Reopened complaints will be reassessed against new guidelines to ensure that they are given fair and balanced consideration. And where the firm finds it was at fault, it must calculate compensation that will put customers in the position they would have been in had the policy not been mis-sold.
Payment protection insurance covers consumers against repayments due on credit products and loans if the consumer cannot afford to pay because of an accident, sickness or death.
In January this year, the Competition Commission concluded that lack of competition in the PPI market meant many customers are being sold unsuitable products and/or being overcharged. Fundamental changes to the way PPI is sold are due to come into effect in 2010, pending the outcome of a legal challenge by Barclays Bank and others.
The FSA now wants to improve the way firms handle PPI complaints and reduce the PPI workload of the Financial Ombudsman Service (FOS). On average, firms have been rejecting around 60% of the PPI complaints they receive. Only a minority of these cases reach the FOS, but of those that do, over 80% are resolved in the customer's favour.
The review will affect around 185,000 cases turned down by firms and which were not referred to the FOS. The guidance will apply to all types of PPI, but only to complaints that relate to the selling of the policy. There are also specific guidelines on calculating redress in the case of single premium PPI, where the premium is added to the amount of the loan.
Announcing the proposals on 29th September, Jon Pain, the FSA's managing director of retail markets, said: "It is unacceptable that despite previous warnings about poor sales practices, backed by 22 enforcement cases and significant fines, the PPI sector still needs the FSA to intervene on this."
"The industry must show it can act fairly, consistently and in the best interest of consumers on PPI," he said. "All firms operating in this sector should take note and where necessary get their house in order."
"Where we find problems in PPI sales or complaint handling, firms can expect tough action, including requiring them to undertake reviews and, where appropriate, pay redress," said Pain.
The regulator has identified a number of deficiencies in the way firms have been handling PPI mis-selling complaints, including giving too much weight to the effectiveness of their own sales practices and not enough to evidence that sales staff were actually doing something rather different.
Firms' internal investigations, such as they are, have failed to focus on the circumstances of the actual sale or on whether the product was appropriate for that particular customer. Too often, the firm has assumed that, whatever its own shortcomings, the customer would have bought the product anyway.
The proposed new guidance aims to ensure firms give fair and balanced consideration to the complaints they receive. Firms are encouraged to establish the true substance of the complaint and to give more weight to what happened during the actual sale. Oral evidence, even if not supported by documentation, is to be given appropriate consideration. And if the investigation reveals other sales failings not mentioned by the customer, these should be treated as if included in the complaint.
Firms will be assisted in this by a standard questionnaire being developed by the FOS, similar to that used in mortgage endowment mis-selling cases, which will help complainants and their representatives provide firms with relevant evidence.
The aim of the guidance on redress is to put the customer back in the position he would have been in were it not for the firm's failures.
So if the firm concludes that the claimant would not have bought this or any other PPI policy, it should cancel the policy and refund the premiums, with interest. If necessary, it should restructure the loan as if the policy had never been taken out.
Any claims already paid under the policy can be deducted from the redress payment. But if the complaint is about a rejected claim under a mis-sold policy, the firm should either pay the claim or refund the premiums, whichever results in the largest sum.
In the case of single premium PPI, if the firm considers the customer would have bought an alternative policy with regular premium payments, it should offer to continue the cover on this basis and refund any difference between the single premium and what the customer would have paid in regular premiums. Any previously paid claims would not be affected and any rejected claims should be paid where appropriate.
To help firms calculate the cost of an alternative policy, the FSA has taken the unusual step of providing a "comparator" based on the average cost between 2005 and 2009 of a broadly equivalent regular premium PPI policy. The same comparator will be used by the FOS in assessing redress in relevant cases.
Only where it reasonably concludes that, despite its selling errors, the customer would have bought the single premium policy in any event, will the firm be justified in not paying any redress. But the FSA expects such cases will be rare.
The FSA also proposes that, under a new rule, any complaints relating to PPI mis-selling received since 14th January 2005 that have been rejected by the firm but which have not been referred to the FOS will have to be reopened and reassessed against the new guidance.
This review must be completed within a year. By 31st December 2010, the FSA will require every firm to have sent a final response to every customer with a reopened complaint, reminding them that, if they are still dissatisfied, they can take their case to the FOS.
Where a firm receives a number of complaints about its PPI selling, it should take steps to analyse the root causes of these complaints. Where recurring or systemic problems are identified, these should be taken into account in assessing individual claims.
More generally, the FSA says it expects firms to use this information to improve selling practices and training and even to consider whether a wider redress programme would be appropriate, including customers who have not yet made any complaint.
In such cases, the firm should report to the regulator detailing its plans for pro-active remediation, or, if it decides not to implement a redress programme, the reasons why it considers it fair and reasonable not to do so.
The consultation closes on 30th October. The finalised guidance and the review rule will be published in a policy statement at the end of December and come into force immediately.
According to the FSA, firms representing over 40% of face-to-face sales of single premium PPI connected to unsecured loans have already agreed to undertake the review of rejected claims.
The regulator is also launching a targeted assessment of the sale of single premium PPI with secured loans (such as second charge mortgages). This will be extended in due course to PPI sold with credit cards.