The Financial Services Authority recently published its policy statement “The assessment and redress of PPI complaints” in which it confirmed its package of measures designed to protect
consumers purchasing payment protection insurance products. These new rules impact any firm currently or previously active in selling PPI.
The scope of the rules is wide, including complaints in relation to the sale of any PPI contract, whenever it took place, however it was sold, and whether or not it is still in force. The requirements include guidance on the issues to consider when assessing a complaint and analysing the available evidence, the basis on which firms should provide redress, and the presumptions they should assume in relation to the complainants’ behaviour had they not purchased a PPI product.
The potential scale of the work involved will likely pose a serious challenge for most firms as they will have to devote time, effort and resource to understanding the requirements, designing new or adapting existing processes to assess complaints, and then training their staff in the new rules. There is also the cost they will incur in assessing and redressing complaints in line with the requirements. The FSA has predicted a flow of 500,000 complaints a year for the next five years and average redress ranging from £1000 to £2000 per complaint. The main concern for firms here is that the redress prescribed under the requirements may, in certain circumstances, be disproportionate to the actual loss suffered.
And not only will firms need to deal with complaints as they are received, they will also need to consider the position of non-complainants who bought policies from January 2005 but have not complained. They may also be required to re-open and review complaints they previously rejected.
One area of the new policy that has alarmed general insurance brokers is the statement that mis-selling will have occurred if brokers have not taken “reasonable care” to ensure that policies were “affordable in light of the customers’ income and outgoings”. One of the leading GI networks has argued that it will prove difficult for brokers to assess whether customers can afford products without an extensive examination of their personal circumstances.
The FSA has estimated the costs of implementing the redress it is demanding could be up to £3 billion. Industry estimates run to as much as £4 billion. There is a risk that some firms may not be able to survive and the FSA is reported to accept that this new policy may lead to up to 10 percent of general insurance intermediaries failing.
At its heart, this is all about ensuring customers are treated fairly – and you can’t argue with that. However, the most worrying outcome in my mind is that this latest policy from the FSA could well cause some firms to reconsider their involvement in this type of insurance protection. The financial services partner at law firm Beachcroft LLP has been quoted as saying that the policy represents “very bad news for the financial services industry and, in particular, sellers of PPI”. Another law firm, CMS Cameron McKenna, has pointed out that firms are receiving thousands of “bogus” complaints with claims management companies involved in six out of 10 new cases. It believes that the right of firms to robustly defend those complaints is now being challenged by the FSA.
While PPI it is not appropriate for everyone and you could argue that it shouldn’t be tied to any one specific credit vehicle, this much maligned insurance has provided a lifeline to thousands of consumers. You only need look at the volume of mortgage payment protection claims experienced by insurers in the three years since the credit crunch took hold to see how many homeowners have benefitted from this type of policy. And I guess this is my primary area of concern. Given the fact that the FSA has said that it has had fewer concerns about the sales of regular premium first charge mortgage PPI, and that so far, the number of complaints about this PPI, and the proportion of them rejected by firms but overturned by the FOS, is relatively lower than for other PPI types, I question the benefits of including complaints about this type of PPI in the scope of its provisions.
Since it took over the regulation of PPI, the FSA has taken action against 24 firms and individuals for PPI failings resulting in fines totalling approximately £13 million. In light of the new rules to be adopted by 1st December this year, there is speculation that two and three quarter million people could be refunded as much as £2.7 billion for allegedly being mis-sold PPI. Make no mistake. The FSA will be monitoring firms closely to ensure its new standards are adhered to and will not hesitate to take action if they don’t.
