FEBRUARY Payment Protection Insurance challenges ahead

Transcription

1 FEBRUARY 2009 Payment Protection Insurance challenges ahead the

2 Contents Page Introduction 2 Competition Commission Market Investigation into PPI 2 PPI and the FSA 3 Market conditions and the requirement to treat customers fairly 4 Financial Ombudsman Service complaints 4 The future 5 Appendix The Competition Commission's Remedies 6 Contacts

3 Introduction Last week the Competition Commission (CC) published its final report on the remedies to be introduced following its investigation into the Payment Protection Insurance (PPI) market. The report was disappointing for insurers and distributors in that it adopted the remedies proposed in the CC's provisional decision with only minor changes, making PPI harder and more expensive to sell. In addition, PPI continues to be an area of considerable focus for the Financial Services Authority (FSA) and, with increased complaints, the Financial Ombudsman Service (FOS) has been raising concerns about systematic issues in relation to PPI. In this briefing note we look at the latest developments in relation to PPI from the CC, FSA and FOS and consider the future for PPI in the UK. Competition Commission Market Investigation into PPI On 27 January the CC published its final report into the PPI market, setting out the remedies it has decided are needed to introduce competition between suppliers. The report adopted the remedies proposed in the provisional decision published in November 2008, with only minor changes, most notably the reduction in the prohibition period between the provision of credit and the sale of PPI from 14 to 7 days. During the course of 2008, the CC undertook an investigation of the PPI market following a referral from the Office of Fair Trading (OFT) in In its provisional findings report, published in June 2008, the CC concluded that distributors of PPI, such as banks, mortgage providers and credit card providers, faced little or no competition when selling PPI to their credit customers. They reached the view that the resulting point-of-sale advantage makes it difficult for other PPI providers to reach credit providers customers and in the absence of such competitive pressure, consumers are charged high prices. Details of the remedies to be introduced are set out in the Appendix to this briefing note. In summary they are:- a prohibition on selling PPI at the credit point-of-sale and on the distributor or intermediary selling the credit contacting the customer for seven days thereafter; the provision of certain information in marketing materials and the provision of a personal PPI quote; the requirement to provide certain information to the FSA and OFT; the requirement to provide an annual statement; and a prohibition on the sale of single premium policies 1. PPI providers already have more stringent disclosure requirements under the FSA's Insurance: New Conduct of Business Sourcebook (ICOBS) than other insurance products but, as a result of the recent CC's market investigation, the regulatory landscape for the sale of PPI is set to change significantly. The remedies are obviously aimed at making the product more transparent and encouraging customers to shop-around. The most contentious issue, however, is the prohibition on distributors and intermediaries from selling PPI to their credit customers within seven days of a credit sale. The credit industry feels that, against the back-drop of financial turmoil and rising unemployment, this barrier undermines a valuable product and it has been critical of the decision to retain this remedy. The Finance & Leasing Association, for example, said " the Commission has thrown the baby out with the bath water. By preventing customers from protecting their repayments at the time they take out a loan, the Commission has made it much less likely that they will do so at all. Many more people will go without the safety-net provided by PPI, just when unemployment is reaching record highs. It is important for people to have access to information about protecting their payments, but by banning the 1 Following an announcement by the FSA on 20 January 2009, Alliance & Leicester, Barclays, The Co-Operative Bank, Lloyds Banking Group (including Lloyds TSB, Halifax, and Bank of Scotland), and RBS/Natwest are to stop selling single premium PPI with unsecured personal loans by the end of January

4 sale of insurance at the same time as taking out a loan, the Commission has failed to understand consumer buying behaviour. These remedies will place a heavy burden and cost on the sale and administration of PPI policies and a number will cut across existing legislative requirements, notably the Consumer Credit Act 1974, which will have to be amended in order to comply with these remedies. Firm's sales processes will also need to change. All this at a time when we are seeing increasing loss ratios as a result of the economic climate. These remedies are expected to come into force during 2010 and more clarity over the detail is required. For example, the content of the personal PPI quote needs to be determined. Currently it is proposed that the information requirements will be in place by April 2010, with the rest of the remedies being introduced by October Firms should be considering the implications of these remedies to their current business models and, in due course, will need to make the necessary changes to their products, sales procedures and customer documentation in readiness for their introduction. PPI and the FSA ICOBS Until the remedies are introduced in 2010, firms must continue to comply with the existing ICOBS requirements. This was reiterated in a statement issued by the FSA following the publication of the CC's final report. Whilst the FSA view the final report as being complementary to its work to improve standards, it also sent a clear message that it will continue to look closely at the full range of regulatory tools and actions available to it to ensure that firms selling PPI meet its requirements to enable customers to make informed purchasing decisions. The FSA has stated that this may include consulting on new rules, if necessary. The FSA has also provided guidance on the appropriate timing of compulsory ICOBS disclosure during delayed PPI sales, following the introduction of the remedies. The prohibition period adopted by the CC does not prevent firms from undertaking the full PPI sales discussion at the credit point-of-sale and then subsequently contacting the customer, after seven days following the conclusion of the credit sale, to conclude the sale of PPI. Where the customer initiates the contact with the firm, this time limit is reduced to 24 hours after the conclusion of the credit sale. The FSA consider that as the customer is being asked to make the substantive purchasing decision during the follow up discussion, which is the effective PPI point-of-sale, it would expect the firm to undertake all the required ICOBS PPI disclosures during that further discussion (irrespective of whether they were also provided at the point-of-sale). FSA enforcement actions Enforcement actions in relation to the sale of PPI continue and the fines imposed are some of the biggest applied by the FSA. Several household names have been the subject of enforcement action and smaller regulated firms, such as motor dealerships, have also been subject to fines or public censure. The FSA is also now looking to make individuals holding significant influence functions accountable for their firm's failures. In September 2007 the FSA announced that it would be imposing larger fines on firms where the standard of PPI sales fell below the required level. It felt that firms had been given due warning of their obligations to treat customers fairly, both generally and in relation to PPI in particular. Whilst the facts of the cases are obviously different, the table below demonstrates a marked shift in the level of fines levied, consistent with the FSA's commitment

5 Pre September 2007 Post September /06 Loans.co.uk Limited 455,000 01/08 HFC Bank Limited 1,085,000 12/06 Redcats (Brands) Limited 270,000 05/08 Land of Leather Limited * 210,000 01/07 GE Capital Bank Limited 610,000 07/08 Liverpool Victoria 840,000 02/07 Capital One Bank (Europe) Plc 175,000 10/08 Alliance & Leicester 7,000,000 09/07 Hadenglen Home Finance plc* 133,000 11/08 Egg Banking plc 721,000 * The chief executives were also individually fined in these cases. The FSA is now in its third phase of thematic work on the sale of PPI. It has stated that it is yet to see significant improvements in the treatment of customers being sold this product, particularly in respect of single premium PPI. In its latest thematic update, the FSA made it clear that it is escalating its regulatory intervention and is considering the appropriate action to: deal with on-going non-compliant sales practices; and identify and remedy non-compliant past sales. The FSA plans to publish a further update on its PPI thematic work in the first quarter of 2009 and we expect there to be further enforcement action. Market conditions and the requirement to treat customers fairly In the current economic climate firms are experiencing increased levels of PPI claims and further increases, particularly in respect of unemployment claims, appear likely. Whilst loss ratios will obviously be a fundamental concern to any commercial business, firms underwriting PPI need to be mindful of their obligations to treat customers fairly. In circumstances where firms wish to vary the terms of the policy or increase premiums, careful consideration will need to be given to the contractual terms in the policy conditions to ensure any variation term complies with the requirements of the Unfair Terms in Consumer Contracts Regulations 1999 and that the firm can rely on the enforceability of variation terms when making these changes. Increases in premiums and any cancellation of policies is likely to come under increased scrutiny. Financial Ombudsman Service complaints In the December issue of 'Ombudsman News' the FOS confirmed that the total number of complaints about PPI received since January 2008 had exceeded 25,000. The FOS has previously stated that a significant proportion of these claims are upheld, suggesting the existence of widespread consumer detriment. Complaints fall into 3 main categories:- 1. the customer saying that PPI was mis-sold to them; 2. the refund received for single premium PPI, due when a loan is paid off early, being less than expected; and 3. claims being turned down. This includes cases where a claim is rejected because of an exclusion clause which the consumer says was not adequately disclosed at the point of sale. 2 In July 2008, coupled with information arising from the FSA and the CC, the FOS came to the view that there appeared to be systemic issues in relation to PPI and formally wrote to the FSA inviting it to consider wider regulatory action. This action was taken on the basis that individual consumer complaints are not the most appropriate way to deal with, what 2 Financial Ombudsman Service Update on Payment Protection Insurance (PPI)(29 January 2009)

6 appeared to be, a systemic problem. The FSA is considering the FOS's concerns in the context of its broader strategy and is working with the FOS on the appropriate response to the marked increase in the volume of PPI complaints. Last year PPI was the most common form of complaint dealt with by FOS. Though some of this is likely to be linked to the increased negative publicity about the sale of PPI, it is unlikely that these complaints will diminish in the near future. Firms should ensure that an overview of complaints received is reported in its management information and that steps are taken to address the underlying issues raised by the complaints. The future As discussed to above, the CC remedies will undoubtedly increase costs for both the distributor and the insurer, at a time of increasing claims. That said, whilst we are unlikely to return to 2007 premium income levels 3 any time soon the credit industry continues to believe in PPI as a valuable product. What is likely to change is the market position of stand alone providers who will have better access to customers following the end of the point-of-sale advantage currently enjoyed by credit providers. There is also likely to be a reassessment of current agreements between credit providers who sell PPI and insurers. It may be, however, that firms look for more innovative solutions. One of the alternatives to PPI being offered at the point-of-sale may be for creditors to consider more closely the provision of 'debt waiver' as part of their credit agreements, rather than offering insurance to their customers. The creditors exposure on a portfolio to debt waiver can be insured by the creditor. We understand that the US market operates in this way. The requirement to provide APRs has been seen as a barrier to this in the UK, but that may now change. Whatever the outcome, firms selling PPI will need to give careful thought to the issues raised in this briefing note and consider their business models accordingly. If you require any assistance in this regard please contact one of our team who will be happy to advise. Written by David Heffron and Zoe Denison Addleshaw Goddard LLP 3 customers in the UK paid 3.8 billion in PPI premiums (Source: CC's Market investigation into payment protection insurance (29 January 2009))

7 Appendix The Competition Commission's Remedies The point of sale prohibition A prohibition on selling PPI at the credit point-of-sale. PPI cannot be sold by a distributor or intermediary to a customer within seven days of selling credit to that customer, or the provision of a personal PPI quote, if one was not provided during the credit sale period 4. The consumer can buy PPI from any other provider at any stage and during the prohibition period. Whilst the distributor or intermediary cannot re-contact the customer for seven days, customers will be able to contact the distributor or intermediary by internet or telephone and purchase a PPI policy on their own initiative from 24 hours after the credit sale. Firms will need to be able to verify that any sales within this exemption were genuine consumer initiated sales. Any firm covered by this prohibition who is selling the policy covered by the quote must obtain confirmation that the customer has seen the personal PPI quote, before any PPI sale can be made. Personal PPI quote Distributors and intermediaries will be required to provide a personal quote in a durable medium, which will clearly state the cost of the PPI policy. The price and terms offered in personal PPI quotes given at or after the point of sale must remain valid for at least 14 days after the start of the point-of-sale prohibition period. If this quote is not given at the point of sale or is provided by a stand alone provider it must be provided when the provider offers the customer PPI cover. Provision of information in marketing material All providers are required to provide certain information prominently in PPI marketing material including: - the price of their PPI, expressed in a common format of monthly cost per 100 of monthly benefit; - an indication of the benefits of the PPI product; - a statement that PPI is optional and available from other providers; and - information on PPI alternative providers and other forms of protection products can be found on the FSA's moneymadeclear website. Provision of information to third parties All providers must provide certain information on PPI policies to the FSA (in a format the FSA specifies) and the CC has made a recommendation to the FSA that it uses this information for its PPI price comparison tables. Providers will also be required to supply information to the OFT for the purpose of monitoring the remedies package and to provide information about their claims ratios split by product type, for the previous year, to any person on request. The single-premium prohibition A prohibition on the selling of all single premium PPI policies. Premiums can be charged monthly or annually. If an annual premium is charged and the customer decides to terminate the policy, then a pro-rata rebate must be given. No separate charges can be levied on a customer for administration or other costs arising from the set-up or early termination of a PPI policy. 4 Defined as starting with the consumer's application for credit and lasting until the consumer is provided with confirmation that the credit provider is bound to provide the credit

8 Unbundling retail PPI from merchandise cover Where distributors of retail PPI offer an insurance package containing PPI and merchandise cover, they must also offer, as a separate item, PPI cover alone. Requirement to provide an annual statement A requirement on all providers to provide an annual statement for PPI customers, including information similar to that provided in the personal quote, to encourage customers to review their policy annually and to make it easier for customers to decide whether to switch. The statement must be provided separately to any information on a credit product held by the customer but might be included with other information relating to the PPI policy

9 Contacts Amanda Hulme - Partner David Heffron - Partner amanda.hulme@addleshawgoddard.com david.heffron@addleshawgoddard.com Clare Hughes Managing Associate Rosanna Bryant Managing Associate clare.hughes@addleshawgoddard.com rosanna.bryant@addleshawgoddard.com Karen Bennell - Associate Zoe Denison - Associate karen.bennell@addleshawgoddard.com zoe.denison@addleshawgoddard.com