Payment protection product guidance proposed by regulators

The Financial Services Authority (FSA), which regulates the UK's financial services industry, and the Office of Fair Trading (OFT), the UK's consumer protection regulator, have co-published proposed new guidelines on how payment protection insurance (PPI) and non-insurance products should be sold.

PPI covers consumers against repayments due on credit products and loans if the consumer cannot afford to pay because of an accident, sickness or death. British banks have had to repay thousands of consumers who paid for PPI but later found were ineligible to claim.

The regulators said companies should select a "target market" that reflects "the intended purpose of the protection" when selling protection products and set out "eligibility criteria" around that.

Companies selling payment protection products can avoid problems over selling to ineligible customers if they give consumers a flexible choice over the cover they need, the regulators said. Firms may need to avoid including "exclusions" to eligibility to ensure products are not mis-sold, they said.

"While firms may use exclusions as a means of ensuring that the product is priced competitively, our view is that firms’ discretion to limit the scope of the cover is constrained by the need to align the events covered by the protection with the needs of the target market," the regulators said in their draft guidance. (32-page / 375KB PDF)

Companies should be wary of selling payment protection products that may not give consumers the benefits they will need in the event of a successful claim, the regulators said.

"Firms should use relevant data (including consumer research, as well as other sources) when defining the level of benefits offered, to ensure that the product design appropriately reflects consumers’ likely needs and so supports positive consumer outcomes," they said.

The regulators also said that payment protection products should be sold without "product features or pricing structures" that create "undue barriers to comparing, exiting or switching cover".

"Good consumer outcomes are more likely to be achieved where consumers can compare products effectively. Consumers should not face unreasonable post-sale barriers to change product or switch provider. These factors reduce the risk that consumers pay for protection where this does not meet their needs, or has ceased to meet their needs," the draft guidance said.

Companies should not insist on an "unrealistic" minimum number of payment protection products being sold "where the product has a restricted target market" and "inappropriate incentives" should not be offered to sales employees tasked with selling them outside of that target market, the regulators' guidance said.

"Firms should ensure that salespeople do not have inappropriate incentives to sell the product outside of the target market, and that effective controls are in place to ensure that issues are identified where they arise, and appropriate action is taken," the guidance said.

Payment protection products should only be sold by companies with "relevant policies, practices, risk controls and oversight arrangements" in place "for identifying, monitoring and mitigating the risks which the product may pose to consumers," the regulators said.

The regulators also set out draft guidance on repayment circumstances that sometimes occur in regulated credit agreements. Sometimes creditors lend money to individuals and offer payment protection products around the repayment, allowing debtors the right to freeze or waive the amount they owe in return for a charge.

Companies that engage in behaviour such as misrepresenting the benefits and costs of lending cover, pressuring customers into taking the cover and that fail to explain how the cover operates and can be claimed are likely to be acting unfairly or improperly, the draft guidance said.

Under the Consumer Credit Act the OFT can rescind the licenses of firms regulated to lend money if they fail act on the regulator's guidance.

The FSA said it was the first time they had issued guidance on how a specific financial product should be designed.

"Firms must learn the lessons of the past and make sure they have consumers' needs at the heart of new product development," Margaret Cole, FSA managing director, said in a statement.

"That is why we are acting early to ensure firms understand the risks they should bear in mind when designing these products, and how they can manage these risks when developing or distributing the product. We want to put consumers 'front of mind' for the providers and distributors of these products," Cole said.

Last year the FSA issued new rules on selling PPI. The new rules said that customers could make retrospective complaints about insurance packages they were mis-sold. The rules came into effect from 1 December 2010.

The British Bankers Association (BBA), which represents more than 200 UK banks, challenged the new rules saying it was unlawful for the FSA to apply new sales standards to old PPI transactions.

In April a High Court judicial review into PPI complaint handling procedures dismissed the BBA's attempts to overturn the FSA's rules. The BBA then dropped plans to appeal the High Court's decision after Lloyds and Barclays withdrew their support.

"It is important that the problems encountered with mis-selling of PPI do not arise in relation to new payment protection products," David Fisher, the OFT's director of consumer credit, said.

"Firms need to ensure that they comply with relevant legislation and do not engage in unfair or improper business practices. In particular, they should make clear to consumers what they are signing up to, and how much it costs, so that they can make properly informed decisions," Fisher said.

The regulators said it would consider responses to its draft guidance received by 13 January 2012 with a view to issuing finalised guidance on payment protection products thereafter.