PPI POLICY STATEMENT 10/12: THE ASSESSMENT AND REDRESS OF PPI COMPLAINTS, FEEDBACK ON THE FURTHER CONSULTATION IN CP10/6 SUMMARY OF KEY POINTS

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1 PPI POLICY STATEMENT 10/12: THE ASSESSMENT AND REDRESS OF PPI COMPLAINTS, FEEDBACK ON THE FURTHER CONSULTATION IN CP10/6 SUMMARY OF KEY POINTS 1. Introduction 1.1 FSA remains of the view that the rationale for the measures is sound, their scope appropriate, and their likely cost impact necessary and proportionate, and reaffirms the existing strategy, combining as it does firm specific action (e.g. past business reviews) and Handbook requirements made in the policy statement, as the most proportionate, timely and effectual way forward. 1.2 FSA has made some minor amendments to the revised Handbook provisions where it believes the industry concerns are well founded. 2. Summary of responses to CP 10/ Responses from consumer representatives expressed concern at the delay to delivering improved consumer outcomes that the further consultation entailed, but supported the: Proposed material on PPI complaint handling as fair, relevant and practical; Proposed comparative redress approach; and Statements on firms obligations to consider the position of non-complainant consumers who may have suffered detriment from PPI sales failings. 2.2 Industry responses were mainly critical of the amended proposals, and largely reasserted previous criticisms that the FSA had: Not demonstrated there was a genuine problem concerning PPI sales; Proposed an inappropriate and disproportionate solution for PPI complaints handling; Underestimated the costs of such solution; Made inappropriate statements about firms obligations concerning non-complainants; and Underestimated the possible wider prudential impact. 2.3 Industry responses also criticised the FSA for proposing revised guidance on PPI complaint handling that is not balanced with the assessment of evidence about complaints; contains flawed presumptions; takes inappropriate approaches to redress; and has a short implementation period. 3. Summary of FSA s conclusions from consultation 3.1 FSA has made a reasonable analysis of benefits, and reasonable estimate of the range of costs arising from the final measures; 3.2 The rationale for the final measures is sound, has an appropriate scope, and the likely impact is fair and proportionate, despite large costs to the industry; 3.3 The overall PPI strategy remains appropriate to address significant consumer detriment;

2 3.4 The FSA approach to the consultation has provided more than adequate information on its thinking and proposals, and has given stakeholders ample time to comment upon them; 3.5 The FSA will stand by and retain the open letter but has amended: The failing concerning inadequate disclosure of terms concerning the cancellation of the cooling off period; The failing concerning inadequate disclosure of non-pro rata refund terms; and The text concerning clear, fair and not misleading communication in the context of faceto-face and telephone sales; 3.6 The FSA shall issue final Handbook text on PPI complaint handling, implementing its approach to assessing evidence and to redress largely as proposed, but with amendments that include: Text recognising in some circumstances, it may be open to firms to remedy a sales failing in a different way to the approaches set out; Evidential provisions concerning the determination and redress of a sales failing; and Text confirming the expectation concerning firms obligations toward non-complainants potentially affected by recurrent sales problems. 3.7 The FSA is considering whether it should seek to extend the time limit for consumers to have for referring a PPI complaint to the FOS following receipt of a firm s final response letter. The FSA will also reflect on whether to allow the temporary time extension to lapse on 27 October The rationale, cost and scope of proposed package of measures: summary of criticisms and FSA stance 4.1 The open letter and FSA view of common PPI sales failings Failed to explain the Principles, ICOB and ICOBS rules behind common failings FSA does not accept that its interpretations are obscure or that regulated firms cannot understand requirements placed on them. However, to assist the industry, the FSA has included in the final listing of the failings a mapping of them in the Handbook provisions Retrospective and inappropriate use of the Principles to back fill gaps FSA does not agree and considers it dealt with this point in CP10/ No account of regulatory developments such as ICOB or ICOBS It is a fundamental aspect of outcomes-focused and Principles-based regulation that the Principles apply in situations where the need for a detailed rule has not been established and the onus remains on firms to comply with the Principles Evidence is inconsistent with failings in open letter In all three thematic reports the FSA stated firms needed to improve the information given to customers and relevant poor behaviours have been flagged up in other published 1 See for more details. 2

3 supporting material (i.e. Dear CEO letters). Such failings do not have to be set out in every general communication to remain relevant Failed to explain expectations Regulated firms have the primary obligation to understand the regulatory and legal systems in which they operate. The essence of the Principles-based approach is that the focus is on setting out the what needs to be achieved, not the how Failings within the open letter are drafted in the form of consumer outcomes Failings are drafted as common types of conduct that amount to a failure to comply with applicable requirements at the point-of-sale. For clarity, the text has been amended to more closely follow the wording of Principle There has not always been an obligation to draw specific attention to price or refund terms Principle 7 requires firms to pay due regard to the information needs of their clients, and communicate information to them in a way that is clear, fair and not misleading. However, the text of the failing concerning the non-disclosure of cancellation terms has been amended to reflect that for most sales under ICOB, firms were specifically required to disclose to the customer before the sale concluded the existence of the right to cancel the policy Disclosure of non-pro rata refund terms was never a regulatory requirement Firms obligations towards their customers extend beyond those set out in ICOB or ICOBS. However, the FSA has decided in light of responses received, to amend the text relating to this failing to reflect the agreement reached with the industry in The rationale for the proposed measures Not adequately made out the case for there being a widespread PPI problem FSA outlines the 2005 and 2007 mystery shopping exercise as demonstrating wide and deep evidence of weaknesses in PPI sales practices. In addition, the findings from the Competition Commission give weight to the view that weaknesses were resulting in poor outcomes for a significant number of consumers Not evidenced the link between PPI selling practices and growing number of complaints It is not unreasonable for the FSA to reach the view that there is a prima facie link between growing complaints and a widespread problem with the sales of PPI. Great weight is given to the 80% FOS overturn rate of the 60,000 PPI sales complaints Proposals try to remedy problems in conduct of business via complaint handling without having shown there is a genuine problem with complaints handling Using a complaints-led approach as a key part of remedying detriment is a reasonable regulatory approach, and sales and complaints about sales should be not be perceived as two separate unrelated domains. FSA has serious concerns that there is a vast difference between firms decisions and the FOS s decisions surrounding PPI complaints and therefore, it is sensible to conclude there is a genuine problem in this area. 3

4 4.2.4 Reliance on FOS decisions is under-researched and flawed There is no convincing evidence to support the industry claim that the FOS arrives at inconsistent decisions and the FSA remains confident that it is right to treat FOS data as one important source of evidence to highlight such concerns with sales of PPI. 4.3 Approach to PPI sales before 14 January Inappropriate and retrospective to apply failings in the open letter to these sales Prior to this date, the General Insurance Standards Council code constituted good practice and such code provisions are substantially similar to FSA s Principles 6 (treat customers fairly) and 7 (provide information that is clear, fair and not misleading). Therefore, breaches of the code will be indicative of breaching FSA Principles and applying the open letter is sensible in such circumstances Not rely on thematic work since January 2005 to cite problems made earlier There is extensive evidence from other sources of poor PPI sales practices before this date and in 2004, before the FSA assumed regulatory responsibility for insurance mediation, it had identified PPI selling as an area of concern and a priority going forward Ultra vires to include in the scope of measures complaints about such sales Complaints about pre-2005 PPI sales are already within the existing scope of DISP on fair complaint handling for most firms, so it is consistent such complaints should fall within the final provisions Such complaints should be rejected as time barred Decisions concerning the time barring of individual complaints is ultimately for the FOS to make. 4.4 FSA view of firms root cause analysis toward non-complainants The use of DISP and Principle 6 in lieu of a section 404 FSMA redress scheme is inappropriate FSA has long set out in treating customers fairly publications that it remains of the view that such consideration and action towards non-complainants is fair. The proposals are radically different from a section 404 review as the firm will only act towards noncomplainants if it finds recurring shortcomings through its own root cause analysis Statements are inappropriate and disproportionate in a PPI context due to the retrospective application of new sales standards Statements are not inappropriate or disproportionate in the context of PPI as the failings in the open letter are not new or retrospective Firms should be free to consider whether to contact all non-complainants, in light of Principle 6 obligations and considerations of proportionality FSA agrees there is scope for a firm to consider for itself what action would be proportionate but such action must also be fair. To make this clear the FSA has added 4

5 Handbook guidance, as proposed at DISP App 3.4.3G, and includes two non-exhaustive examples of approaches firms can take to non-complainants Costs, benefits and wider impact of the proposed measures Handbook provisions are not a proportionate response as the estimate of costs had increased three fold from CP09/23 PPI complaint numbers have increased dramatically over the last 2-3 years and in particular over the last 12 months, but there has not been evidence of any significant industry-wide improvement in firms handling of them. The cost increase does not undermine the proportionality of the proposals but reflects the large extent of the PPI problem and the size of the fairness driven transfer that will be delivered by redress Mis-statement of benefits to consumers, and underestimated likely costs FSA has made a reasonable analysis of benefits and estimate of costs and wider impact that may arise from the final measures. These remain largely in line with CP 10/ Scope and impact of measures for specific firms or types of PPI Carve outs are required for credit card PPI, home shopping PPI and regular premium first charge PPI The responses concerning specific firms and market sectors have not provided any significant new evidence to justify being carved out from the scope of the final Handbook provisions. 4.7 The position of secured lenders and secured loan brokers Secured loan approval processes differ from unsecured personal loans and are fairer due to the staged nature of the Consumer Credit Act The Consumer Credit Act does not in any way over-ride or alter a firm s obligations concerning general insurance selling under the FSA Handbook requirements Proposals fail to acknowledge the role of a broker acting as an agent for insurers and lenders involved in the PPI process If brokers feel that lenders or insurers placed undue pressure upon them, they may separately have recourse to the courts if they so choose Brokers should have the right to use the complaint forwarding rules in DISP 1.7R The matter complained of is about the sale of PPI, as opposed to a complaint about the underlying product, and so a complaint should be directed at the firm who sold the PPI. Therefore, brokers are unlikely to have grounds to invoke DISP 1.7R. 2 For details on these examples please see pages 28 and 29 of the Policy Statement 5

6 5. Handbook provisions on assessing and redressing PPI complaints: summary of criticisms and responses 5.1 The fair assessment of evidence Proposals reverse the burden of proof, by not requiring the consumer to make enough of a case There is nothing in responses that gives the FSA reason to change the view expressed in CP10/ Proposals discount valid evidence The focus of the proposals was mainly to warn firms against placing too much weight on some types of evidence and giving too little weight to other evidence, for example by failing to recognise that a consumer s oral evidence can be good and sufficient The FOS PPI questionnaire was not sufficiently detailed to elicit pertinent information Comments on the design of the questionnaire should be directed at the FOS Proposals unworkable as assessed from perspective of a reasonable customer The reasonable person test is a fair test, and one which firms should be accustomed to applying in general complaint-handling functions and in their design of product literature. 5.2 The rebuttable presumptions concerning consumer action but for firms sales failings Presumptions are inappropriate and narrow The presumptions represent a way of judging what a customer would generally have done. It is not possible to establish in every case what a customer would have done in every individual circumstance and there has to be scope for a firm to depart from the presumptions. Therefore, the presumptions remain rebuttable The but for test underpinning the presumptions is inappropriate because it is difficult to apply retrospectively 5.3 Principles of redress It remains the typical approach in the UK legal system that the customer should be put in a position they would have been in if there had been no failure to comply with its obligations on the part of the firm. Complaints about PPI are not new or unusual and therefore the but for test is a reasonable one to consider in such circumstances Approach remains flawed, irrational, disproportionate and likely to deliver inappropriately large redress to customers The FSA does not consider it necessary to change the substance of its approach. However, it has amended the Handbook text, at DISP App 3.8, to make clear that the remedies set out are not exhaustive. The guidance to firms is those remedies represent considerations and remedies that may be appropriate in a number of common scenarios. It is open to a firm to apply other remedies where it considers it would provide an effective and fair remedy for its customers, and represents a reasonable outcome in all circumstances of the case. 6

7 5.4 The referent price used in the comparative approach to redress The price remained too low, is inappropriate and amounted to price fixing The price was reached following a detailed scenario analysis which showed that the effect of a 6 referent price would be disproportionate, unfair to firms and undermine the customer protection policy intention behind the comparative approach. It was found that such distortion could be largely corrected by raising the referent price to 9. The figure is intended to be neither the lowest price that was or is available in the market, nor a reflection of what firms might have charged had more of them offered a regular premium PPI product. The FSA remains of the view the 9 referent price is appropriate. 5.5 The menu of options for implementing comparative redress FSA ought not to be identifying preferred approaches to implementation The proposals are flexible and workable and the final Handbook text is framed as evidential provisions. However, this does still give firms a degree of flexibility in how to implement it Approach D makes for expensive forward cover for the consumer 5.6 Complaints and claims The final Handbook text has been amended so as to emphasise that firms have to make clear when offering such maintained cover, that the consumer could well be able to source it more cheaply elsewhere Inconsistent to presume the customer would not have bought the policy, but then require firms to potentially pay an amount equivalent to settling a relevant claim The FSA accepted that this was unclear in the revised Handbook. Although it has not departed from the principles in CP10/6, it has clarified the intended policy position with some additional text at DISP App 3.7.6E(2). 5.7 Guidance v Evidential Provisions v Rules Provisions should remain as guidance as the introduction of evidential provisions ( EPs ) (or rules) is disproportionate and inflexible 6. Next steps Due to the prescriptive nature (and likelihood that firms will ultimately not change their behaviour if the provisions were structured as guidance), in the final Handbook text, DISP App 3.5 to 3.8 are EPs (although DISP App 3.5.2G remains as guidance reflecting its subjective nature). DISP 3.4 on root cause analysis remains as guidance. This is consistent with the status of the existing root cause analysis guidance at DISP 1.3.5G. 6.1 The FSA has amended the implementation period so firms have until 1 December 2010 to comply with all parts of the Handbook provisions. 6.2 Firms should also implement by this date guidance on root cause analysis and firms obligations to consider the position of non-complainants who may have been affected by recurrent sales problems. However, the FSA does not expect firms to commence any own initiative actions they consider necessary until mid Q1 2011, although firms may choose to start any actions sooner. 7

8 6.3 The FSA anticipates the monitoring of PPI complaint handling will run along the following lines: Stage 1 (Q3 2010): FSA will ask the 28 firms who have been reporting PPI data over the last three years to start providing more granular standardised information on PPI complaints to help assess their compliance with the new Handbook provisions; Stage 2 (Q4 2010): FSA will write to several firms (selected on a risk/impact basis) asking them for a detailed self-report on what steps they are taking to prepare for implementing the Handbook provisions (which will then be assessed and, where appropriate, challenged); and Stage 3 (Q1 Q3 2011): FSA will carry out (and/or potentially ask skilled persons to report on) detailed and intensive reviews (likely to include significant samples of recent PPI complaint files and responses) of the PPI complaint handling of several firms (selected on a risk/impact basis, including in terms of their self-reporting in Stage 2 and our other data and intelligence about them). 6.4 Where the FSA find a firm cannot demonstrate it is delivering fair outcomes, it can expect tough action. This includes, where appropriate, possible referral for further investigation and potential enforcement action. A firm must therefore take steps to ensure it revisits all complaints and/or sales that it has failed to assess and address fairly. 8