Reopened complaints will be reassessed against new guidelines to
ensure that they are given fair and balanced consideration. And
where the firm finds it was at fault, it must calculate
compensation that will put customers in the position they would
have been in had the policy not been mis-sold.
Payment protection insurance covers consumers against repayments
due on credit products and loans if the consumer cannot afford to
pay because of an accident, sickness or death.
In January this year, the Competition Commission concluded that
lack of competition in the PPI market meant many customers are
being sold unsuitable products and/or being overcharged.
Fundamental changes to the way PPI is sold are due to come into
effect in 2010, pending the outcome of a legal challenge by
Barclays Bank and others.
The FSA now wants to improve the way firms handle PPI complaints
and reduce the PPI workload of the Financial Ombudsman Service
(FOS). On average, firms have been rejecting around 60% of the PPI
complaints they receive. Only a minority of these cases reach the
FOS, but of those that do, over 80% are resolved in the customer's
favour.
The review will affect around 185,000 cases turned down by firms
and which were not referred to the FOS. The guidance will apply to
all types of PPI, but only to complaints that relate to the selling
of the policy. There are also specific guidelines on calculating
redress in the case of single premium PPI, where the premium is
added to the amount of the loan.
Announcing the proposals on 29th September, Jon Pain, the FSA's
managing director of retail markets, said: "It is unacceptable that
despite previous warnings about poor sales practices, backed by 22
enforcement cases and significant fines, the PPI sector still needs
the FSA to intervene on this."
"The industry must show it can act fairly, consistently and in
the best interest of consumers on PPI," he said. "All firms
operating in this sector should take note and where necessary get
their house in order."
"Where we find problems in PPI sales or complaint handling,
firms can expect tough action, including requiring them to
undertake reviews and, where appropriate, pay redress," said
Pain.
The guidance
The regulator has identified a number of deficiencies in the way
firms have been handling PPI mis-selling complaints, including
giving too much weight to the effectiveness of their own sales
practices and not enough to evidence that sales staff were actually
doing something rather different.
Firms' internal investigations, such as they are, have failed to
focus on the circumstances of the actual sale or on whether the
product was appropriate for that particular customer. Too often,
the firm has assumed that, whatever its own shortcomings, the
customer would have bought the product anyway.
The proposed new guidance aims to ensure firms give fair and
balanced consideration to the complaints they receive. Firms are
encouraged to establish the true substance of the complaint and to
give more weight to what happened during the actual sale. Oral
evidence, even if not supported by documentation, is to be given
appropriate consideration. And if the investigation reveals other
sales failings not mentioned by the customer, these should be
treated as if included in the complaint.
Firms will be assisted in this by a standard questionnaire being
developed by the FOS, similar to that used in mortgage endowment
mis-selling cases, which will help complainants and their
representatives provide firms with relevant evidence.
Calculating redress
The aim of the guidance on redress is to put the customer back
in the position he would have been in were it not for the firm's
failures.
So if the firm concludes that the claimant would not have bought
this or any other PPI policy, it should cancel the policy and
refund the premiums, with interest. If necessary, it should
restructure the loan as if the policy had never been taken out.
Any claims already paid under the policy can be deducted from
the redress payment. But if the complaint is about a rejected claim
under a mis-sold policy, the firm should either pay the claim or
refund the premiums, whichever results in the largest sum.
In the case of single premium PPI, if the firm considers the
customer would have bought an alternative policy with regular
premium payments, it should offer to continue the cover on this
basis and refund any difference between the single premium and what
the customer would have paid in regular premiums. Any previously
paid claims would not be affected and any rejected claims should be
paid where appropriate.
To help firms calculate the cost of an alternative policy, the
FSA has taken the unusual step of providing a "comparator" based on
the average cost between 2005 and 2009 of a broadly equivalent
regular premium PPI policy. The same comparator will be used by the
FOS in assessing redress in relevant cases.
Only where it reasonably concludes that, despite its selling
errors, the customer would have bought the single premium policy in
any event, will the firm be justified in not paying any redress.
But the FSA expects such cases will be rare.
Reopening cases
The FSA also proposes that, under a new rule, any complaints
relating to PPI mis-selling received since 14th January 2005 that
have been rejected by the firm but which have not been referred to
the FOS will have to be reopened and reassessed against the new
guidance.
This review must be completed within a year. By 31st December
2010, the FSA will require every firm to have sent a final response
to every customer with a reopened complaint, reminding them that,
if they are still dissatisfied, they can take their case to the
FOS.
Where a firm receives a number of complaints about its PPI
selling, it should take steps to analyse the root causes of these
complaints. Where recurring or systemic problems are identified,
these should be taken into account in assessing individual
claims.
More generally, the FSA says it expects firms to use this
information to improve selling practices and training and even to
consider whether a wider redress programme would be appropriate,
including customers who have not yet made any complaint.
In such cases, the firm should report to the regulator detailing
its plans for pro-active remediation, or, if it decides not to
implement a redress programme, the reasons why it considers it fair
and reasonable not to do so.
Next steps
The consultation closes on 30th October. The finalised guidance
and the review rule will be published in a policy statement at the
end of December and come into force immediately.
According to the FSA, firms representing over 40% of
face-to-face sales of single premium PPI connected to unsecured
loans have already agreed to undertake the review of rejected
claims.
The regulator is also launching a targeted assessment of the
sale of single premium PPI with secured loans (such as second
charge mortgages). This will be extended in due course to PPI sold
with credit cards.
Want more content like this? This story was written by the insurance and reinsurance legal experts at Pinsent Masons, the law firm behind OUT-LAW.COM. See our legal info for Insurance and Reinsurance.
