FSA update on payment protection insurance

FSA have today released a report (The Sale of Payment Protection Insurance – results of thematic work), which warns the financial services industry to take urgent action to address concerns it has relating to the sale of payment protection insurance (PPI). The report is based on a series of firm supervisory visits and mystery shopping undertaken during the summer.

While FSA acknowledges that PPI can provide worthwhile cover for some consumers it is concerned that selling practices in certain sectors mean that there is a risk that it is sold to customers who are unable to make valid claims or who will receive only a limited benefit from the product. FSA reports that the thematic review showed that while the sales of regular premium PPI with prime mortgages were generally compliant, there were significant concerns in relation to PPI sold in other market sectors.

Clive Briault, FSA Managing Director for Retail Markets is quoted as saying that:

"compliance standards in other areas of the market, notably single premium PPI business, are generally weak… this poses a serious risk to consumers because of the poor disclosure of product and price details; the possibility that consumers may not be eligible to claim against their policies; and the fact that consumers may not be aware that they may receive little money back if they cancel these policies early."

FSA surveyed 30 firms selling PPI with credit and store cards, catalogues, secured and unsecured loans and sub-prime mortgages. Key points of their findings included the following:

• inappropriate sales - around half the firms failed to take reasonable steps to ensure the potential policyholder was eligible to claim under the policy. FSA emphasises the difficulties that the current complex products cause for sales staff in checking eligibility to claim under all sections of the cover and ensuring a compliant and fair sales process. There is no specific requirement in FSA's Insurance Conduct of Business rules (ICOB) to carry out eligibility checks for non-advised sales. Is this an example of FSA legislating by the "back-door" by using its general Principles to impose additional requirements on firms?
• inadequate controls relating to non-advised sales – around half the firms did not take appropriate measures to ensure staff did not give advice
• advice – most was poor, staff failed to adequately assess product suitability
• over-reliance on product documentation – most firms selling over the telephone did not give sufficient information relating to policy exclusions
• poor quality and timeliness of product disclosure – in respect of some firms selling single premium policies
• level and structure of inducements and targets – in some small and medium firms which could encourage mis-selling
• training and competence – at inadequate levels in around half the firms
• level of compliance monitoring – variable and, in some cases, poor.

Following this thematic work, FSA has confirmed that it will follow up by:

• contacting firms to give detailed feedback on its findings and requiring them to address any problems raised
• referring some firms identified in the thematic review as having serious issues for further investigations with a view to possible enforcement action
• completing a second round of thematic work, early next financial year, to check that standards have improved
• put new PPI information on its consumer website, which they are advised to read before purchasing PPI
• meeting with trade associations to seek their commitment to changing and improving the market.

FSA are also currently liasing with the Office of Fair Trading (OFT) regarding the handling of the super-complaint received in September from consumer group, Citizens Advice (CAB). In their report, which forms the basis of the super-complaint, CAB made various (including competition based) criticisms of the PPI market, which included, that it was too expensive. CAB have called for intervention from OFT, FSA, the Competition Commission (CC) and the Treasury Select Committee. OFT must publish its response on what it intends to do by mid December. Such response could include a market study to gather further information or an immediate reference to CC for a market investigation.

CC has recently published its preliminary findings on the store card market and associated insurance, which includes PPI. The findings indicate that there is a lack of competition in relation to PPI pricing. For more information regarding the CC store card investigation and the super-complaint, please see our previous Law-Now, Criticism of the payment protection insurance market, published on 29 September 2005.