Select Committee on Treasury Written Evidence

Supplementary memorandum by the Financial Services Authority


Current work on refunds

  1.  The Committee has raised concerns about some firms' approach to providing refunds of PPI premiums in various circumstances.

  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 deliver this.

  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 months.

    —  Supervisory work: in addition to formal discipline, we will follow up with firms in this market—those involved in our thematic work and others—to 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 regulation—on 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 (ASA).

  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 concerned—our 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 would—given the due process we are, rightly, required to follow—significantly 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 very quickly.

  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 advertising—in this case that advertisements are clear, fair and not misleading to the benefit of consumers—rather than technical breaches of rules which pose a low risk of consumer detriment.

  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.

November 2006

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