Select Committee on Treasury Written Evidence

Supplementary memorandum submitted by the Financial Services Authority


  1.  When we gave evidence to the Committee on 8 November, we undertook to provide further information on the legal position on nil refunds of single premium Payment Protection Insurance (PPI) policies.

  2.  The Committee expressed concern at the finding in our thematic work, published on 4 November, that five of the 45 firms we visited offered single premium PPI policies which did not allow either:

    (i)  for the refund of a proportion of any unused premium or;

    (ii)  (in the absence of a refund) for the policyholder to take the benefit of the unused premium in some other way,

in the event the policyholder repaid the linked credit product early but outside the statutory cancellation period ("nil refund terms").

  The Committee enquired how we view this practice measured against the Unfair Terms in Consumer Contracts Regulations 1999 ("the Regulations").

  3.  We said in our 4 November report on the findings of our review of the PPI market that nil refund terms may be unfair under the Regulations. In the course of our thematic work we identified a number of single premium PPI policies with nil refund terms and launched a project to look into this further.

  4.  This project focuses on single premium PPI policies, which are typically sold with loans and sub-prime mortgages. The premium is usually added to the loan or mortgage at the outset of the agreement, with interest charged on top.

  5.  Regulation 5 of the Regulations provides that:

    "A contractual term which has not been individually negotiated shall be regarded as unfair if, contrary to the requirement of good faith, it causes a significant imbalance in the parties' rights and obligations arising under the contract, to the detriment of the consumer".

  Our preliminary analysis of PPI policies suggests that a nil refund term may breach that Regulation. On 11 November we wrote to a number of PPI firms whose policies contain nil refund terms to determine whether or not the terms are unfair under the Regulations. We plan to publish the findings of this work in April 2006.

  6.  Our power to address unfair contract terms includes seeking undertakings from firms that they will stop including the term in new contracts and stop relying on it in contracts which have been concluded. If a firm either declines to give such an undertaking or gives such an undertaking and fails to follow it, we will consider the need to apply to court for an injunction. If we decide to take action in a case, we publish on our website any undertakings received by firms or injunctions granted by the courts.

2 December 2005

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