Out-Law Guide 3 min. read
17 Mar 2008, 10:48 am
This guide was last updated on 11th February 2008.
Payment protection insurance (PPI) has been having a bad press recently. Not only is it under investigation by the Financial Services Authority and the Competition Commission but it is now probably the most complained-about insurance product in the UK.
PPI covers repayments on credit products if the borrower is unable to do so as a result of accident, sickness, unemployment or death.
An ABI market report "Coping with Crises" published on 1st February 2008 found that most households have no strategy for dealing with a sudden drop in income. Insurance (whether PPI or another product) could significantly improve their situation. But people are put off by questions of affordability, a lack of confidence in the product and reliable advice from neutral sources.
FSA investigations have shown that all too often customers have been sold unsuitable and expensive policies under which they may be ineligible to claim. Terms and conditions, including price, have been poorly explained, if at all, and customers have little chance to shop around.
They may have even felt under pressure to buy the PPI associated with the loan, credit card or product. And if they decide to cancel after paying the premium, they have not been able to get a refund.
PPI has been the subject of a long-running consumer campaign by Which?, the consumer watchdog. It seems to be having an effect. In January 2008, the Financial Services Ombudsman received a record number of PPI-related complaints.
The FSA has been trying to improve PPI selling practices since 2005. In September 2007, its third thematic report into PPI selling concluded that, although there had been some progress in firms making it clear to customers that PPI is optional and in providing refunds when single premium policies are cancelled, there had been little or no improvement in the disclosure of price and policy details or firms' consideration of eligibility and suitability.
The new Insurance Conduct of Business Sourcebook (ICOBS) introduces special rules for PPI policies that specifically address these concerns (see our guide to the PPI provisions in ICOBS). Firms must be ready to comply by 6th July 2008.
In addition, by the end of March 2008, as part of the TCF initiative, all firms are expected to have appropriate management information in place to test whether they are treating customers fairly. And by the end of December 2008 they must be able to show that they are consistently treating their customers fairly in all aspects of their business, including PPI.
Meanwhile, the FSA is concentrating on enforcement. In September 2007 it announced that higher fines would be imposed where this was warranted by the nature, seriousness and impact of the breach in question, and by the likely impact on deterrence.
This was borne out in January 2008, when HFC Bank Ltd was fined £1,085,000 for failing to take care that its advice to customers to buy PPI was suitable and for inadequate systems and controls. In that case, the FSA considered the need for robust systems and controls was particularly great because of the bank's large branch network and because it had a bonus structure that provided potential incentives to staff to meet sales targets.
Chief executives can be fined too. In September 2007, Hadenglen Home Finance Plc was fined £133,000 and its CEO £49,000 for inadequate systems and controls when recommending re-mortgages and PPI to customers.
The Competition Commission's investigation into PPI began in February 2007 following a formal referral by the Office of Fair Trading under the Enterprise Act 2002.
Under the Act, the Commission must consider whether "any feature or combination of features" prevents, restricts or distorts competition in connection with the buying and selling of PPI, whether these add up to an "adverse effect on competition", and if so, what action should be taken.
The investigation covers the supply of all PPI (except store card PPI) to consumer customers in the UK. Store card PPI formed part of a separate market inquiry in March 2006, which found an adverse effect on competition in connection with store card credit and related insurance services.
In November 2007, the Competition Commission's Emerging Thinking report invited views on its current thinking on the nature of competition in the PPI market in the UK.
The report suggested that distributors face little real competition when selling PPI to customers buying the distributors' own credit products. Although the cost of PPI can in some cases be higher than the interest paid on the loan, consumers buying such products are relatively "price insensitive" and tend not to consider alternatives.
The Commission plans to publish its provisional findings in May 2008 and its final report in November or December 2008.
Providers of PPI may be affected by a recent proposal from the Ministry of Justice that would enable individuals to obtain up to 12 months' temporary relief from debt enforcement actions. It is not yet clear how the MoJ envisages this will sit with PPI sold alongside personal loans and credit cards.
The consultation "Administration and Enforcement Protection Orders" closes on 16th April 2008.
Contact (regulation): Liz Johnson ([email protected] / 020 7667 0251)
Contact (competition): Alan Davis ([email protected] / 020 7418 7026)