Response Paper. Response to comments on Bulletin 8: Payment protection insurance and unsecured personal loan comparative tables.

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1 October 2007 Response Paper Bulletin Number 8 Response to comments on Bulletin 8: Payment protection insurance and unsecured personal loan comparative tables

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3 Contents 1. Introduction 3 2. Responses to main issues raised 4 3. Responses to other common issues 6 4. Next steps 11 The Financial Services Authority 2007

4 If you require further copies of this paper, please contact: Anna Nicolaou The Financial Services Authority 25 The North Colonnade Canary Wharf London E14 5HS Telephone:

5 1 Introduction 1.1 In July 2007 we published a bulletin setting out our proposals for a comparative table on payment protection insurance (PPI) and unsecured personal loans. The bulletin asked for comments and feedback on our proposals. 1.2 We received a wide range of useful comments, and this paper gives our response to the main issues raised, as well as to several other common issues. We will not be responding to comments individually, and won t be attributing any of the issues raised. 1.3 In general, the comments were supportive of our plans to develop tables for PPI and unsecured personal loans. 1.4 It is important to note that the bulletin just gave an overview of our proposed approach, and that the tables will include explanatory text to help consumers answer questions and understand information shown. Financial Services Authority 3

6 2 Main issues Unsecured personal loan tables 2.1 Most respondents supported our plans to develop unsecured personal loan tables. But some questioned their usefulness given our intention to use the typical annual percentage rate (APR) rather than risk-based pricing, and the fact that comparative information on loans is already available on several other websites. Other respondents asked whether it is necessary to include unsecured personal loan information in order to provide a shopping-around mechanism for unsecured personal loan PPI. Response: We have considered the points raised, and will continue to develop PPI tables, but will put unsecured personal loan tables on hold. We still think that loan tables will be a valuable addition for consumers, but our primary aim now is to help consumers shop around for PPI. We believe we can achieve this without including comparative information on unsecured personal loans. As a result of this decision, when the tables are up and running, consumers will be able to compare the PPI element of a product they are offered by a lender/lenders with products on offer from standalone providers. Involvement of Defaqto 2.2 A number of respondents expressed concern at the involvement of Defaqto (a financial product research company) in collecting data for the new tables. A common concern was that Defaqto might use the data collected for the comparative tables in its commercial data provision service. Another question raised was about the tender process used to appoint Defaqto. Response: We appointed Defaqto via a tender process (complying with European law) when the comparative tables were first created. This contract was subject to another tender process (again complying with European law) in 2006, which reappointed Defaqto, although we considered alternative suppliers in both instances. 4 Financial Services Authority

7 In both cases the tender process considered both matters of cost and the firms abilities to provide the required service. We have service-level agreements with Defaqto to ensure standards are maintained. When considering developing a new table, it is obviously more cost effective to use the current data supplier for the tables. However, we also considered Defaqto s ability to deliver, and if we had doubts about this we would of course have looked at other options. When Defaqto undertakes the initial data collection exercise for the PPI tables, firms will be able to choose whether this data is used only for the FSA comparative tables, or if it can also be featured on Defaqto s commercial site. Firms can also change this at any time. This will not apply to any information you already provide to Defaqto, or that it already collects as part of its commercial activities. Defaqto s data collection for the comparative tables is in no way linked to their production of market reports etc. Pricing/cost emphasis 2.3 Several respondents expressed concern that the tables, as proposed, placed too much emphasis on the cost of the PPI products, and not enough emphasis on the features and benefits. Response: We have looked at the proposed structure of the tables in the light of these comments and have made some changes. Firstly, the cost of the product won t be the first thing the consumer sees when accessing the tables. There will be a mixture of features, benefits and cost information on the first page. Secondly, the sorting and filtering functions will include more product features respondents felt these were heavily biased towards cost. Some of the purely cost focussed filters will also be removed. Store cards 2.4 Some respondents asked why we weren t intending to feature PPI for store cards. Response: Having revisited this issue, we are considering adding PPI for store cards on the tables alongside PPI for credit cards. PPI for secured loans 2.5 Many respondents queried our intention to exclude PPI for secured loans. Response: Having revisited this issue, we are considering adding a separate table for PPI for secured loans. Financial Services Authority 5

8 3 Other common issues Consistency of terminology 3.1 Many respondents felt that care was needed in defining various terms and using consistent terminology Response: We appreciate the need for consistency here. We are aware of the guide the Association of British Insurers (ABI) will publish later this year, and are working with it to ensure we are in line with its proposals. However, we will also need to explain terminology for consumers. Competition Commission work 3.2 One issue raised was that the Competition Commission are also in the middle of some significant work on PPI, and some respondents expressed concern about how the tables would fit in with this. Response: Before issuing the bulletin, we spoke to the Competition Commission at length about our plans and proposed timescales. It is comfortable that our proposals won t conflict with its investigation into PPI (which will continue for at least a further 12 months). There is no conflict between the objective of the FSA s comparative tables which are practical tools to help consumers shop around and the CC s investigation, which will be a comprehensive analysis of all factors affecting competition in the market. Consumer testing 3.3 Some respondents felt it is necessary to consumer test the proposed tables to see if users can understand the questions they are being asked, and the information they see as a result. Response: We agree and will build consumer testing into the timescales of the project. 6 Financial Services Authority

9 Publication of league tables 3.4 Some replies asked for more information about the reference to possible publication of league tables for PPI. Response: There are no plans at present to publish league tables. In our Bulletin where we referred to this, we said we would possibly publish league tables based on firms complaints handling on PPI. Choices questions and eligibility 3.5 Respondents asked about the questions we are proposing to ask before showing a consumer the table of results. They were comparing these questions with eligibility checks as part of the PPI sales process. Response: The comparative tables are a tool to help consumers shop around; they aren t part of a sales process and don t establish a consumer s eligibility for a product. We ask questions before a consumer sees the results table in order to narrow down the products the individual is shown. However, the tables aren t making any suitability recommendations. The tables will also have supporting text explaining that an individual shouldn t buy a product based on what they see in the tables; they should check the details with the provider or an adviser. Cost over term 3.6 Some comments asked about our proposals to show the cost of PPI over the term of the loan or mortgage. They pointed out that many consumers pay off their borrowing before the full term. Response: We agree that it is more relevant to show consumers the cost of PPI over the term they are likely to keep the loan/mortgage for, and will amend the questions so that the user can select the term of the PPI cover. Waiting period/excess 3.7 Many respondents felt that first payment date wasn t a useful way of explaining whether there is a waiting period before a consumer receives payment, or whether the policy pays out back to day one etc. Response: We are looking at other ways of presenting this information. Where a policy has a number of different versions that vary by waiting period, we intend to show all of these versions on the tables. Financial Services Authority 7

10 Life cover 3.8 A number of responses indicated that life cover is often included as part of the core cover of a PPI policy, and felt that this should be more prominently featured on the tables. Response: We will add a column to the tables to show if life cover is included in the PPI product. This will not be the case for MPPI, as our sources indicate this is never included as part of the core cover. Yes/no answers not giving full details 3.9 Some respondents queried our intention to include Yes/No answers to questions about the exclusion of backache, stress, pre-existing conditions and other exclusions. They felt this would not give full information on the criteria for including/excluding such things. Response: Where the criteria for inclusion/exclusion is not as straightforward as a yes or no answer, we will give a link to the product summary page which will give a full explanation of the conditions. For pre-existing conditions, if they are covered after say a 12-month treatment free period, we will enter 12 months on the table, with a link to the product summary page. This will explain the consumer has to be treatment free for that period of time. Where there are time periods relating to other exclusions, these will also be detailed. For backache, we have been informed that some providers provide restricted cover for the condition. This could be where they will provide cover subject to certain medical evidence etc. We intend to add a restricted indicator for backache to reflect this. Joint policies 3.10 Some replies pointed out the need to explain if benefits under joint policies are split in proportion. Response: We will include information about the split of benefits for MPPI, as this is the product area where joint cover is available. Provider information 3.11 Responses indicated that it was unclear what the definition of provider would include ie if it was just the product manufacturer, or if it would include third party distributors and brokers. Response: We are intending to cover all different types of provider/broker arrangements, and will be seeking data from a wide range of companies. Ultimately, a product will be listed under the provider name that resonates with the consumer ie where they go to buy the product. 8 Financial Services Authority

11 Coverage 3.12 Still on the provider theme, some replies asked how we will ensure we contact/get data from all involved in the PPI market. Response: Defaqto already collects data on PPI from a wide range of providers, and we will use its contacts as a starting point, as well as using other market intelligence. When we contact firms as part of the data collection exercise, we will ask which channels they make their products available through. This will give us information about the other third party distribution arrangements we need to detail. Minimum sales thresholds 3.13 Many respondents were in favour of our proposed minimum sales thresholds. But some felt they were too low, while others asked why they didn t apply to standalone PPI providers as well. Response: We will abolish thresholds for the PPI tables, and will invite all providers, however small, to participate. This means that anyone who chooses not to provide data will be listed as a non-participant. Price differentials 3.14 Some respondents asked how we would deal with price differences in products depending on a consumer s age or where they buy their policy (eg direct or from a broker). Response: We will hold separate product records where there are differences in price and/or other features. The questions a consumer is asked before getting to the table of results will ensure they see the appropriate information. Portability 3.15 A number of respondents asked why we aren t intending to include PPI products that aren t portable. Response: Having reviewed the situation with portable/non-portable PPI products, we agree it makes sense to include non-portable products, as they feature significantly in parts of the PPI market. We will also add a portability indicator to the MPPI tables, as this is the area where both portable and non-portable products are available. Financial Services Authority 9

12 Cost of credit card PPI 3.16 We received several comments on our proposals for detailing the cost of PPI for credit cards. Some questioned why we needed to include cost per 100 of cover, cost per 100 of benefit and % of balance covered, and others felt showing all this information might confuse consumers. Response: As part of the review of Insurance Conduct of Business (ICOB) rules, we have consulted firms on how the cost of PPI for credit cards might be shown in a meaningful way so that customers can make an informed decision. For the moment, we propose to show the cost per 100 of benefit and % of balance covered on the tables. These indicators will enable consumers to compare different PPI offerings without overloading them with information and confusing them. The way the cost of PPI for credit cards is shown on the tables may change subject to the outcome of the ICOB review. Accident/Sickness/Unemployment combinations 3.17 Some responses questioned whether it is actually possible to get a PPI policy covering any combination of accident, sickness and unemployment cover. Replies suggested that the choice was actually between; accident and sickness; unemployment; or accident, sickness and unemployment. Response: We take this point on board and will redraft the choices question to reflect the choice between the elements as described above. 10 Financial Services Authority

13 4 Next steps 4.1 Now that we have considered all comments received, we are finalising the content of the tables and our data collection documentation with Defaqto. We will also start work with our technical team on building the new comparative table. 4.2 The timetable from here for data collection is: welcome pack despatched to providers November 2007; data received and audited February 2008; and launch March Financial Services Authority 11

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15 Pub Ref: The Financial Services Authority 25 The North Colonnade Canary Wharf London E14 5HS Telephone: +44 (0) Fax: +44 (0) Website: Registered as a Limited Company in England and Wales No Registered Office as above.