Select Committee on Treasury Written Evidence

Memorandum submitted by Citizens Advice



  2.1  The Citizens Advice evidence report Protection Racket identified a number of problems with PPI sold by lenders or retailers selling goods on credit. Thematic work by the FSA and the ongoing OFT market study have made similar findings. The most serious of the problems can be summarised as follows:

    —  High price of products and variable quality of products both suggesting limited or no competition where PPI is sold by lenders.

    —  Policies often pay limited benefits that don't actually cover people against credit risks and policies often contains various exclusion clauses that remove common causes of credit risk from cover.

    —  CAB evidence suggests that policies are frequently mis-sold to people who, because of their personal circumstances, would not be able to benefit from all or part of the cover they have paid for.

  2.2  The FSA thematic work has so far mainly been concerned with addressing the problem of mis-selling. The aim of this work could perhaps be summarised as ensuring that consumers are able make informed choices about the product they are buying, that they understand what the product does, what it costs and that it is broadly suitable for their needs. The FSA has paid rather less attention to the other main problem areas.

  2.3  Citizens Advice believes that there are two main issues which arise from the FSA's thematic work on PPI. Firstly, how well has the FSA thematic work addressed the problem of mis-selling. Secondly, why has the FSA paid less attention to other problem areas.


  3.1  The FSA approach has been initially to ask industry trade associations to come up with proposals that would address the PPI mis-selling. The industry response has been to propose a consumer guidance leaflet for prospective PPI purchasers. We saw an initial draft of this guidance written by the Finance and Leasing Association and Association of British Insurers that provided a quite clear plain language generic guide to PPI. We felt that this could certainly help consumers to understand the nature and content of PPI policies. The guidance is most likely to be helpful if it is used by firms in their PPI sales process as a prompt to ensure that a policy is suitable for the needs of a prospective purchaser.

  3.2  However we are concerned that a truncated version of the guidance was published by the ABI on 19 October. This is a two page leaflet that gives a brief overview of PPI and some of the main things to look out for. Again this leaflet will no doubt help consumers, but only to a limited extent. We are concerned that the leaflet emphasises that the onus is on consumers to read policy information rather than on firms to ensure that consumers get the help they need to understand policy terms and conditions. As we understand that this leaflet has been published with the FSA's blessing, it is unclear why the leaflet does not give a stronger message to firms in this respect.

  3.3  Whatever the quality or merits of this leaflet, one might also ask whether a two page leaflet represents a reasonable return for a year of regulatory activity by the FSA on consumer information. However the quality of printed guidance for consumers is not at the heart of the mis-selling problem. It is the behaviour of firms in the way that they sell PPI to consumers that needs to be addressed.

  3.4  The FSA say as much in the minutes of their 6 April meeting with the industry trade associations. This states that the trade association proposals deal with neither wider competition issues nor the sales process itself. While this is a fairly explicit criticism of the limits of the trade association proposals, it also contains an implicit criticism of the FSA approach so far. The trade associations are unlikely to move outside of the consumer leaflet comfort zone unless directed to by more prescriptive and active leadership from the regulator.

  3.5  This is not to say that there has been no other movement in the sector. We understand that individual firms have been making changes to their PPI policies to simplify terms or improve benefits. This might be in response to work by the FSA, or the OFT or simply to adverse publicity on problems with PPI. Again, any action by firms to improve sales practices and provide consumers with a better deal is welcome. But if the PPI sector as a whole is going to make a step change away from mis-selling problems, then more co-ordinated action is essential. It is unacceptable to leave individual firms to choose what changes to make and when to make them, because this will not improve PPI products for all consumers.

  3.6  This seems to be reflected in the second round of thematic work, where the FSA reports seeing some improvements in an otherwise mixed picture of good and bad practices. The FSA thematic work has been going on for over a year and a mixed picture is some way from the step change in sales practices that a regulator should be able to bring about. We would hope to see the FSA seeking to pick up the pace of change from here on. A key question here is how the FSA plans to bring this about.

  3.7  The summary of the second round report sets out a list of key outcomes the FSA want to achieve in sales practices and the actions they believe firms will need to take to achieve these. These outcomes and actions seem fairly well targeted at the sort of problems highlighted in CAB evidence but we believe the approach suffers from two broad shortcomings.

  3.8  Firstly the FSA are tackling PPI mis-selling within the structure of their current ICOB rules that differentiate between advised and non-advised sales with firms required to make more onerous and wider ranging checks on product suitability advised sales. However non advised PPI sales will generally pitch PPI by asking borrowers to consider how they would repay a loan if they lost their job or became ill. The PPI product is sold to borrowers as offering peace of mind or reassurance against this risk. This all sounds rather like advice and as only one product is generally offered by lenders, this offer seems rather like a recommendation. We believe that where PPI is sold with a credit product, the distinction between types of sale in the ICOB rules is a fiction that allows firms to reduce suitability checking to little more than providing a leaflet. Couple this to a reasonably hard sell and the potential for mis-selling is clear.

  3.9  It is notable that the FSA found a particular concentration of bad sales practices among firms that sell PPI as a tertiary business, such as car retailers selling hire purchase. Given the large commissions that firms are making from PPI sales one might expect them to actually do some work in ensuring product suitability. In this respect the FSA should look to the effectively of this distinction in ICOB rules.

  3.10.  Secondly, and more fundamentally, we are not at all sure that the actions listed by the FSA in the report summary are strong enough or place enough onus on firms to help consumers make the right choices. Here are some examples:

    —  Firms are urged to take reasonable efforts to ensure eligibility is always checked but if this is not possible customers should be provided with information. The key point is surely what these reasonable efforts should be. Given the scale of mis-selling problems we believe that the FSA need to set out clearly and comprehensively how firms must check eligibility and suitability and how this should be evidenced. Equally the caveat that firms can provide information where such a check is not possible seems to provide an easy escape route for firms that want to take it.

    —  In all PPI sales firms are urged to make customers fully aware of any parts of the policy that they may not be able to claim under. The key point here is what happens next. There is no sense of whether the FSA are telling firms not to sell policies where consumers are ineligible for particular parts of the cover or whether firms are merely required to point out the limits of cover. We have seen examples where people have been persuaded to buy PPI policies when they are unemployed on the basis that they might get a job and examples where people who are unable to work because of a pre-existing illness or disability have been sold PPI on the basis that another illness or disability might arise. Policy information can be interpreted to mislead and confuse consumers into a purchase that will not benefit them.

    —  Firms are required to make consumers aware of exclusion clauses and tell them where to look for more information. We are not sure how this will differ in practice from what has happened previously and the FSA report summary does little to spell this out.

    —  The report sets out more detailed requirements for advised sales which we believe should broadly apply to all sales. However, again it is not clear how this improves on what should have happened in the past.

  3.11  The purpose of these outcomes and actions seems to be to provide additional guidance to the existing ICOB rules and high level principles that will apply specifically to sales of PPI. We would ask questions on the wording and degree of prescription contained within this. In this respect the statement by the FSA that they are considering further specific regulation on the PPI market is also a welcome recognition that the rules are not working well for this sector.

  3.12  However, Citizens Advice would temper this support with three further observations.

    —  If the existing rules are not working well to protect consumers, then they need to be redrafted. The requirements of firms under ICOB tend to be detailed in terms of scope by fairly general and vague in terms of application. For example, the ICOB rules run to around 170 pages with 28 pages on sales and 31 pages on product disclosure alone. Yet a year of regulatory work and further guidance is needed to try to pin firms down on how these rules should be applied in sales of PPI. We believe that the problem is not necessarily with the amount or extent of regulation but with the effectiveness of the FSA's approach to regulation.

    —  We are concerned that the FSA analysis does not seem to be particularly reflective of the problem described above. The report summary places requirements on firms that are partly defined, open to interpretation and often accompanied by caveats. In this respect the FSA strategy is to set out a broad framework and then trust firms to do the right thing. But the evidence on PPI mis-selling suggests that firms cannot necessarily be trusted to do the right thing. Conversely, we do not believe that the FSA have fully demonstrated that it is capable of telling firms what the right thing is or ensuring that firms do it. In more general terms the FSA proposals to move to more principle based regulation brings more dread than hope.

    —  Finally we are concerned that more does not seem to have been done. It is nearly a year since the first round thematic review and the FSA still reports problems in the market. While this is perhaps not surprising, we would now expect to see a more prescriptive and urgent approach to tackling mis-selling problems. While this second report certainly represents progress, we are not convinced that this has moved far enough or fast enough.


  4.1  The FSA report pays little attention to price and competition issues, although FSA are clear in stating in the report that they believe the market to be flawed. However, FSA has taken a consistent line that it is not a price authority and that price and competition issues are a matter of the OFT. This is an interesting position given findings by the OFT that the high cost of many PPI policies is due to commission payments to lenders in downstream markets. We understand that issues relating to commission are considered to be with the FSA's remit and that the FSA is working on commission bias issues in other areas.

  4.2  This is a missed opportunity as the rules governing the sale of PPI are clearly capable of stimulating further competition. By way of example, the second round report list an outcome for assessing suitability in advised sales. This states that firms must take account, among other things, of the cost of the contract with regard to the consumer's circumstances. However we understand that this stops short of disclosure on costs relative to alternative products, particularly PPI available from other providers. One wonders how a lender sold PPI policy can be said to be suitable for the demands and needs of a consumer when the same cover can be bought elsewhere at a substantially lower price. Lenders will know this, consumer may not. By thinking about the role of the sales process in a more expansive way the FSA might be able to address some of the competition issues.

  4.3  The FSA report also says little about the product content issues; the variation in cover offered by similarly priced policies and the various exclusion clauses found in many policies. The FSA discusses these in terms of disclosure in the sales process but is unwilling to look into the content of products to see whether they provide consumers with a good deal.

  4.4  The exception to this is the work carried out by the FSA on the lack or refunds in single premium policies under the Unfair Terms in Consumer Contracts Regulations 1999 (UTCC regs). This is a discrete piece of legislation and so outside the general sweep of the FSA approach. This work is most welcome.

  4.5  However outside of the UTCC regs there seems to be little appetite to move the PPI industry towards better products. We cannot see an argument against such an intervention on competition grounds. On one hand there is little or no competition in the sector. On the other, the baseline approach taken by the CML on MPPI does not seem to have limited product competition or innovation while successfully ensuring that MPPI products sold by CML members perform to a considered reasonable standard. Again the opportunity to build on this work and extend it to other areas of the broad PPI market seems to have been missed.

  4.6  On this point we are concerned that the wider product content questions will also become sidelined as the OFT investigation is refereed to the competition commission. Citizens Advice initially voiced concerns about PPI not just because we found many instances where these products had failed consumers but because we are seeing large increases in the number of people struggling with consumer credit debts. Citizens Advice would like to support PPI as a way that the additional and external costs of debt could be minimised though self insurance. Unfortunately it seems that the lending industry has been more concerned to treat PPI as an additional profit centre, rather than a way of dealing with over-indebtedness.

  4.7  In this respect the quality and content of PPI policies is not merely a competition issue, but a responsible lending issue. We are concerned that this feature of our report Protection Racket has been forgotten as the regulators have followed their own concerns. We would ask the Treasury Select Committee to consider this wider issue of PPI in limiting the problems associated with debt and the role of lenders in this.

  4.8  Finally we would also point out the OFT report on the outcome of their market study published on 19 October 2006. At paragraph 7.12 the OFT notes that they have not decided to pursue action on mis-selling on PPI under consumer credit licensing powers. We have heard much recently about the efforts that the OFT and the FSA have been making to work together. We would argue that persistent and systematic mis-selling of PPI policies should call in to question the fitness of the firm in question to hold a consumer credit licence. There would seem to be a clear read over here between the FSA and OFT to co-ordinate enforcement powers in this area. Therefore we surprised and concerned that the OFT has stated in this report that it is not aware of any breaches of the Consumer Credit act in respect of sales of PPI.

October 2006

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