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FSA Handbook

FSA Handbook

 

This modification allows firms selling single premium Payment Protection Insurance (PPI) policies to treat Deferred Acquisition Costs as an admissible asset.

Over recent years, we have carried out extensive thematic work on PPI. Part of this work has been aimed at making it possible to specify in the terms of a PPI policy what the refund would be if the policy is cancelled. This is intended to make the contract terms more transparent.

As a result of this work, we are making this modification by consent available from 26 February 2007.

Under the unmodified rules, commission prepaid to agents or intermediaries may not be treated as an admissible asset. However, this modification will allow the commission to be included as an asset, if it is associated with certain single premium PPI policies.

Which firms does this apply to?

This modification will be suitable for any insurers which sell single premium PPI policies. It will only apply if firms make sure:

  • the wording of the single premium PPI policy specifies that any refund of the premium by the insurer is paid to the agent or intermediary to offset against the loan;
  • there is a written agreement with the agent or intermediary that requires any unearned commission to be paid to the insurer within a month of a policy refund; and
  • the agent or intermediary is an approved credit institution, or the wholly owned subsidiary of an approved credit institution.

What is the modification for?

Under this modification, in their PPI policies insurers will be able to give illustrative examples of refunds if the policy was cancelled, without having to hold capital reserves for these refunds.

How does the modification work?

The modification does two things:

  1. it allows prepaid commission to be treated as an admissible asset, by including it in the table of 'Admissible assets for insurers' (in GENPRU 2 Annex 7R); and
  2. the exposure arising from prepaid commission is added to the list of exemptions from counterparty or asset exposures (in INSPRU 2.1.33R).

These changes can be seen in the modification direction.

You should note that the modification contains a condition that an appropriate note is added to the firm's financial returns.

This modification is valid for 5 years from the start date of the direction unless subsequently withdrawn.

How can firms make use of this modification?

If you want to take advantage of the modification by consent described here, you should write to:

Central Waivers Team
The Financial Services Authority
25 The North Colonnade
Canary Wharf
London
E14 5HS

We will then write to you to confirm that the modification has been granted, and we will publish each modification direction we grant on our website.