Late last year the Citizens Advice Bureau (CAB) issued a ’super complaint’ to the Office of Fair Trading (OFT) about Payment Protection Insurance (PPI).
The complaint concentrated on four keys areas, these being, consumers pay too much for PPI, some policies unreasonably exclude some come causes for claims, consumers are sometimes mis-sold PPI with evidence of high pressure sales techniques and the administration of PPI is sometimes slow and unfair. This document looks at these complaints and attempts to predict the outcome of the OFT inquiry into Payment Protection Insurance.
Problems with Payment Protection Insurance
PPI can be applied to a number of credit products including mortgages, unsecured loans and credit and store cards. It is sold almost exclusively as a secondary product, typically introduced and sold to the consumer at the point of sale of the credit agreement. A recent FSA report, and the Competition Commission’s provisional findings report in its store cards market inquiry, noted that consumers do not shop around for PPI and in general have little understanding of PPI pricing, alternatives or product attributes. So one of the problems is that people shop around looking at the headline interest rate of a loan, but fail to even think about looking for an alternative PPI provider.
The number of people making a claim, the ‘claims ratio’, against PPI is estimated to be between 15 and 20 per cent. This figure is supported by work carried out by Credit Suisse First Boston and is markedly lower than for other types of general insurance (for example, house and car insurance). Whether this is due to limitations within the policies or down to something else is difficult to establish.
The nature of the way the product is sold, at point of sale with the consumer focusing on the primary credit product rather than the secondary PPI product, limits the potential for stand-alone providers to attract customers. During its research the OFT came across few suppliers of stand-alone products. Where they do exist they tend to focus on mortgage PPI (MPPI). The OFT spoke to companies in the insurance sector and they indicated that a number of insurers have tried to enter the stand-alone market in the past but found the product was not financially viable.
The OFT has talked about breaking down the credit insurance market into different sectors and its early observations suggest that MPPI, for example, differs from the rest of PPI, with a distribution chain more likely to include brokers and stand-alone providers and monthly premiums rather than upfront single premiums. MPPI also faces competition from alternative protection products such as critical illness insurance, income protection insurance and permanent health insurance.
The FSA has also been investigating PPI and has found some firms failing to take reasonable steps to ensure customers did not buy policies on which they could not claim or which provide only limited cover. It also discovered there were inadequate controls in place for non-advised sales: some firms selling on a non-advised basis did not have adequate systems to stop their staff giving advice. The FSA also found advice on PPI was likely to be of poor quality – there was a failure to assess suitability adequately. Documentation setting out reasons for a recommendation was too generalized and did not take into account a customer’s specific requirements or circumstances. They also discovered the level and structure of inducements and targets for sales staff could encourage mis-selling in some firms.
The FSA was particularly concerned about single premium policies. Information on interest was not disclosed, insufficient information was given on the lack of refunds, and in some cases misleading comparisons were made between single and regular premiums in favour of single premiums. When the FSA talks about this it is talking about the front-loading of the insurance cost onto the principle loan amount, so that it too is subject to interest. The FSA found that disclosure documentation on PPI was often of poor quality and unhelpful. Information relating to single premium policies raised particular concerns – information on interest not disclosed as is required under FSA rules, insufficient information on the lack of refunds, and in some cases misleading comparisons between single and regular premiums in favour of single premiums. The evidence from the CAB found that consumers are not sufficiently aware of exclusions and cancellation rights.
When the CAB made its complaint to the OFT it was aware that the FSA and not the OFT is responsible for the regulation of PPI. The problem is that PPI straddles both the FSA and OFT and they recognise the need for a joint strategy. The OFT has said it will not grant or will revoke Consumer Credit Licenses where they find that there is mis-selling of PPI.
During the OFT’s consultation on this super-complaint, a common theme put to them by the industry was that the introduction of insurance conduct of business (ICOB) regulations in January 2005 22 had led to significant changes in the sale of PPI, which should have reduced the likelihood of complaints such as those set out in CABs report.
It is more or less certain that the current investigation by the OFT (and FSA) into PPI will result in changes in policy and regulation. It is also predicted that the OFT will publish some documents to increase consumer awareness about shopping around, cancellation rights and understanding the small print in their policies. It is also believed the OFT, rather than producing concrete policy, will encourage firms to take voluntary action and persuade them to create a consumer code of practice. In extreme cases the OFT will probably enforce action against companies suspected of breaching consumer law or competition law