Payment 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.
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. We've recently launched a new section, legal info for Insurance and Reinsurance, giving free legal information to anyone working in that sector.
