We have conducted work on the sale of payment protection insurance (PPI), and published reports on this in November 2005 and October 2006. As part of this work, we looked at the refund terms in single premium PPI policies.

We were particularly concerned with terms that prevent consumers from receiving any refund of the premium if they want to cancel the PPI policy for any reason. For example if they repay the associated loan early, are no longer able to claim under the insurance, or simply do not want to have the cover any more ('nil refund terms'). We were also concerned with the fairness and transparency of refund terms.

We have now concluded our work on refund terms. The agreement reached with a number of trade associations means that firms should:

  • not include nil refund terms in contracts with new customers;
  • not rely on nil refund terms in contracts with existing customers;
  • contact existing customers if their contracts contain nil refund terms to tell them how refunds will be dealt with in practice;
  • treat their customers fairly if they need to reissue the associated loan in order to cancel the PPI;
  • calculate the refund fairly taking into account their reasonably incurred costs, which may or may not result in a pro-rata refund; and
  • include in new policies examples or a table to illustrate how refunds will be calculated to improve the transparency of refunds.

This has been achieved through us working with the trade associations to achieve concrete benefits for consumers.

We are monitoring firms' compliance with this agreement carefully. We will raise non-compliance with firms to ensure they take steps immediately to treat their PPI customers fairly. Where we are not satisfied that this is the case we will take further regulatory action as appropriate. We will also be visiting a sample of firms – as part of the next phase of our wider PPI work – to verify that our outcomes for this are being delivered in practice.

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Nil refund terms

We worked with the relevant trade associations1 to look at nil refund terms in single premium PPI contracts.

We take the view that this type of term may be unfair under the Unfair Terms in Consumer Contracts Regulations 1999 (the Regulations). This is because, contrary to the requirement of good faith, it could cause a significant imbalance in the parties' rights and obligations under the contract, to the detriment of the consumer.

The trade associations have agreed that firms should provide partial refunds in their PPI policies if the consumer cancels the policy for any reason. This is unless a policy is very near to its end, a claim has already been paid under the insurance policy or the consumer has chosen to continue with the policy as free-standing cover, for example as income protection insurance.

As agreed with the trade associations in October 2006, firms which have nil refund terms in their contracts should change their contracts so new contracts contain terms which provide partial refunds. These firms should also write to their existing customers to tell them how they will deal with refunds in practice. Firms should ensure that new customers receive clear and accurate information about PPI refunds in contracts and other product literature.

When consumers cancel the PPI without repaying the loan, some firms will need to reissue the loan without the PPI. Firms should ensure they treat their customers fairly in relation to the terms on which they reissue the loan.

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The fairness of the refund

We have looked at terms relating to the amount of the refund to be provided, and the clarity of these terms. Because of the differing types of firms and commercial practices within the PPI industry, we do not intend to propose a single refund method for all firms to use. We believe refunds should be calculated to take firms' reasonably incurred costs into account. These costs will depend on the individual firm, but might include administrative fees, a proportion of commission and the uneven spread of the risk across the length of the policy. Firms may find it useful to carry out a review of their refund terms to ensure they are fair under the Regulations.

Firms should consider whether they must draw the refund term to the customer's attention as a significant limitation of the policy as required in the policy summary – ICOB 5.5.5R(5) – and in telephone sales – ICOB 5.3.6R(2)(a)(iv).

Transparency

The trade associations have committed to work with their members to improve the transparency of refunds. They have agreed firms should include in presale material and/or the policy documents explanations of whether the refund is based on a pro-rata calculation. They have also proposed that firms include in their contracts a table or example to illustrate the amount of refund consumers can expect to receive.

For some firms, stating the amounts of refunds consumers will be given has implications for the amount of capital required to cover our capital adequacy rules on provisioning. Firms who meet specified requirements can apply for a modification by consent for their single premium payment protection insurance products.

This means firms are now able to include a table or example of the amount of refund consumers can expect to receive in their contract. We expect firms will take steps to obtain the modification and amend their contracts to include a table or example of expected refunds. We will check this as part of the next phase of our wider PPI work.

Undertakings

In June 2006, we published several undertakings and statements from firms who have agreed to give consumers refunds if they repay their loan early (but outside the statutory cancellation period). These are now detailed on the Undertakings and statements page.

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1The Association of British Insurers, the British Bankers' Association, the Council of Mortgage Lenders, the Finance and Leasing Association, and Protect