Out-Law Guide 14 min. read
01 Apr 2008, 11:25 am
This guide is based on UK law. It was last updated on 19th October 2010.
As part of its review of the selling of payment protection insurance (PPI), the Financial Services Authority (FSA) concentrated on four main areas of continuing concern: eligibility to make a claim, suitability of advice and product, inadequate disclosure of policy details and price.
To address these issues, the Insurance Conduct of Business Sourcebook (ICOBS) sets out a differentiated regulatory regime that imposes stricter selling standards on "protection products" than on general insurance. This term covers "pure protection contracts" (term, critical illness and income protection insurance) and "payment protection contracts" (PPI). There are also special rules that apply to PPI alone.
The ICOBS provisions, however, must be read in the context of the Competition Commission's measures for improving competition in the PPI market, which will radically alter the way PPI is sold in the UK.
In October 2009, a crucial element of those reforms - a ban on PPI being sold at the same time as a loan or credit - was remitted back to the Commission for reconsideration by the Competition Appeal Tribunal, following a successful legal challenge by Barclays Bank.
But on 14th October 2010, the Competition Commission announced it had decided to go ahead with the point of sale ban for all types of PPI, except retail PPI. The ban is expected to come into force in April 2012.
One of the main problems with PPI, both from a regulatory and competition point of view, is that the majority of policies are bought at the same time as taking out a loan or credit. Most customers (50% to 75% according to the Competition Commission's research) will not have thought about PPI until that moment. Many are unaware that they could buy PPI from another provider.
There are also barriers to customers shopping around for PPI. Differences in policy terms and structures make it difficult to compare like with like. Many firms only provide accurate price illustrations if the customer goes through a full credit application.
The Commission also found that a significant number of people thought that taking out PPI would improve their chances of obtaining credit, or even that it was a condition of the loan.
All this increases the risk that the customer will be sold an inappropriate product. From a competition angle, having sole access to the customer gives the credit provider a considerable point of sale advantage over other providers. Peter Davis, chairman of the Commission's investigation, described this as the "single biggest barrier to competition in this market".
The Commission wants to remove the point of sale advantage by prohibiting credit providers and intermediaries (or any affiliated businesses) from selling PPI to their loan or credit customers for seven days after the credit transaction or from the time they provide the customer with a personal PPI quote, if later.
The customer may still buy PPI during the prohibition period if he contacts the provider or intermediary by telephone or via the internet more than 24 hours after the credit sale and the provider or intermediary can show the customer has seen a personal PPI quote before the PPI sale.
This 24-hour exception will not apply if the customer makes contact by any other means, such as by post or by calling in at the branch. The Commission concluded that contact other than by phone or online would be too easy to manipulate so as to sidestep the seven-day rule.
In addition, the Commission will ban outright PPI policies paid for by a single premium because it believes they prevent customers from switching to another provider and are often overly expensive.
Other remedies are designed to help the customer shop around and make informed choices. It will become a pre-condition of any PPI sale that the customer has been provided with a personal PPI quote. Customers will also receive annual statements about their PPI policy to encourage them to review their cover.
New rules will govern PPI advertising and marketing to ensure the material is easy to understand and that any price information is given in a standard format. Adverts must also make it clear that PPI is optional, available from other providers and that more information is available from the FSA Moneymadeclear website.
In addition, all PPI providers will be required to provide information to the FSA for inclusion in the FSA's PPI price comparison tables and to the Office of Fair Trading (OFT) on compliance. Large PPI suppliers will also have to commission an annual mystery shopping exercise and report the results to the OFT.
In October 2009, the Competition Appeal Tribunal ruled that the Commission should have taken into account the effect of the point of sale ban in terms of loss of convenience to the consumer when it was considering whether the remedy was proportionate.
This failure was sufficiently material to require the ban to be quashed and remitted back to the Commission for reconsideration.
But after carrying out a significant amount of further work, the Commission concluded that its full package of remedies, including the ban, remained an effective and proportionate way of tackling the problems connected with all types of PPI except retail PPI.
Its additional investigations showed that, although some consumers preferred being able to buy PPI at the point of sale, a significant proportion put greater value on having time to consider whether or not to buy the cover.
"We have carefully considered the arguments put forward by the parties and concluded that they are over-stating the loss of convenience that would result from the introduction of [a point of sale ban]," the Commission states in its provisional decision paper in May 2010.
"To the extent that any decline in take-up of PPI is as a consequence of the elimination or reduction of unwanted sales at the credit point of sale… we do not regard those lost sales as indicative of any consumer detriment resulting from the [point of sale ban]".
The Commission has, however, decided not to impose the point of sale ban on retail PPI, which provides cover for repayments on goods bought via catalogues. Specific remedies will instead include a ban on single premium policies, the "unbundling" of retail PPI from merchandise cover and improved information for customers.
The Competition Commission's suggested timetable would see the new rules on marketing and the information to be provided to third parties come into force in October 2011. All other elements of the package - including the point of sale ban - would come into effect in April 2012.
The Commission's remedies will inevitably have an impact on ICOBS rules and guidance for firms selling PPI. In 2009, the FSA published a clarification explaining how the Commission's proposals would work within existing ICOBS rules.
Firms will still be expected to provide appropriate information about a policy in good time and in a comprehensible form so that a customer can make an informed decision about the arrangements proposed (6.1.8G). But what does in "in good time" mean in the context of a sales process that will last over a week?
The point of sale ban will create two sales events - the credit point of sale and the PPI point of sale. What information should firms disclose to customers – and when - to comply with ICOBS?
One of the FSA's main concerns is that information may be forgotten or left incomplete because the dialogue between the firm and the customer will be split over the two events.
A customer applying for a loan is likely to be thinking more about the loan than the PPI product. Contacted again after the end of the prohibition period, he may not remember enough of the information he was given seven days previously to be able to make an informed decision.
The Competition Commission envisages that any PPI information given at the credit point of sale will be a "general terms discussion". But, as the FSA points out, the prohibition will not actually prevent a full PPI sales discussion at that stage.
Firms should, however, be aware that they "cannot rely on oral information about PPI given during the credit transaction as meeting our oral disclosure requirements and informed decision standard for PPI".
In other words, a firm must always have a fully ICOBS-compliant discussion with the customer at the PPI point of sale, whatever took place earlier.
Where the customer initiates a sale by contacting the firm at least 24 hours after the credit sale, that is the effective PPI point of sale and all the required disclosures must be made then.
The FSA also warns that a firm writing to a customer after the prohibition period must not give the customer the impression that he has already agreed to buy the PPI. The customer's decision to buy must be an "active opt-in decision" taken once he has been provided with all the appropriate information.
A particular PPI-related problem has been the large number of customers who, when it comes to making a claim, find they are ineligible, usually because of age, employment status or because they live abroad.
ICOBS has 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 pay due regard to the interests of its customers and treat them fairly.
Firms arranging general insurance contracts and pure protection contracts are expected to carry out the same eligibility checks, but in those cases the provision is set out as guidance, not as a mandatory rule.
The distinction between a rule, a principle and guidance is significant. Individuals can claim damages for 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, for instance, he is not resident in the UK, or is over 65, or because he is self-employed.
Under ICOBS, 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, but making it a rule means that an individual can sue for damages if there is a breach.
Once the point of sale ban is introduced, the FSA says it will apply the same duty of reasonable care to any advice on PPI given at the credit point of sale as well as at the PPI point of sale.
For PPI and pure protection contracts, additional guidance at 5.3.2G sets out what the firm should take into account in giving suitable advice, such as establishing the customer's demands and needs, obtaining further relevant information, taking reasonable care that the policy is suitable and telling the customer if any demands and needs are not met.
Before the PPI contract is concluded, the firm must draw up a statement of the customer's demands and needs based on the information provided, giving the underlying reasons for any advice given on the policy (5.2.2R).
5.2.3R sets out the ways in which this statement must be communicated to the customer. In most cases it will be in writing, but the information can be given orally where the customer requests it or where immediate cover is required. If so, the statement must be provided in writing immediately after the contract is concluded.
When the point of sale ban is introduced, the requirement for a statement of demands and needs will apply to advice given at either the credit point of sale or the PPI point of sale. Firms will need to be careful that the statement sweeps up advice given at both stages.
For non-advised sales of protection products, the firm must take reasonable steps to ensure the customer understands he is responsible for deciding whether a policy meets his requirements (4.2.4R).
Under the Competition Commission's new PPI regime, this should take place at the PPI point of sale, whether or not there has been an earlier discussion. And if it is done orally, it must be followed up in writing immediately after the contract is concluded.
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).
In deciding what is "in good time," the guidance suggests the firm consider the importance of the information to the customer's decision-making process and the point at which that information would be most useful (6.1.8G). In the case of protection policies, a firm considering when and how to give information should take into account how important the information is for the customer's purchasing decision (4.2.2G).
In the context of the Competition Commission's point of sale ban, the FSA's view is that the customer will make his substantive purchasing decision at the PPI point of sale, rather than at the credit point of sale, whether this occurs after the seven-day period has ended or when the customer initiates a PPI sale during the prohibition period.
Consequently, all the required disclosures will have to be made at the PPI point of sale, including disclosures about the firm's status, whose policies it offers and any limits to the service it provides (4.2).
Special rules for protection policies (including PPI) deal with oral sales (6.4.2R). Information provided orally during the sale process must cover all the product's main characteristics (its significant benefits, exclusions and limitations, duration and price). The firm must 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".
Once the point of sale ban is implemented, this oral disclosure rule will apply to any PPI discussion at the credit point of sale as well as at the PPI point of sale. It will not be enough, for instance, for the firm to outline only some of the policy's main characteristics at the credit point of sale, even if it later provides information about all of them at the PPI point of sale.
When, at the end of the prohibition period, the firm contacts the customer again for a further oral discussion, this discussion must provide the customer with all the information he needs to make an informed decision, whether or not an earlier discussion took place.
For consumer customers, the sales discussion 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).
For all policies, a firm must provide price information in a way calculated to enable the customer to relate it to a regular budget (6.4.6). The wording refers to "the" customer, rather than "a" customer, to make the requirement specific to the actual customer concerned.
Guidance notes explain that the information should include at least the total premium, or the basis of calculating it so that the customer can verify it. 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).
In 2008, the FSA raised concerns about premium disclosures being made in relation to certain types of regular premium policies, particularly mortgage PPI, where some firms have only been disclosing the monthly premium.
These policies are sometimes described as "monthly renewable" because they are cancellable on a month's notice. But, as the FSA points out, the fact that a contract is cancellable does not make it renewable if no actual renewal takes place. In reality, the duration of cover is usually much longer. In mortgage PPI, for instance, the cover is normally linked to the duration of the mortgage (i.e. 25 years).
In December 2008, the FSA published guidance confirming that disclosure of a monthly premium in such cases is not enough to enable the consumer to make an informed decision.
Firms should disclose the total premium over a period defined by a trigger event (e.g. reaching the age of 65) or at certain milestones (5 years, 10 years). In the case of a reviewable premium, this should be accompanied by a reminder that the premium may be reviewed. Following a review, the new premium should be disclosed on the same basis.
There are also special price disclosure rules in ICOBS governing 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, so 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).
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).
In August 2010, the FSA published its policy paper and finalised guidance on PPI complaints handling and redress, together with an open letter to industry bodies highlighting common point of sale failings "in order to remind members of the appropriate standards".
The new requirements are set out in Appendix 3 to the Dispute Resolution Sourcebook (DISP) and are due to come into effect on 1st December 2010.
On 8th October, however, the British Bankers Association (BBA) issued court proceedings for a judicial review of the FSA’s and FOS's approach to PPI sales complaints. It is not yet known when this application will be heard.
The BBA claims the regulator is seeking to apply higher sales standards for PPI than were in the Handbook at the time the sales were made and that this will set a precedent for other products regulated by the FSA.
Contact: Alexis Roberts [email protected] (020 7667 0259)
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