Out-Law News 2 min. read

Payment protection insurance sales practices 'worse than expected', says FSA


The Financial Services Authority (FSA) yesterday promised further action on the sale of single premium payment protection products after its most recent research showed firms are still falling far short of the required standards.

Advert: free OUT-LAW Breakfast Seminars - 1. Making your contract work: pitfalls and best practices; 2. Transferring data: the information security issuesPayment protection insurance (PPI) covers repayments on personal loans, credit cards, mortgages and second mortgages if the borrower cannot afford to pay because of an accident, sickness, unemployment or death.

Most PPI products are sold alongside unsecured personal loans and are often paid for by a single premium. But the FSA's mystery shoppers found that very few customers sold PPI face-to-face are being told that the premium will be added to their loan or that interest will be charged on it.

Firms are also failing to give adequate information about the actual cost of the product and only half of customers are being warned about key limitations and exclusions in the policy, which could affect whether they will ever be able to make a valid claim.

"Firms rely on documentation to explain costs and exclusions without giving a proper verbal explanation even when the sales pitch is face-to-face", the FSA said in its most recent PPI update.

After nearly three years of issuing guidance and advice on PPI selling, the regulator acknowledged: "We are disappointed by our initial analysis to discover the results of the latest mystery shopping of single premium PPI to be worse than expected". 

Jon Pain, the new Managing Director of the FSA's Retail Markets, said: "Tackling poor PPI sales practices remains a high priority for the FSA. We will intervene to ensure consumers are protected and are considering what regulatory powers are the most appropriate to deliver fair outcomes."

He added, "Firms may wish to consider stopping selling single premium PPIs sold alongside unsecured personal loans, given the continuing problems in the sales of this product".

Last month, consumer watchdog Which? labelled credit card PPI "a modern-day snake oil" after the organisation's research found that over a million people thought that buying PPI was a condition of their credit card application or would improve the chances of their application being accepted.

In June, the Competition Commission, as part of its ongoing investigation into PPI, suggested that customers are being overcharged by over £1.4 billion a year because of lack of competition in the PPI market. Its final report is due at the end of this year.

Now the Financial Ombudsman Service (FOS), faced with record numbers of PPI complaints, has notified the FSA that PPI is a "wider implications issue", which means that it is affecting such a large number of consumers and firms that regulatory intervention may be more appropriate than the FOS deciding individual cases.

The FSA will be working with the FOS, consumer groups and other interested parties before it decides on the best regulatory response. But firms cannot rule out the possibility that they might be faced with lengthy and expensive reviews of past business.

Liz Johnson, insurance regulation specialist at Pinsent Masons, the law firm behind OUT-LAW.COM, said: "The FSA will look at identifying and remedying past sales, as well as on-going sales practices. This clearly raises the potential for enforcement in serious cases, with the additional reputational issues that would involve."

"It also suggests that firms will potentially be exposed to the cost of mailing customers, and providing refunds if customers wish to cancel. Given this warning from the FSA, firms that want to continue selling single premium PPI products for unsecured loans will need to make sure their procedures meet the FSA's strict requirements," she said.

The FSA will publish a further update on its PPI review early next year.

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