Whether they are assessing a broker for underwriting purposes or handling claims against them, insurers should ensure that brokers are aware of recent developments in the sale of payment protection insurance (PPI), so that they do not fall foul of the Financial Services Authority’s (FSA) requirements.

Selling PPI: the rules

PPI is sold against a range of debt products. It promises to cover repayments if the customer becomes unemployed or falls ill. Over recent years, the sale of PPI has worried both the FSA and the Competition Commission. Many customers have complained that they did not realise such a policy was optional or that it was subject to numerous wide-ranging exclusions. Single premium policies, in particular, are poorly understood. Under such policies the premium is added to the loan, with the result that the customer pays interest on it.

In January 2009, following extensive investigation, the Competition Commission advised that a number of measures designed to protect customers should be implemented. These include a ban on the sale of PPI at the point of sale and a requirement that key facts about the policy are prominently disclosed in marketing material. Critically, single premium policies are to be banned as from October 2010.

In line with these changes, the Insurance: Conduct of Business Sourcebook (commonly referred to as the “ICOB rules”, the rules by which a broker’s conduct is governed) has been clarified. Brokers must now take additional steps to ensure that:

  1. customers can make an informed decision before purchasing PPI; and
  2. the policy is suitable for that particular customer.

In addition, brokers should be aware that they need to provide written evidence showing that they have complied with the ICOB rules.

Dealing with complaints

An increasing number of complaints about PPI are being referred to the FSA, whose scrutiny is revealing that many brokers are falling short of the required standards. Moreover, the FSA has recently reported that some firms are “deliberately obstructing” thousands of legitimate PPI misselling complaints. This is evidenced by the fact that the Financial Ombudsman Service (FOS), which usually upholds approximately 40% of all claims brought before it, is now upholding 90% of PPI complaints previously rejected by finance brokers and/or their lender clients.

In October 2007 the FOS produced a consumer factsheet on PPI, which it updated last October. These factsheets explain how to complain and what a firm should consider when it receives a complaint. They provide a useful guide to best practice. Firms need to take the following key steps when considering complaints:

  • Review the FSA’s complaints-handling guidelines to ensure they are complying with them.
  • Consider the policy sale thoroughly, including all relevant personal information about the customer and all communications (verbal or written) with the customer before and at the point of sale. To defend a complaint successfully, a broker must show that the policy that was recommended was appropriate to the customer’s circumstances at the time; the customer fully understood what he/she was buying; and alternative insurance cover was considered.
  • Consider the complaint as quickly as possible so as to avoid an additional award for distress and inconvenience.

The future

Further developments should be expected, as several major lenders are currently appealing the ban against PPI point of sale transactions. However, a high standard of care has now been set and brokers must meet this if they are to avoid falling foul of the FSA’s requirements.