Out-Law News 2 min. read

Remedying PPI mis-selling could cost the industry over £4 billion, says FSA

The FSA has drastically revised its estimate of what it will cost firms to comply with new guidance on handling and redressing customer complaints about payment protection insurance (PPI).

Last September, the regulator announced proposals to improve the way firms deal with PPI complaints, including a rule requiring firms to review all the PPI mis-selling complaints they have rejected since 2005. Re-opened complaints were to be reassessed and any compensation calculated according to new guidance aimed at ensuring firms gave complaints fair and balanced consideration.

The FSA calculated the overall cost to firms of complying with this new regime at between £290 million and £400 million over five years.

But in a paper published this week, it has revised those figures to between £700 million and £1.2 billion over the same period. Added to this is the one-off cost of firms reviewing and redressing PPI sales where no complaint has yet been made, which the FSA now estimates at between £1 billion and £3 billion.

The paper predicts that around 5% to 10% of intermediaries involved in PPI selling could go out of business as a direct result of the costs impact of the new guidance, leaving the Financial Services Compensation Scheme to pick up the bill for around £160 million in redress payments.

Industry responses to the FSA's original proposals were almost universally hostile, with firms arguing that the regulator had not demonstrated that there was a genuine problem and that the proposed guidance was unbalanced and retrospectively changed the rules about selling PPI.

In response, the FSA acknowledges that its consultation "substantially underestimated" the cost of compliance, but says it has not introduced requirements that were not already in its Handbook. It still believes its approach is appropriate and proportionate, given the size of the problem.

"We remain of the view that we have well-founded and adequately evidenced concerns about widespread weaknesses in PPI sales practices, and in PPI sales complaint handling, which have given rise to the risk of significant ongoing consumer detriment and that we need to address these in order to protect consumers and meet our statutory objectives," the paper concludes.

Nevertheless, the regulator has revised its proposals to some extent. The rule requiring firms to re-open all rejected PPI complaints has been set aside until the FSA's powers regarding consumer redress schemes have been clarified by the Financial Services Bill, currently before Parliament.

Implementation has also been delayed by a further six-week consultation period, which ends on 22nd April. Once the guidance is finalised, the sections on assessing claims will come into effect after one month and the sections on calculating redress after three months.

In addition, the FSA has revised the guidance in some places to make its meaning more clear or to reflect more closely the wording used in the Insurance Conduct of Business Sourcebook (ICOBS).

There have also been some adjustments to the way compensation is calculated in the case of single premium PPI, where the firm concludes that the customer would have bought an alternative PPI policy with regular premiums, and (if the customer wants the cover to continue) how future premiums are paid. 

Announcing the new consultation on 9th March, Dan Waters, the FSA’s director of conduct risk, said:
“We’re disappointed that the industry has responded so critically to our proposals but we remain 100 per cent committed to bringing about genuine, lasting change in the PPI market. We do, however, recognise the importance in ensuring that genuine concerns have been listened to.

“Our commitment, nevertheless, is evidenced by the fact that we have halted single premium PPI sales, taken enforcement action against 23 firms, issued two ‘Dear CEO’ letters, undertaken three thematic reviews, conducted numerous mystery shops, and visited over 200 PPI providers. We remain firmly of the view that the PPI market is broken and needs to be fixed.”

The Competition Commission is currently reconsidering its ban on firms selling PPI at the same time as a loan or credit, following a ruling by the Competition Appeal Tribunal last October. It is due to publish its revised proposals in the summer.

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