Payment protection insurance back in the spotlight as banks demand review

Payment protection insurance back in the spotlight as banks demand review

19 October 2010 / by Paul Dicken

The controversial area of payment protection insurance hit the headlines last week with some of the major high street banks launching a legal review of a new policy statement from the Financial Services Authority (FSA).

That was followed by the confirmation that point-of-sale PPI will be prohibited.

Payment Protection Insurance (PPI) is a type of insurance available when taking out a loan or some form of credit to protect against your failure to make repayments.

In recent complaints data published by banks, PPI complaints increased by 53 per cent to 265,949 in the first half of 2010.

The FSA said in 2009/2010 49,196 complaints made to banks were referred on to the Financial Ombudsman Service (FOS).

Nine out of ten of those complaints referred to the FOS were upheld. The widespread concern about the way PPI is sold to customers prompted the FSA to make changes to its policy on how firms provide PPI and deal with complaints.

Publishing an open letter with its new policy statement in August, the FSA listed ongoing failings firms are making in PPI sales. These included: pressuring customers into taking out a policy, automatically including a PPI quote in a loan quotation and even leading customers to believe that a policy had to be taken out in order to obtain a loan or goods.

Judicial review


On 8 October the British Banking Association – the group that represents the major high street banks – announced it was requesting a review of the FSA policy in the High Court.

The FSA said it would ‘vigorously contest the BBA’s judicial review of the new complaint handling procedures for the PPI market’ but banks should continue to process existing complaints.

In defiance of this, banks, including Lloyds Banking Group the largest and most complained about UK bank, said they would be suspending the processing of complaints affected by the new policy.

The British Banking Association said: “If your complaint will be impacted by the judicial review, and cannot be resolved at this point, then your bank will write to inform you.”

One of the major high street banks, Santander, took a different view, issuing a statement saying: “We are not involved in the legal action being pursued by a number of UK banks with regards to Payment Protection Insurance (PPI). We will continue to deal with any issues our customers put to us regarding PPI in accordance with FSA rules.”

Why the legal challenge?

It would appear that the banks involved in the BBA action have taken issue with the FSA position that firms should apply the new policy ‘when considering their point of sale obligations for earlier sales, including in the context of assessing complaints about such sales.’

Explaining its decision to challenge the new policy the BBA said the case was about the FSA applying ‘new standards to old sales’.

“We believe the FSA is effectively creating a precedent which permits it to apply new rules to previous sales – even where those sales were regulated by other FSA rules,” the BBA said.

The FSA is still advising customers with existing complaints that firms are expected to continue handling complaints.

“If customers are unhappy with how their complaint has been handled they may refer it to the Financial Ombudsman Service,” the FSA said.

The current suspension of complaints by major banks has echoes of the suspension of complaints processing in relation to bank charges for exceeding overdraft limits in 2009.

However, the waiver for bank charges complaints was authorised by the FSA while the Supreme Court heard a test case brought by the Office of Fair Trading.

Competition concerns

On 14 October, in a separate development, the Competition Commission confirmed it was pressing ahead with regulation to prevent organisations from completing a sale of PPI at the same time as credit is agreed.

The move is designed to create competition for PPI where currently a loan provider faces little competition for its PPI products.

Peter Davis, inquiry chairman and Competition Commission deputy chairman, said: “In essence, there are clear benefits of putting our remedy package in place. First we found that some consumers would actually value an opportunity to reflect on their options away from the credit point of sale.

“Second, the package of remedies, including the point-of-sale prohibition, will introduce competition which is likely to bring substantial benefits to customers in terms of lower prices, better products and more choice.”

The only type of PPI that will be exempt from the point-of-sale prohibition is known as retail PPI – credit taken out when buying products through shopping catalogues.

The Competition Commission research found that the majority of the 12million PPI sales in 2009 were made when a consumer took out a loan, credit card or other type of credit, with many people unaware that they could buy PPI from another provider.

Whether the FSA’s new policy to improve the PPI market will go through unchanged will be up to the High Court Administrative Division, with the BBA expecting a hearing within the next few months or early 2011.

© Fair Investment Company Ltd