30 September 2008

  1. Tackling poor Payment Protection Insurance (PPI) sales practices is a priority for the FSA. We said in our 2007 Business Plan1 we would provide an update on our third phase of thematic work to review the sale of PPI in Q3 2008.  Our previous thematic update was published in September 20072.         

  2. Our retail strategy looks for the FSA to promote resilient, effective and attractive financial retail markets that deliver fair outcomes for consumers. Within this strategy the aim of our work into the sale of PPI is to secure better outcomes for consumers through firms improving their sales standards and consumers making well-informed purchasing decisions and is consistent with our continuing focus on treating customers fairly. The FSA expects firms to meet the Principles, including treating customers fairly, and to comply with Insurance Conduct of Business (ICOBS) rules.

  3. This update outlines our high-level findings and our next steps. In view of the poor results gathered during our recent work we are escalating our regulatory intervention. We are considering the appropriate action to:

    1. deal with on-going non-compliant sales practices; and

    2. identify and remedy non-compliant past sales.

Mystery Shopping

  1. Our third phase of thematic work on PPI has included a mystery shopping programme that captured customer experiences of face-to-face branch sales of PPI when sold alongside an unsecured personal loan.  We chose to mystery shop single premium PPI sold alongside unsecured loans because previous thematic reviews identified this sector as having a higher risk of consumer detriment.  PPI sold with unsecured loans is also the largest product area3 with the highest penetration rates4 in the wider PPI market.  All the mystery shops were of single premium PPI policies. 

  2. In November 2005, October 2006 and September 2007 we issued clear guidance and warnings to firms selling PPI, so we are disappointed by our initial analysis to discover the results of the latest mystery shopping of single premium PPI to be worse than expected. Firms rely on documentation to explain costs and exclusions without giving a proper verbal explanation even when the sales pitch is face-to-face. We found, for example:

    1. very few customers were informed orally that the cost of the payment protection would be added to the loan as a single premium and that interest would be charged on this amount;

    2. only half of all customers said that they were informed orally about the key limitations and exclusions of the policy.  This is fundamental to establishing a customer's need and eligibility and shows unacceptably poor levels of sales competence; and

    3. many customers were not informed orally of both the monthly and total cost of their PPI.  At the worst performing firms very few customers were given adequate information on the cost of their policy.

  3. Poor sales practices increase the risk of unacceptable outcomes, for example that a customer may be ineligible to make a claim on a policy they purchased and that they will not understand that they will be paying interest on their extra borrowing.  Firms need to do considerably better in order to achieve the right consumer outcomes.

Financial Ombudsman Service

  1. Since we last reported, there has been a marked increase in the volume of PPI related complaints received both by firms and by the Financial Ombudsman Service (FOS).  FOS has raised the sale of PPI as a wider implications issue with the FSA.  Wider implications issues are those which affect a large number of consumers or firms.  The process allows the FSA to consider whether a regulatory solution may be more appropriate than the Ombudsman deciding individual cases.  The FSA is considering the FOS's concerns in the context of our broader strategy. We are working with FOS on the appropriate response to this serious matter.

Competition Commission

  1. We have welcomed the Competition Commission’s (CC) work and see it as complementary to our own. The focus of the CC’s work is improving competition in the PPI market for the benefits of companies, customers and the economy; ours is on consumer outcomes and fair treatment of customers in the sale of PPI as part of our wider retail strategy. In June 2008 the CC published its provisional findings and notice of remedies. Together our actions will drive changes in the market and deliver better consumer outcomes. 

Industry and Consumer Groups

  1. We are also in dialogue with trade associations and consumer groups on the issue of the consistent and adequate handling of PPI complaints and redress, with a view to an appropriate response to improving the handling of complaints by firms. 

Next Steps

  1. Our plan is to publish an update on our third phase of thematic work in Q1 2009. In view of the poor results gathered during our recent work, we are escalating our regulatory intervention. We are considering the appropriate action to deal with on-going non-compliant sales practices and identify and remedy non-compliant past sales.

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Footnotes

1. http://www.fsa.gov.uk/pubs/plan/pb2008_09.pdf

2. http://www.fsa.gov.uk/pages/Library/Communication/PR/2007/102.shtml

3. with 60% of GWP in 2005 [Source OFT report October 2006/Creditor Insurance November 2005/Mintel 2007]

4. with 40-60% of unsecured personal loans having associated PPI in 2003/2004 [ reflects values in three sources being: datamonitoring (2004); Mintel (2007) and Credit Suisse (2005).