Problems with Payment Protection Insurance Targeted by OFT, FSA
The Financial Services Authority (FSA) and the Office of Fair Trading (OFT) have entered into an agreement to jointly prevent the problems associated with payment protection insurance (PPI) from recurring in a new generation of products.
For 10 weeks until January 13, 2012, the FSA and the OFT are consulting on proposed guidance to firms in relation to payment protection products, which can fall within either regulator’s remit.
The consultation comes as the market shifts away from PPI and firms begin to develop new products or product features – such as short-term income protection, or debt freeze or debt waiver as elements of a credit agreement or mortgage.
The two regulators will continue to monitor developments in the market, and will take appropriate steps under their respective powers where firms’ products or practices can cause detriment to consumers.
The FSA identified new forms of payment protection products as an emerging risk in the Retail Conduct Risk Outlook, published February 2011.
The FSA’s guidance stresses that firms should ensure that product features reflect the needs of the consumers they are targeting. The major concern that providers should think about carefully include firms that are not properly identifying the target market for the protection product; the protection not reflecting the needs of the intended consumers; the benefit of a successful claim not matching the needs of the claimant, and product features or pricing structures creating barriers to comparing products, exiting a policy or switching cover.
Margaret Cole, FSA managing director, said: “This is the first time that the FSA has issued guidance on the design of a specific product. Firms must learn the lessons of the past and make sure they have consumers’ needs at the heart of new product development.”
The OFT’s guidance sets out how the OFT considers the Consumer Credit Act (CCA) applies to payment protection products such as debt freeze or debt waivers linked to a regulated credit agreement, and what firms can do to ensure compliance with the CCA.
In particular, firms should ensure that consumers are absolutely clear about the nature, price and implications of payment protection products. For example, if an agreement is offered with an option to choose debt waiver terms, upon payment of a fee, it may be necessary to provide financial information including and excluding the cost of the debt waiver.
The guidance also sets out examples of business practices in relation to payment protection products which the OFT is likely to regard as unfair or improper (whether unlawful or not) and so may cast doubt on fitness to hold a consumer credit licence.
Some of the payment protection products the FSA and the OFT considered during the preparation of this proposed guidance are insurance, which includes short term income protection, and non-insurance, which includes features of a credit agreement or mortgage where, in return for payment, the creditor agrees to freeze or waive the requirement on a consumer to make periodic repayments, or to freeze or waive interest or other charges, when a specified ‘event’ occurs, such as sickness or unemployment.
Insurance products are regulated by the FSA under the Financial Services and Markets Act 2000 (FSMA). Non-insurance protection linked to a regulated first charge mortgage contract are also regulated by the FSA. Non-insurance protection linked to a credit or hire agreement (including a second charge mortgage) will typically be regulated by the OFT under the Consumer Credit Act 1974 (CCA).
The Competition Commission’s Payment Protection Insurance Market Investigation Order came into force on April 6, 2011. It imposes restrictions and requirements in relation to the selling of PPI. The OFT is responsible for monitoring the operation of the Order.
The CCA requires most firms offering credit, lending money or involved in activities relating to credit or hire to be licensed by the OFT. The OFT produces guidance to clarify its expectations of those companies and individuals that hold a consumer credit licence.
Failure to have regard to OFT guidance can call into consideration a firm’s fitness to hold a licence. The OFT also publishes guidance setting out how the CCA applies in particular areas where this may assist firms in complying with the legislation.