deal with are:-
- secured debts
- overdrafts
- Wonga loans
- Argos overpayments
- refund of RBS Complex Fees
- Brighthouse.
If any queries are received on the above miss-sold products these can be forwarded to the PPI Team.
38.33 Deciding whether to pursue a PPI complaint relating to a secured or unsecured debt
The official receiver should consider the net benefit to the estate in pursuing any potential PPI mis-selling complaint, i.e. the value of any potential compensation that would be received by the estate.
Set-off should not normally be a deciding factor when considered whether to pursue a claim, as most financial institutions are not applying the right (see below).
Generally, as outlined above, it will be the PPI Unit that will handle the realisation of potential PPI claims.
38.34 PPI mis-selling complaint where there are other assets in the bankrupt’s estate
It may be that the estate has other assets which are sufficient to generate a dividend to creditors after the payment of bankruptcy expenses, but the PPI complaint is not estimated to have a net benefit to the bankruptcy estate after set-off is applied. Recovery should still be pursued on the basis that the respective financial institution’s provable debt will be reduced by reason of set-off, resulting in an increased dividend to other creditors. This is also applicable when set-off is applied to reduce a secured debt, as it may result in a reduction of the monthly mortgage payments or more equity in the property.
38.35 First stage complaint process – Financial institutions complaints procedure
Once a PPI questionnaire has been completed and a decision is taken by the official receiver to pursue the complaint, the questionnaire should be sent to the respective financial institution with a covering letter requesting that they investigate the complaint and forward any compensation payable for the benefit of the bankrupt’s estate.
Most financial institutions have a dedicated email or postal address for PPI queries detailed under their complaints procedure which is available from the ‘contact us’ section of their website. If there is not a dedicated PPI address, the official receiver’s letter of complaint enclosing the questionnaire should be addressed to the complaints department. A list of financial institutions PPI departments can be accessed by clicking here.
38.36 Response received from financial institution
The financial institution should respond to the questionnaire generally within eight weeks, although some institutions have been granted more time by the Financial Ombudsman to deal with complaints.
Where the financial institution responds accepting the PPI mis-selling complaint the correspondence should be forward to the PPI Team to request the monies..
38.37 Second stage complaint process – forward complaint to Financial Ombudsman
Where the financial institution responds refusing the mis-selling complaint, and the letter confirms that this is their final response, then the PPI Team will consider whether to forward the matter to the Financial Ombudsman for review. Any referral to the Financial Ombudsman must be made within six months of the financial institutions final response.
The Financial Ombudsman will not look at a complaint for mis-selling PPI until after the complaint has first been addressed by the appropriate financial institution. There is no minimum amount for which a claim should be pursued.
38.38 Second stage complaint process - forward complaint to Financial Ombudsman within 6 months
Where the PPI Team wishes to refer a complaint to the Financial Ombudsman following an unsatisfactory final response from the financial institution, the complaint must normally be made within 6 months of receiving the final response. The final response to a PPI mis-selling complaint must specify that if the complainant wishes to, they can take their complaint to the Financial Ombudsman, and set out the time limits.
38.39 Sending complaint to the Financial Ombudsman
If the PPI Team decides to send the complaint to the Financial Ombudsman for review, a covering letter should be sent enclosing the bankrupt’s completed questionnaire and the response from the financial institution concerned.
38.40 Financial Ombudsman’s reply
The Financial Ombudsman will review the information sent by the PPI Team and may write to the financial institution involved requiring them to provide further information. Once a complaint has been accepted for investigation no further action need be taken other than monitoring the case for a response.
38.41 Outcome of Financial Ombudsman’s investigation
Where the Financial Ombudsman responds to the PPI Team indicating that a PPI mis-selling complaint for compensation is unsuccessful no further action should be taken.
Where the Financial Ombudsman finds that a PPI policy was mis-sold, the Ombudsman will instruct the financial institution involved to make an appropriate compensation payment for the benefit of the bankrupt’s estate.
38.42 Time limit for bringing action – ability to claim ended on 29 August 2019
A final date for the banks to receive complaints was set by the FSA. Any new claims received after 29 August 2019 will be deemed out of time.
38.43 Time limit to complain to Financial Ombudsman
The Financial Ombudsman follows set rules on complaints handling. Where a complaint to a financial institution has resulted in an unsatisfactory final response, the complaint must be referred to the Financial Ombudsman within 6 months.
38.44 Financial Ombudsman – discretion in relation to time limits
Under the rules, the Financial Ombudsman has the discretion to look at complaints that fall outside the time limits in “exceptional circumstances”. An example of this might be if the consumer was incapacitated during the period when they could have complained.
38.45 Jointly purchased PPI policy
Where there is a potential mis-selling complaint in relation to a single PPI policy purchased by two or more customer, e.g. a husband and wife, then it is likely both parties will have their own separate PPI complaints.
When considering the split of compensation payments following a complaint the following matters should be considered:
a) the rights of each party under a joint PPI cover. If the policy provides for greater cover for one party, then it may be appropriate that that party receives a larger proportion of any compensation paid
b) in a jointly held PPI policy whether a separate complaint has been brought by each party. If so, then any payment would most likely only relate to that party
c) who made the PPI loan repayments. If each party contributed towards the repayments it would appear that there is an equal right to any mis-selling complaint, but if evidence can be provided that only one party paid the premiums, it may be appropriate for that person to benefit from the compensation
The financial institution involved may advise the official receiver of any joint policy holder entitlement to a PPI compensation payment, although the official receiver should rely on the accuracy of the information provided by the bankrupt initially.
38.46 Payments made jointly towards PPI policy held in one party’s name
Where a PPI policy covers a joint loan but is only in the name of one party, it is possible that any compensation following a complaint will be divided between both parties. Where the PPI insurance premium is added to the loan taken out, which is a joint loan, both parties will be liable for the repayments on the total loan, regardless of who is named on the policy. The issue of who is named on the policy would only be relevant if a claim is made under the policy. Only the person named on the policy would be able to make a claim. Redress comprising of a refund of the premium plus interest following a complaint that the policy was mis-sold would be split between the two parties who were liable to pay it.
Where the PPI insurance premium in the name of one person on a joint loan has not been added to the mortgage loan, but is to be paid separately from the loan, any PPI compensation would be payable to that person alone.
In some instances the banks will make a single payment to the individual who instigated the claim. The payment will need to be investigated to determine if the loan and PPI were taken out in joint names as the funds will need to be split.
38.47 Mis-selling complaint vests even where loan re-paid prior to bankruptcy order
As the PPI policy is a separate product to the debt it was obtained to protect, the right to compensation for mis-selling will vest in the trustee whether or not the loan has subsequently been repaid. This would apply even if the loan had been repaid in full prior to the bankruptcy order [Ward v Official Receiver [2012] BPIR 1073].
38.48 Claims management companies
In respect of mis-sold PPI, a claims management company (‘CMC’) will offer advice and/or services in respect of complaints for compensation. They usually operate on a ‘conditional fee’ basis whereby any fee for services provided is payable only if there is a favourable result and compensation is paid.
38.49 CMC instructed prior to date of bankruptcy order
The official receiver may discover at the initial enquiry stage or first interview, that a bankrupt has employed the services of a CMC prior to the date of the bankruptcy order.
The official receiver should not agree to the bankrupt continuing any complaint via the CMC, as any right to complain for the mis-selling of a PPI policy vests in the official receiver as trustee.
Details with respect to the CMC and progress made in relation to the complaint should be obtained from the bankrupt. Where the complaint has already progressed to conclusion, i.e. a settlement or adjudication has been obtained, the official receiver should contact the Financial Institution and attempt to have any compensation awarded paid directly to the insolvent estate.
38.50 Contacting the CMC
Where the bankrupt has already instructed a CMC prior to the making of the bankruptcy order, the official receiver, should seek to take control of the complaint and write to the CMC advising that:
a) the complaint now vests in the official receiver, as trustee of the bankrupt’s estate
b) the bankrupt is without standing to instruct in this matter [Pickthall v Hill Dickinson LLP [2009] PNLR 31]
c) the official receiver does not intend to adopt the contract
d) the CMC may wish to submit a claim for any amounts outstanding to them up to the date of the bankruptcy order
e) any compensation payment should be remitted to the official receiver as trustee of the bankrupt’s estate
38.51 Complaint to be progressed by the PPI Team rather than CMC
There is usually no benefit to retaining the services of a CMC, as in most cases the only action required is the completion of the questionnaire by the bankrupt and passing the information to the Financial Institution.
Where a PPI complaint has commenced at the date of the bankruptcy order, any further action with regards to the complaint should be managed by the PPI Team.
38.52 The PPI Team and CMC fees
Where a CMC has pursued a PPI mis-selling complaint to the point that compensation is payable, the PPI Team should firstly ensure that any PPI compensation is collected for the benefit of the insolvent estate.
Having successfully pursued the complaint, the CMC is likely to request payment of their fees and it is reasonable for the PPI Team to allow some payment from the compensation proceeds realised; the proceeds having resulted, in part, from the CMC’s efforts. It should be noted however, that the PPI Team is not bound by the terms of the CMC’s contract with the bankrupt, and fees based on a percentage of the compensation awarded are likely to be excessive in relation to the amount of work actually undertaken by the CMC (fees claimed may be as high as 25-30%). The PPI Team should, consequently, offer a reasonable remuneration following the guidance below.
All CMC invoices should be forwarded to the Insolvency Service PPI Team. (see below)
38.53 PPI Team to exercise discretion
The PPI Team have discretion in the negotiation/establishment of what should be paid to a CMC as a fee for work undertaken. Typically, 10% of the net realisation to the bankruptcy estate, i.e. the amount received after application of any set-off applied by the financial institution, should be offered to the CMC from the bankruptcy estate. The 10% offer should be inclusive of VAT. The payment in all cases should be limited to the amount received by the estate, i.e. a debit balance can not be incurred to meet CMC charges.
Ultimately the agreed fee to be paid to the CMC is a matter for the PPI Team to decide and the PPI Team should always act in the best interests of the creditors.
38.54 Using a time and rate basis for calculating CMC fee
Where the CMC claims a fee which is in excess of £600, the PPI Team should consider requesting the CMC to provide a time and rate breakdown of the work they have undertaken. The sum of £600 does not represent the maximum that may be paid by the PPI Team to a CMC in respect of their fees. The figure should simply be used as a trigger for approaching the request for payment on a ‘time and rate basis’, instead of arbitrarily offering 10%.
Where 10% of the net realisation is under £600 and the CMC reject the PPI Team fee payment offer, the PPI Team should consider requesting the CMC to provide a time and rate breakdown in support of their fee claim and then use this breakdown to determine what fee is appropriate taking into consideration the ‘reasonable costs’ of the CMC.
38.55 CMC using contract as evidence of fees
Where a CMC has been required to send in a time and rate breakdown, the CMC may simply provide the PPI Team with a copy of the contract it holds with the bankrupt as evidence that they are entitled to a certain percentage of the gross realisation. The PPI Team should not accept this as evidence of entitlement to that fee. As the PPI Team did not instruct the CMC, they are not bound by the contract. The PPI Team should reiterate a request for a time and rate breakdown in order that the ‘reasonable costs’ of the CMC may be calculated.
38.56 Bankrupt employing a CMC post bankruptcy
The Service is aware that some bankrupts and former bankrupts have used CMCs to pursue PPI policy mis-selling complaints on their behalf after the date of the bankruptcy order. If these services are used after the date of the bankruptcy order, it is possible that the bankrupt will remain responsible for all or part of the CMC fee charged as a post-bankruptcy debt.
The bankrupt will not receive any direct benefit from the compensation, which is vested in the bankruptcy estate, and, consequently, may be left without any funds with which to settle the CMC’s fees. In these circumstances, the bankrupt may wish to seek independent advice on the enforceability of the claim, specifically whether the CMC should have accepted an instruction when knowing (or failing to enquire) about the bankruptcy and its effect on the bankrupt’s standing to make a complaint.
In practice where the insolvent estate has benefited from the compensation payment, the PPI Team should agree to pay the reasonable costs of the CMC. Problems may occur where the PPI provider has exercised a right to set-off. In such circumstances this may result in no compensation received by the insolvent estate from which the CMC’s fees could be paid.
38.57 Bankrupt ultimately liable for CMC fees if instruction post-dates bankruptcy
Ultimately, where the bankrupt’s instruction to the CMC is after the date of the bankruptcy order, it is the bankrupt who is liable under the contract with the CMC and, any liability will be a post-bankruptcy debt.
38.58 CMC – assignment of right to make PPI complaint prior to date of bankruptcy order
Where a CMC is pursuing a PPI mis-selling complaint prior to the date of the bankruptcy order, the CMC may claim that the right to pursue the complaint was assigned to them by the bankrupt. It is unlikely that any purported assignment of a PPI mis-selling complaint to a CMC would be a formal assignment. It is more likely that the bankrupt has entered into a contract for services offered by the CMC. Any purported assignment after the presentation of the bankruptcy petition would be automatically void [section 284].
The PPI Team should obtain copies of any written documentation to establish whether it is a legally binding assignment of the right to make the complaint, seeking advice as necessary.
38.59 PPI and secured loans
A PPI mis-selling complaint in relation to a secured loan is generally anticipated to have a more positive benefit to insolvent estates than a PPI mis-selling complaint against an unsecured loan. This is because the size of the loan is likely to be larger and consequently any potential PPI compensation payout would also be larger. Additionally as there may be no unsecured element of the debt, the loan creditor will have no right of set off.
38.60 Re-vesting of bankrupt’s home and PPI
Where the bankrupt’s home has re-vested in the bankrupt, this will not effect any compensation payments received from a PPI mis-selling complaint, which will still be payable to the official receiver as trustee of the bankrupt’s estate. This is because the PPI is a stand alone insurance contract and does not fall within the definition of “an interest in a dwelling house” [section 283A(1)].
38.61 Vehicle purchased on hire purchase – agreement has not been adopted
The adoption or non-adoption of the agreement of a hire purchase agreement, relates only to the official receiver’s ability to exercise a right of redemption in respect of the goods subject to the agreement. Consequently, the non-adoption of a hire purchase agreement does not affect the vesting of a PPI complaint in respect of a PPI policy taken out in relation to the hire purchase agreement.
38.62 Vehicle purchased on hire purchase – bankrupt released from liability on discharge
As with other property which comprises part of the bankrupt’s estate, the bankrupt is released from any liability under the hire purchase agreement on discharge [section 281]. The bankrupt may have chosen to continue paying any amounts due under the hire purchase loan in order to retain use of the vehicle, not through a legal obligation to do so.
The monthly hire purchase payments are likely to include an amount towards the loan obtained for the initial purchase of the PPI policy as often the amounts cannot be easily separated. By continuing to make payments, the bankrupt is not acquiring an interest back in the PPI policy. It is a matter between the hire purchase company and the bankrupt where the bankrupt decides to continue making payments towards the hire purchase agreement. The official receiver should make it clear to the bankrupt that any payment received under a successful PPI complaint will be paid in full to the official receiver, as trustee, for the benefit of the bankrupt’s insolvent estate and this will apply even where the bankrupt continues to make PPI payments post bankruptcy as part of the hire purchase loan.
38.63 Right of set off - overview
There is an automatic right to set-off any compensation in relation to mis-sold PPI against any provable debt held by the lender at the date of a bankruptcy order [section 323]. This is particularly relevant to an outstanding unsecured debt but will also apply to any shortfall in respect of secured debts.
38.64 Right of set-off is automatic
Set-off should be automatically applied where at the date of the bankruptcy order, the financial institution liable to pay compensation also holds a provable debt in the bankruptcy proceedings.
By way of example, if the financial institution is liable to pay compensation of £2,000 but holds a provable debt of £5,000, the institution’s claim is reduced by means of set-off to £3,000 (£5,000 - £2,000).
38.65 Compensation received, set-off not applied
Often a financial institution will pay out or offer compensation in relation to PPI sold in relation to an unsecured debt, without first having acknowledging their right to apply set-off.
38.66 Lenders advised by Financial Ombudsman not to apply set-off
The Financial Ombudsman has generally advised lenders to compensate consumers to put them back into the position they would have been in had the mis-selling of a PPI policy not occurred. This means that in a non-insolvency position, financial institutions are not normally applying set-off with compensation against any outstanding debts.
38.67 Loan sold on by financial institution
If the lender sells or assigns the debt to a third party prior to the date of the bankruptcy order, this ends the right of set-off as there is no mutuality at the date of the bankruptcy order. This is because once the debt is assigned or sold, the debt is outstanding to a different party (the assignee) to that owing compensation (the lender).
38.68 Set off can benefit general body of creditors
Where a compensation payment is set off against part of an unsecured provable bankruptcy debt, this will result in the creditor having a reduced claim in the bankruptcy proceedings. Where a bankruptcy estate has other assets and a dividend payout is possible, the official receiver should consider pursuing the mis-sold PPI complaint as an increased dividend will result from the reduction of the total provable debts.
38.69 Right of set-off in relation to secured debt
Where the financial institution has a secured debt, the statutory right of set-off applies only to the portion of that debt which is provable in the bankruptcy proceedings, i.e. the unsecured shortfall.
When a PPI complaint is upheld the secured loan will be rearranged by writing off all amounts that remain outstanding in relation to the borrowing for the PPI premium, including any interest and charges, so that in future the number and level of outstanding repayments against the loan (and any charges and fees) are the same as if bankrupt taken the original loan sum without the PPI cover.
Additionally, where a PPI complaint is upheld, instead of paying the amount due in compensation in respect of PPI payments already paid and interest on those payments to the official receiver as trustee, the secured creditor may elect to apply statutory set-off by adjusting the outstanding loan balance to account for the compensation payable. The official receiver as trustee maybe able to object to the application of set-off if there is no provable debt (shortfall), to set-off against.
The official receiver should consider carrying out a further income and expenditure assessment of the bankrupt as it is possible that the bankrupt’s monthly payments on the secured loan may have decreased as a consequence of the successful PPI complaint, and therefore a new income payments agreement may be appropriate or it may be possible to increase the payments made by the bankrupt on a current one.
Additionally, as a result of the adjustment of the secured loan, the value of the bankrupt’s interest in the property will be increased and should be considered for realisation by the official receiver as trustee of the bankrupt’s estate.
38.70 Adjusting a secured debt to account for PPI compensation
Where a secured creditor elects to adjust the outstanding loan balance instead of paying compensation for PPI mis-selling, the loan would be readjusted by:
a) writing off all amounts outstanding in relation to the PPI borrowing, including interest and charges
b) calculating the amount already paid in relation to the PPI borrowing, including interest charged (less any premium refunded to the bankrupt or estate when the policy was cancelled)
c) adding interest to the amount at (b) from the point that payments were made to the firm by the bankrupt to the point that the firm settled the complaint
d) the amounts at (b) and (c) will then be deducted from the loan balance going forward; as they were previously paid and credited to a mis-sold PPI policy which has since been cancelled
38.71 Set-off and brokers
Where the policy was sold by a broker, the right of set-off will not apply, unless the broker also has a provable debt in the bankruptcy proceedings.
If a bankrupt has obtained a loan and PPI, and that loan was subsequently repaid by a later loan with the same financial institute, but obtained through a broker, then it is likely that mutuality still exists sufficiently for set-off to apply [section 323].
38.72 Set off still applies when loans are consolidated
Where a loan has been taken out and PPI purchased and that first loan is consolidated, the right of set-off will still apply if the same loan company is a creditor at the date of bankruptcy order.
38.73 Set off still applies where a break in mutual dealings
Mutuality in dealings between a bankrupt and a financial institution is likely to exist throughout any banking related dealings, even if some time goes by without the bankrupt owing the financial institution, e.g. if a loan is repaid over time then a further loan is obtained several months later. The PPI policy does not need to have been purchased in relation to a particular loan outstanding at the date of the bankruptcy order.
38.74 Compensation payment where guarantor subsequently repaid loan post bankruptcy
Where a loan company is owed money at the date of the bankruptcy order, and a third party (such as a relative) has guaranteed that debt, that third party will remain liable for the loan despite the bankrupt being released on discharge from that debt [section 281].
Where the third party then repays that debt in full and subsequently PPI compensation is agreed, it is possible that some or all of that payment may be rightly made to the third party. This would be appropriate if the loan creditor could have applied set-off at the date of the bankruptcy. It could be said that if set-off had been applied by the loan creditor, then the guarantor who repaid that debt has overpaid by the amount that would have been recoverable under the right of set off.