Supplementary memorandum by the Financial
A. PAYMENT PROTECTION
Current work on refunds
1. The Committee has raised concerns about
some firms' approach to providing refunds of PPI premiums in various
2. Industry trade associations have recently
agreed that firms should not include so-called "nil refund"
terms in their PPI policies. Firms will therefore give their customers
refunds if they repay the associated loan early or if they choose
to cancel the PPI policy without repaying the loan, except where
the policy is near its end, the customer has made a successful
claim or if a customer chooses to transfer cover to another product.
3. As these arrangements have only recently
been agreed with the industry, not all firms will have revised
their contracts and other arrangements accordingly. Firms may
also need to amend their internal systems to be able to reissue
the loan without the PPI. The firm referred to in your letter
has confirmed to us that they will provide partial refunds of
the premium where consumers choose to cancel the policy. They
are in the process of amending their contracts and systems to
4. Our work to secure improvements in firms'
handling of refunds continues; the improvements we seek include
clearer communication by firms to consumers on the circumstances
in which refunds are available and the amount that is likely to
be refunded. We will further publicise, by the end of March 2007,
the concrete benefits this is delivering to consumers when this
work is completed. We will also be checking that these refund
arrangements are being implemented effectively across the industry.
The wider PPI market
5. As the Committee is aware, the OFT is
of the view that there are deep-rooted barriers to effective competition
in this market which go to the heart of why consumers fail to
obtain a fair deal. They are currently consulting on whether they
should refer this issue to the Competition Commission; we continue
to assist the competition authorities in their work.
6. In parallel, we are taking forward a
programme of action to deliver the improvements we must see in
the way PPI is currently sold.
We are urgently examining a range
of options for adding PPI to our suite of comparative tables,
including giving information on price and commission. This is
not straightforward because of the differences in the PPI products
sold by different providers. We will have decided by the end of
March 2007 what should be done. In the meantime, we will build
on the information that is already on our consumer website. In
particular, information on PPI and other insurance protection
products will be more accessible and clearer when we launch our
new consumer website next month. This material will be promoted
as part of a consumer awareness campaign on general insurance
starting in February 2007.
Enforcement: as a mark of the seriousness
with which we are following up deficiencies in sales standards,
we have referred 10 firms for investigation, with a view to possible
enforcement action. We have recently fined two of these firms,
generating significant media coverage to follow that driven by
our joint announcement with the OFT in October. This will underline
to all firms in the market the seriousness of having effective
controls in this area. We will be making further announcements
about the outcome of our enforcement investigations in the coming
Supervisory work: in addition to
formal discipline, we will follow up with firms in this marketthose
involved in our thematic work and othersto ensure that
they have taken appropriate action in the light of our findings.
If they have not taken appropriate action, or if we consider it
insufficient, we have not ruled out further referrals to Enforcement.
Trade associations: the industry-led
initiatives which concentrate on, among other things, information
for consumers and better training material for firms are slowly
beginning to bear fruit. The Association of British Insurers and
the Finance & Leasing Association have recently launched consumer
guides for consultation. We will press the industry on what steps
they are taking to get this material to consumers at the right
time. These guides complement the advice to consumers that we
included in our October announcement and which feature on the
consumer pages of our web site.
FSA communications to small firms
in the PPI market: we are currently running a series of national
roadshows aimed at motor dealers, in conjunction with the National
Franchised Dealer Association, to reinforce the standards we expect
of them. This includes how we expect insurance products to be
sold alongside motor finance, an area of particular deficiency
identified by our latest work. We are also setting up a dedicated
motor dealer section on our Small Firms website to encourage greater
compliance by such firms, which typically transact insurance business
as the "third leg" of their business (eg a car sale,
the financing of the purchase and then the associated PPI).
Rule changes: we are not convinced
that the existing general insurance regime, introduced in January
2005, is delivering the protections that customers deserve in
this area. We are, therefore, examining the case for changes to
existing rules or the introduction of new rules. This is being
carried forward as part of the review of our regime for general
insurance regulationon which we sent the Committee a separate
note on 15 November. We will publish the outcome of that review
in the first quarter of 2007.
7. The Committee raises concerns about the
transparency of the FSA's work on financial promotions, compared
with the approach adopted by the Advertising Standards Authority
8. The Committee has urged the FSA to be
more willing to "name and shame" individual firms. The
Financial Services and Markets Act 2000 (FSMA) and the administrative
law requirement, which applies to public bodies, to follow due
process, restrict our ability to do this. Unless a firm expressly
agrees to be named, we are not permitted to issue statements which
amount to "public censure" without first taking the
matter through our formal disciplinary process.
9. Our overall strategy to dealing with
financial promotions in the financial services sector is to be
proactive. We systematically scan print, internet and broadcast
media in high risk areas and we do not rely on consumer complaints
to alert us to problems. This also enables us to examine other
compliance issues in the firms concernedour experience
is that deficient advertising can indicate more general problems
in the way a firm is managed and controlled.
10. In the course of this proactive work,
we are often able to spot pre-emptively material threats to consumers
and take swift action to head them off before consumers are harmed
and before complaints are made. Our ability to do so relies on
resolving the vast majority of issues in discussions with the
firms, without using our formal disciplinary powers. Since April
2004, we have pursued more than 930 cases directly with firms.
While we did not need to take action in all these cases, in around
60% of them firms quickly amended or withdrew the advertisements
without the need for formal disciplinary action. In a number of
cases, firms also offered compensation to consumers who had been
misled and suffered loss, again without resort to formal disciplinary
action. We published the number of cases and the themes emerging
from them in August.
11. Use of formal discipline would, in our
view, be disproportionate except in the more serious cases and
wouldgiven the due process we are, rightly, required to
followsignificantly delay resolution of the problems. We
might well not, for example, be able to require the withdrawal
of potentially misleading advertising until the conclusion of
the disciplinary process. We publish full details at the conclusion
of formal enforcement actions of the issue, penalties imposed
and any redress secured for consumers. We have done this in respect
of financial advertising on 12 occasions over the last two years,
levying in total £1.5 million in fines.
12. While we do not name the firms concerned
(unless there has been a formal enforcement process taken to a
conclusion), we publicise the main themes to emerge from our supervisory
and thematic work and communicate them directly to the industry
to make clear the standards we expect and the areas in which we
have continuing concerns and plan follow-up action. This transparency
often has the effect of raising overall standards in those areas
13. Although we do not rely primarily on
complaints, we launched a Hotline in 2004 to enable consumers
and industry to report issues to us. Over the last two years we
have reviewed over 1,500 reports. There has been a broadly even
split between complaints from consumers and those from the industry
itself. We publish periodically the number of complaints we receive
and their source.
14. We believe that our strategy, based
on these different elements, is delivering real benefits to consumers.
Over the last two years we have seen a material reduction in the
number of complaints posing a high risk to consumers. The Consumer
Panel's recent research suggested that only four of the 220 advertisements
they reviewed posed high risk.
15. A further significant influence is our
move to a more principles-based approach to regulation. Around
50% of our current rules on financial advertising are likely,
subject to consultation, to be removed by November 2007, enabling
us and the industry to concentrate on the big things that matter
most in financial advertisingin this case that advertisements
are clear, fair and not misleading to the benefit of consumersrather
than technical breaches of rules which pose a low risk of consumer
16. In recent months, we have built on our
good working relationship with the ASA. In particular, the ASA
continues to consider advertising where the concern is either
a matter of taste or decency or where concerns relate to non-financial
claims in the advertising. These can be settled by the ASA formally
or informally. In the case of informal adjudications, the ASA
publishes these in skeleton form on its website and makes the
nature of the complaint available on request. It is able to do
this largely because the ASA code is voluntary and does not impose
the process disciplines mentioned earlier which restrict the FSA.
17. We are holding further discussions with
the ASA to decide what further opportunities there are for collaboration
and what more we can learn from their approach.