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