Memorandum submitted by Citizens Advice
1. 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
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. FSA WORK ON
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. FSA WORK ON
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
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