Current investigations into payment protection insurance
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.
Selling practices
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.
Fines
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.
Competition
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.
Debt relief?
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 (liz.johnson@pinsentmasons.com /
020 7667 0251)
Contact (competition): Alan Davis
(alan.davis@pinsentmasons.com
/ 020 7418 7026)
See:
