Payment Protection Insurance: the provisions in ICOBS
This guide is based on the law of England and Wales.
It was last updated on 1st October 2008.
As part of its ongoing review of Payment Protection
Insurance (PPI) selling practices, the Financial Services
Authority (FSA) identified four areas of continuing concern:
eligibility, suitability, inadequate disclosure of policy details
and price.
To address these issues, the Insurance Conduct of Business
Sourcebook (ICOBS) introduced a differentiated regulatory regime
that brought with it some additional jargon.
Special rules have been included for "protection products".
This term covers "pure protection contracts" (term, critical
illness and income protection insurance) and "payment protection
contracts" (PPI). There are also rules that apply to PPI
alone.
Eligibility
The simple question is: will the customer be eligible to claim
under the policy? All too often the answer is no.
The FSA's research found evidence of PPI claims ratios as low as
15%. According to the Office of Fair Trading, the overall median
claim ratio for all PPI sold in 2005 was 17%. By contrast,
household and motor insurance had reported ratios of 74% and 55%
respectively.
ICOBS' solution is a special rule requiring firms to take
reasonable steps to ensure that a customer only buys a PPI policy
under which he is eligible to make a claim (5.1.2R). If, while
arranging the policy, the firm becomes aware that parts of the
cover will not apply, it must tell the customer so he can make an
informed decision whether or not to buy it.
This elaborates on the Principle 6 requirement that a firm pays
due regard to the interests of its customers and treats them
fairly.
The same standard is expected of a firm arranging general
insurance contracts and pure protection contracts, but in those
cases the provision is set out as guidance, not as a mandatory
rule. The distinction is significant because an individual can sue
for damages over breach of a rule but not for breach of a guidance
note or a Principle.
Eligibility checks will vary from case to case, but should
include whether the customer will be prevented from claiming under
any part of a PPI policy because he is not resident in the UK, or
is over 65, or because of his employment status.
Suitability
Most PPI policies are bought as a secondary purchase to consumer
credit. The FSA's research shows 60% of sales are made at the
same time as an unsecured loan. The rest are bought alongside
mortgages, credit cards and car finance.
Unfortunately, this usually means customers have little interest
in the details of the cover and tend to rely on whatever they are
told at the point of sale. This increases the risk that the
customer will be sold an inappropriate product - a single premium
policy, for example, when a regular premium policy might be more
suitable.
For non-advised sales of all protection products, a firm
must take reasonable steps to ensure the customer understands he is
responsible for deciding whether a policy meets his requirements
(4.2.4R). If this is done orally, it must be followed up in writing
immediately after the contract is concluded.
Whatever the type of product, it is a rule that, if advice is
given, the firm must take reasonable care to ensure the suitability
of that advice for any customer entitled to rely upon its judgment
(5.3.1R).
This virtually repeats the wording of Principle 9 so should not
have made much difference to what firms were already doing to
comply. Once again, however, individuals affected by a breach of
the rule will be able to sue for damages.
For PPI and pure protection contracts, there is some additional
guidance at 5.3.2G, which says a firm should establish the
customer's demands and needs, obtain further relevant information
from the customer, take reasonable care that the policy is suitable
and tell the customer if any demands and needs are not met.
Policy details
Whatever the type of insurance product, there is no guarantee that
a customer will read the written information properly, or at all.
The FSA's thematic work found that PPI customers are particularly
bad at looking at documentation and often do not understand
significant exclusions and limitations, although they tend to
remember more if the information is explained orally.
The general rule in ICOBS is that, whatever the product, a firm
must take reasonable steps to make sure a customer is given
appropriate information about a policy in good time and in a
comprehensible form so that he can make an informed decision
(6.1.5R).
The guidance acknowledges that the level of information required
will vary according to the circumstances (the knowledge and
experience of a typical customer for that product, the policy's
main terms and conditions etc).
Special rules for protection policies (including PPI) deal with
oral sales (6.4.2R). Information provided orally during the sale
process must cover the product's main characteristics (its
significant benefits, exclusions and limitations, duration and
price). But the firm must also take reasonable steps to ensure the
information is enough to allow the customer to make an informed
decision "without overloading the customer or obscuring other parts
of the information".
For consumer customers, all this must be backed up by a policy
summary provided in good time before the conclusion of the contract
(6.4.4R). And for PPI sales, the firm must also draw the consumer's
attention (orally if it is an oral sale) to the importance of
reading the document before the end of the cancellation period to
check the product is suitable (6.4.5R).
Price
FSA research found that customers remember more about price if
the information is provided orally, but it makes little difference
if information about interest is given orally or in writing.
For all protection policies, a firm must provide price
information in a way calculated to enable the customer to relate it
to a regular budget (6.4.6R). The wording refers to "the" customer,
rather than "a" customer, to make the requirement specific to the
actual customer concerned.
Guidance notes explain what the information should include.
Whether or not the information is given orally, it should also be
given in writing in good time before the conclusion of the contract
(or in the case of a contract completed over the telephone,
immediately after the phone call).
Special rules govern the situation where the premiums are to be
financed by credit agreement (other than a store or credit
card).
The information must be given in such a way as to enable the
customer to understand the cost of the policy, any difference in
duration between the loan and the policy, and, where appropriate,
that the premium will be added to the loan and that interest will
be payable on it (6.4.9R). Disclosure in writing of the actual
amount of interest is still required by the Consumer Credit
Act.
Policies sold alongside a revolving credit agreement (such as a
store or credit card) pose particular difficulties. The amounts
involved are usually relatively small, but the price information
can easily become overly complicated and expensive to
provide.
For the present, the FSA has settled for guidance that the price
information given should enable a typical customer to understand
the typical cumulative cost of taking out the policy (6.4.10G).
It is still discussing with the industry how this can best be
achieved, so further guidance may follow. But it has made it clear
that giving prices in terms of x pence per £100 outstanding credit
"is not enough to give the customer sufficient information to make
an informed decision on whether or not to buy the cover" (Policy
Statement 07/24).
Cancellation
Lastly, under 7.1.1R all policies with an element of pure
protection or PPI are subject to a 30-day cancellation period
(compared to 14 days for most general insurance products).
Cancellation of a pure protection contract entitles a consumer
customer to a full refund. The same applies to a PPI contract,
unless a claim is made during the 30 days and settlement is
subsequently agreed (7.2.2R).
Further intervention
Firms had to comply with ICOBS by 6th July 2008.
Further regulatory intervention is likely, however,
particularly in the area of single premium PPI sold with unsecured
personal loans.
On 30th September 2008, the FSA announced it was "disappointed"
by the results from its most recent research into the sale
of single premium PPI. It is currently considering the most
appropriate regulatory response to continuing poor
selling practices and how best to identify and
recompense customers mis-sold PPI products in the past.
The FSA will publish a further update on its PPI review
early in 2009.
The Competition Commission, which is conducting its own
investigation into the PPI market, is due to produce its final
report by the end of 2008. In June this year, it suggested that
customers are being overcharged by over £1.4 billion a year because
of a lack of competition in PPI sales.
Contact: Liz Johnson (liz.johnson@pinsentmasons.com
/ 020 7667 0251)
See:
See also:
Regulator attacks payment
protection insurance sales, OUT-LAW News, 13/06/2008
