Payment protection insurance – beware the next generation
The Financial Services Authority (FSA) and Office of Fair Trading (OFT) have joined forces to help prevent the problems associated with payment protection insurance (PPI) recurring in a new generation of products.
The FSA and the OFT are consulting on proposed guidance to firms in relation to payment protection products – which can fall within either regulator’s remit. This is a key time as the market shifts away from PPI and firms begin to develop new products or product features – such as short-term income protection, or debt freeze or debt waiver as elements of a credit agreement or mortgage.
The two organisations will continue to monitor developments in the market, and will take appropriate action under their respective powers where firms’ products or practices risk causing detriment to consumers.
Payment protection products within the FSA’s jurisdiction
The FSA’s guidance stresses that firms should ensure that product features reflect the needs of the consumers they are targeting. There are four key areas of concern that providers should think about carefully:
- firms not properly identifying the target market for the protection product
- the protection not reflecting the needs of the intended consumers
- the benefit of a successful claim not matching the needs of the claimant, and
- product features or pricing structures creating barriers to comparing products, exiting a policy or switching cover.
Margaret Cole, FSA managing director, said:
‘This is the first time that the FSA has issued guidance on the design of a specific product. Firms must learn the lessons of the past and make sure they have consumers’ needs at the heart of new product development.
‘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.
Payment protection products within the OFT’s jurisdiction
The OFT’s guidance sets out how the OFT considers the Consumer Credit Act (CCA) applies to payment protection products such as debt freeze or debt waivers linked to a regulated credit agreement, and what firms can do to ensure compliance with the CCA.
In particular, firms should ensure that consumers are absolutely clear about the nature, price and implications of payment protection products. For example, if an agreement is offered with an option to choose debt waiver terms, upon payment of a fee, it may be necessary to provide financial information including and excluding the cost of the debt waiver.
The guidance also sets out examples of business practices in relation to payment protection products which the OFT is likely to regard as unfair or improper (whether unlawful or not) and so may cast doubt on fitness to hold a consumer credit licence.
David Fisher, the OFT’s Director of Consumer Credit, said:
‘It is important that the problems encountered with mis-selling of PPI do not arise in relation to new payment protection products. 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.’
- The consultation will be open for 10 weeks, closing on 13 January 2012.
- The FSA identified new forms of payment protection products as an emerging risk in the Retail Conduct Risk Outlook, published February 2011 (see Chapter B, paragraph 4.1.2).
- Some of the payment protection products the FSA and the OFT considered during the preparation of this proposed guidance are:
– Insurance. This includes short term income protection or ‘STIP’, an insurance contract which provides a pre-agreed amount to the policy holder if they experience involuntary redundancy or are incapacitated through sickness or as a result of an accident and may be combined with other forms of insurance cover or include other benefits, and which:
– has a maximum time-limited benefit duration
– is written for a term which is less than five years and not predetermined by the term of any credit agreement or RMC, and
– can be terminated by the insurer.
– Non-insurance. This includes features of a credit agreement or mortgage where, in return for payment, the creditor agrees to freeze or waive the requirement on a consumer to make periodic repayments, or to freeze or waive interest or other charges, when a specified ‘event’ occurs, such as sickness or unemployment.
- Insurance products are regulated by the FSA under the Financial Services and Markets Act 2000 (FSMA). Non-insurance protection linked to a regulated first charge mortgage contract are also regulated by the FSA. Non-insurance protection linked to a credit or hire agreement (including a second charge mortgage) will typically be regulated by the OFT under the Consumer Credit Act 1974 (CCA).
- The Competition Commission’s Payment Protection Insurance Market Investigation Order came into force on 6 April 2011, and imposes restrictions and requirements in relation to the selling of PPI – see www.competition-commission.org.uk/inquiries/ref2010/ppi_remittal/pdf/PPI_Market_Investigation_Order_(2011).pdf. The OFT is responsible for monitoring the operation of the Order.
- The FSA regulates the financial services industry and has four objectives under FSMA: maintaining market confidence; securing the appropriate degree of protection for consumers; fighting financial crime; and contributing to the protection and enhancement of the stability of the UK financial system.
- The CCA requires most firms offering credit, lending money or involved in activities relating to credit or hire to be licensed by the OFT. The OFT produces guidance to clarify its expectations of those companies and individuals that hold a consumer credit licence. Failure to have regard to OFT guidance can call into consideration a firm’s fitness to hold a licence. The OFT also publishes guidance setting out how the CCA applies in particular areas where this may assist firms in complying with the legislation.