In July 2008 we sent letters to several trade bodies setting out our expectations in relation to the disclosure of total premium by firms selling regular premium Mortgage Payment Protection Insurance (“MPPI”). We have previously communicated the same message around disclosure of total premium for shorter term PPI policies such as those for personal loans.

Discussions with firms and trade associations have led us to conclude that many firms selling MPPI disclose only the monthly premium. Following further discussion with the CML, AIFA and several firms we are now aware that some firms’ interpretation of total premium is not consistent with the requirement to provide sufficient information to enable consumers to make an informed decision. For this reason we are providing further clarification of the requirement to disclose total premium, particularly bearing in mind the intended outcome of the disclosure, in respect of both MPPI and other general insurance and protection products.

The required standard of price disclosure in ICOBS

The rule in ICOBS 6.1.5R is that firms must take reasonable steps to ensure that a customer is given appropriate information about the policy in a comprehensible form and in good time so that customers can make an informed decision.

Our guidance is that this information will include the price of the policy (ICOBS 6.1.6G). A disclosure of price by firms in a form that fails to put the customer in a position to make an informed decision will not meet the requirements of the rule.

In our view the disclosure of total premium will be necessary to put the customer in a position to make an informed decision. The disclosure of the monthly premium alone is not sufficient to enable consumers to make an informed decision (see for example our report: The Sale of Payment Protection Insurance: Results of follow-up thematic work - October 2006 ). We do not accept that it is safe to assume that consumers can readily grasp from a statement of monthly premium alone the nature of the overall financial commitment proposed. We consider that the sales discussion is not balanced if consumers are only given the monthly premium to weigh up against the information the firm gives on the benefits of the product, which consumers are asked to relate to protecting a loan that covers a much longer period of time.

Our position on this has not changed. From 2005 ICOB 5.5.14R required firms to provide consumers with a statement of price which included the total amount of the premium for the non-investment insurance contract, or, if the premium could not be indicated, the basis for the calculation of the total premium enabling the retail customer to verify it. Although ICOBS 6.1.5R is expressed in a more principles-based way, our view on what disclosure will satisfy the rule has not changed. It remains our expectation that firms should continue to meet the requirement to disclose appropriate information to customers by giving the total premium. ICOBS 6.4.7G, which states that price information is likely to also include at least the total premium (or the basis for calculating it so that the customer can verify it, where the exact price cannot be calculated) retains this standard. There is also a Distance Marketing Directive requirement to disclose the total premium in distance sales.

The consumer's decision can be thought of as having two elements: one about the affordability of the premium as part of their regular budget (so the monthly premium is appropriate here); and the other is a long term decision about the value of the product for them compared with alternative products or courses of action. Here the monthly premium alone does not provide sufficient information to enable the consumer to make an informed decision. So we are clear that firms need to provide information on the cumulative costs of the policy.

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Oral disclosure

We would like to draw firms' attention to the oral disclosure requirements set out at ICOBS 6.4.2R which require that if a firm provides information orally during a sales dialogue with a customer on a main characteristic of a policy, it must do so for all the policy’s main characteristics. A policy’s main characteristics include price information and so our expectation is that the total premium should also be disclosed orally as well as in writing in these circumstances.

Clarification of total premium

We are aware of two types of MPPI contract: one which is described as “monthly renewable” and one which is described as “annual renewable”. In both cases the customer is able to cancel1. by giving no fewer than 30 days’ and in some cases as much as 90 days’ notice without penalty. We look at each type of policy in turn, set out some of the issues and whether the accompanying disclosure of price is likely to achieve the informed decision standard.

MPPI contracts described as “monthly renewable”

In this category of policy the customer is provided with the monthly premium amount at the inception of the contract but does not actively renew at the end of each month and no renewal documentation is sent to the customer with an invitation to renew or opt out. We do not consider that a contract of this type is in substance a contract of only a month’s duration because:

  • The terms of the policy are clearly linked to the length of cover (e.g. 25 years).
  • Many such contracts have cancellation periods longer than a month.
  • Contracts commonly refer to time periods in which something will happen that are longer (sometimes much longer) than a month.

In our view the fact that a contract is cancellable does not make it monthly. Our review of a sample of contracts indicates that when a customer takes out an MPPI product, the duration of cover is usually linked to the term of the mortgage which the policy was taken out to cover or some contingent event such as age. The monthly automatic/default 'renewal' is at best a series of potential end-points to the contract but this does not make it a monthly contract. ICOB 6.1.3G clearly stated that a creditor policy that remains in existence from month to month until the policyholder attains a certain age, until cancelled by either party, or lapse because of non-payment of premiums would not be considered as a policy with monthly renewal under the ICOB rules. This remains our position.

For these reasons we consider that disclosing the monthly premium alone is not sufficient for consumers to make an informed decision.

Annually renewable MPPI contract

The other types of MPPI contracts we are aware of are those described as annually renewable. This type of contract can accurately be described as annually renewable if, at inception, the customer is provided with the monthly premium and the total annual premium and then at renewal the customer is sent a renewal schedule with the monthly premium and the total annual premium and given the opportunity to opt out. The disclosure of a monthly and the annual total premium at inception and at renewal in a way consistent with the standards set out in the ICOBS is capable of meeting the informed decision standards for these types of contracts.

Other general insurance and protection products

ICOBS 6.4.6 R, which requires a firm to provide price information in a way calculated to enable the customer to relate it to a regular budget, and the associated guidance ICOBS 6.4.7G which states that price information is likely to also include at least the total premium (or the basis for calculating it so that the customer can verify it) apply to all protection policies including pure protection products. ICOBS 6.1.5R and the DMD requirement to disclose total price in distance sales (see below) apply to all product types.

For products such as motor and home insurance disclosure of total price is not problematic as these are annual products and the annual price and, where applicable, the monthly price is quoted at inception and at renewal. For pure protection products it is unclear to what extent firms are disclosing the total premium but as far back as 2005 we provided individual guidance that ICOB 5.5.14R required the total lifetime price to be disclosed for pure protection products where possible, or the basis for calculation where an exact amount could not be calculated.

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Distance Marketing Directive requirements

Article 3 of the Distance Marketing Directive requires the disclosure of ‘total price’, which in our view refers to the price paid over the lifetime of the insurance cover (rather than just the price paid for a month's worth of cover). ICOBS 3.1.3R Annex 2, which sets out the distance marketing information, requires a firm to provide a consumer with, among other things, the total price to be paid by the consumer for the financial service…or, when an exact price cannot be indicated, the basis for the calculation of the price enabling the consumer to verify it. Our view here is that in most cases total price should be calculated as being for the total term of the contract. So where you have a known premium over a contractual period, such as a 25-year term, you would show the premium over that term. For some contracts this will not be possible, for example a whole of life contract where the term of the contract is not known at the outset. In this case, where the exact price cannot be calculated and in accordance with the DMD provision (for distance sales), we would expect firms to show the basis of the calculation and to do so in a way that is clear, fair and not misleading.

Achieving the required standard of price disclosure bearing in mind the informed decision standard

We have set out above the outcomes we are looking for and what we consider is required by the informed decision standard (ICOBS 6.1.5R) and the general guidance on provision of price information (ICOBS 6.4.7G).

Annually renewable contracts

We consider that if a contract is offered on an annual basis and the customer is offered the opportunity actively to renew or to opt out at the appropriate intervals the disclosure of the annual total premium is sufficient.

Contracts described as “monthly renewable” on an automatic basis

Where a policy is continuous but cancellable with prior notice by the consumer, or otherwise described by firms as “monthly renewable” on an automatic basis, we do not consider the monthly premium amount to represent the likely total amount payable by the consumer over the duration of the contract. As such the disclosure of the monthly premium is not sufficient to meet the requirements in the rules.

For such contracts and for other continuous contracts, possible ways of disclosing the premium which we would consider to comply with the rule include:

  1. disclosing the total premium over a period defined by reference to the list of events which the insurance contract says will cause the cover to cease (trigger events), e.g. the customer reaching the age of 65. The premium quoted is over a term which ends on the date of the first fixed-date trigger event that occurs (e.g. the full term of the mortgage or retirement age of the customer). This approach avoids the need for firms to make assumptions about likely dates of early redemption of the mortgage; or
  2. an illustration of the cumulative cost of the policy for milestone durations, for example of 1, 5 and 10 years (or the full term of the policy if it is shorter);or
  3. for reviewable-premium policies disclosure of the total premium as set out in (a) or an illustration of cumulative costs as set out at (b) in the first instance, noting that it is subject to review. If and when a policy is reviewed, the new calculation of total premium is given to the customer as soon as the new premium has been set.
    As discussed above, if a firm provides information orally during a sales dialogue with a customer on a main characteristic of a policy, it must do so for all the policy’s main characteristics including the total premium.

Next Steps

In July 2008 we communicated by letter with Insurance Industry Associations and voiced concern that many firms were not currently meeting the standards set out in our rules but acknowledged that some firms may require time to adjust their practices to reflect the reiteration of our expectations around the disclosure of total premium. For this reason we gave firms selling PPI who were not currently meeting the requirement 6 months (until 15 January 2009) to put in place any necessary changes to enable them to do so.

We believe that the position is clear regarding this requirement for firms selling either PPI or pure protection products so firms that are providing only the monthly price information need to review their selling processes in light of this clarification and make the necessary changes as soon as possible.

1.Outside of the statutory cancellation period

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