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Speech by Dan Waters, Asset Management Sector Leader, FSA
BBA Seminar
24 February 2009
Good morning ladies and gentlemen. Thank you for your kind invitation to reflect on the Competition Commission’s remedies for the PPI market and to offer the FSA’s perspective and approach to problems in this important market.
As you know, we have taken a keen interest in the PPI market since we began regulating the conduct of general insurance business in January 2005. This is a significant market. At the present time, Data Monitor estimates that there are around 20 million PPI policies in force, with 6.5 to 7.5 million new policies sold annually. During 2007 alone, consumers paid around £4 billion in premiums - although we expect this figure to have fallen during 2008.
It is important to consider the scale of the market and to recognise the severity of the financial problems many consumers are facing in the current economic climate. I want to state again our belief that PPI can play an important and legitimate role for consumers during this difficult time. Our regulatory focus, however, has been and remains on how this product has been sold and whether consumers have been treated fairly when purchasing it. Following on from Peter Davies’ summary of the Competition Commission’s inquiry and package of remedies, I want to touch on a few key issues.
To begin with, let me say that we welcome both the Competition Commission’s inquiry and the package of remedies it set out last month. Our goal has always been to ensure that the combination of our work on sales conduct and the CC’s work on competition would lead to lasting improvements in consumer outcomes in PPI markets. We will continue to work closely with the CC and with the Office of Fair Trading to ensure that our respective regulatory intervention and oversight is effective, proportionate and coherent.
In our response to the CC, we said that no single remedy would comprehensively address the adverse effect on competition. We commented that a package of remedies would be the most appropriate solution. We noted that this package should address the current barriers to consumer choice and should look to remove barriers to entry by stand alone providers.
With regard to the Commission’s point of sale ban, therefore, we believe that tackling the point of sale advantage of bundled selling is critical to ensuring this market works well for consumers. We think the CC’s focus on addressing this advantage and reducing barriers to switching is entirely appropriate.
As far as providing information to consumers goes, we consider that consumers must be provided with the appropriate information about PPI in good time, which means at a time when they are in a position to make a substantive decision about the product. Where PPI is sold after the loan has been taken out, we consider this to be at the point when PPI is sold and not at the credit point of sale.
We see no reason why the point of sale ban should decrease the choice of products and indeed it should operate to reduce the price of PPI available to consumers. We share the Commission's perspective that the likely gains from improved competition will increase, as consumers become more aware that PPI products are available from different providers.
In relation to the CC’s ban of single premium product structures, we have publicly stated we believe that very few, if any, customers need to lose out when it is banned and we fully support the CC’s decision to remove it from the market. More on our regulatory interventions in respect of single premium products in a moment.
These market improvements are also supported by the requirement for all PPI providers to give us information on their PPI policies, along with the recommendation for us to use this information for our PPI comparative tables.
The Commission’s remedies will sit alongside our Insurance Conduct of Business sourcebook (ICOBS). To help firms selling PPI, we’ve taken the opportunity to publish a clarification of the ICOBS PPI requirements on our website. The clarification is designed to remind firms that they cannot rely only on oral information, relating to PPI, provided to consumers during the credit sale, as this will not meet our oral disclosure requirements and the standards for informed decisions on PPI sales. Our regulatory requirements in respect of the sale of PPI will bite at the point when it is sold, which under the Commission’s new requirements will not be at the point of sale of the underlying credit product.
Having spoken about the CC remedies for PPI, I would now like to touch on our retail market strategic aims, captured in our 2009/10 Business Plan, and how our work on PPI relates to them.1.
At the present time, retail financial firms face unprecedented challenges arising from the current global financial and economic crisis. Whilst we have maintained an important regulatory focus on prudential issues, such as capital adequacy and liquidity during these turbulent times, it is also important for us to maintain an effective focus on conduct of business risks in the retail market. The PPI Project is one example among many of the FSA continuing to address important conduct risks in the retail market.
One of our strategic aims in the retail market is focusing on consumer outcomes; seeking to ensure that firms adhere to our conduct principles and treat their customers fairly.
Our work on PPI illustrates the benefit and importance of our enhanced, outcome-focused approach to conduct of business supervision. We made extensive use of mystery shopping at a number of firms to evidence exactly how customers were being treated during the sale of PPI. We intend to deploy more coal-face tools in the future, such as mystery shopping and file reviews and other techniques designed to test whether in practice firms are treating their customers fairly and otherwise complying with our conduct of business principles. We intend through this more intrusive and challenging approach to make clear to firms that the FSA takes compliance with its conduct of business principles very seriously.
The second strategic retail aim I would like to highlight, which is relevant to our PPI work is that we will intervene pro-actively and proportionately to deliver credible deterrence and redress.
One of the core problems we have in the PPI market is that firms have not listened to our repeated warnings about the need to improve sales standards. Perhaps getting caught for non-compliance has simply been seen as a regulatory cost of doing business. Perhaps the remarkable profitability demonstrated by the Competition Commission’s work has been just too good to pass up. Whatever the reason, PPI business models in too many firms have continued to demonstrate poor consumer outcomes. Firms’ failure to translate our warnings into improvements has led us to take a more robust approach to regulatory action.
Following the publication of thematic reports on PPI, we stressed our determination to provide credible deterrence, and indicated that we would escalate our regulatory intervention. Let me turn now to some of the things we doing to deliver this escalation. The bottom line is that failure to comply with PPI sales standards will now be an expensive mistake.
Given this strategic positioning on conduct risk, what are we doing about problems in the PPI market. The primary aims of our work are:
After 20 enforcement cases, including the imposition of a record £7 million fine against Alliance and Leicester, as well as issuing a number of clear guidance notes and warnings, it has been an incredible disappointment to continue to see problems with sales standards.
In regulating PPI, we have made explicit five outcomes we are expecting firms to ensure that they deliver. They are:
The poor sales practices that we have identified increase the risk of unacceptable outcomes for consumers purchasing PPI policies. We have found instances where a customer may be ineligible to make a claim on a policy they purchased and where they were not provided with adequate information to help them understand that they would be paying interest on their extra borrowing. Firms must do considerably better in order to ensure that consumers are not poorly treated.
In light of this continued poor sales practice we announced in September 2008 that we were escalating our regulatory intervention into the market. We identified the sale of single premium PPI sold with unsecured loans as the sector with the highest risk of consumer detriment and we have focused our regulatory intervention on this sector.
Our statement in January welcomed moves by many firms to stop selling single premium PPI and we are also pleased to see many market players switching from single to regular premium products.
In this respect, a number of firms received a letter yesterday asking them to stop selling single premium PPI with unsecured personal loans. We published this letter today on our website. We expect all firms still selling, distributing or underwriting single premium PPI sold with unsecured personal loans, to write to us by 31 March confirming their intention to stop selling this product by the end of May this year.
This shouldn’t come as a great surprise. We continue to have concerns over the industry’s ability to comply with sale standards in the sale of single premium so we want the selling of that product stopped.
Let me turn to the issue of PPI complaint handling. This is one of the major conduct risks we have highlighted in our Business Plan for 2009/10.
It will be useful for firms to listen to what FOS will be saying this morning. We recognise that the effective operation of FOS is vital for the fair treatment of consumers. We have been actively engaged with FOS regarding concerns about proper handling of complaints by firms. We are taking action with firms and working with FOS to ensure customers are treated fairly, but it is becoming clear that there are systems and controls issues in some firms and we are taking a keen interest in this. Now is not the time for firms to be cutting back on resources in this area.
Firms cannot claim to misunderstand what their obligations are under existing PPI and complaint handling rules and guidance (such as the DISP rules). In addition to the fair handling of complaints, it is fundamental for firms to give consideration to whether flaws in their processes have led to poor consumer outcomes and to take steps to tackle the root cause of the problems. I am sure that the FOS will discuss in detail its comments on complaint handling processes. I would ask that you listen carefully.
In conclusion, the FSA considers that the Commission’s remedies will mark a step change in how the PPI market functions. The remedies will no doubt have a significant impact on firms. The FSA believes that they will deliver a positive improvement for consumers by offering a fairer and more competitive PPI market.
We believe that our regulatory approach complements the work of the Commission. Let me remind you again to review our clarification of the interaction of the Commission’s remedies with our ICOBS requirements and ask that you bear in mind these points when setting up your PPI sales processes as part of implementing the CC remedies. In addition, a message to those firms taking the decision to switch to regular premium policies: we expect the same high standards of sales that we have been demanding in the sales of single premium policies.
Finally, I’ve said it before and I will say it again: PPI is a key priority for the FSA. It is clearly reflected in our Business Plan for 2009/10. We have given more that enough warnings and opportunities to firms to improve their sales practices, and provide suitable outcomes for consumers.
Now is the time for firms to tackle these problems once and for all.
Thank you for you kind attention.
1. FSA Business Plan 2009/10
BBA Seminar
24 February 2009
Good morning ladies and gentlemen. Thank you for your kind invitation to reflect on the Competition Commission’s remedies for the PPI market and to offer the FSA’s perspective and approach to problems in this important market.
As you know, we have taken a keen interest in the PPI market since we began regulating the conduct of general insurance business in January 2005. This is a significant market. At the present time, Data Monitor estimates that there are around 20 million PPI policies in force, with 6.5 to 7.5 million new policies sold annually. During 2007 alone, consumers paid around £4 billion in premiums - although we expect this figure to have fallen during 2008.
It is important to consider the scale of the market and to recognise the severity of the financial problems many consumers are facing in the current economic climate. I want to state again our belief that PPI can play an important and legitimate role for consumers during this difficult time. Our regulatory focus, however, has been and remains on how this product has been sold and whether consumers have been treated fairly when purchasing it. Following on from Peter Davies’ summary of the Competition Commission’s inquiry and package of remedies, I want to touch on a few key issues.
- I first outline our response to the CC’s package of market remedies and how we view its interaction with our own work;
- I then consider how our work on PPI relates to and demonstrates some of the strategic retail market aims that are reflected in our Business Plan; and
- Finally, I consider our continuing work on PPI and the expectations we have of firms going forward.
To begin with, let me say that we welcome both the Competition Commission’s inquiry and the package of remedies it set out last month. Our goal has always been to ensure that the combination of our work on sales conduct and the CC’s work on competition would lead to lasting improvements in consumer outcomes in PPI markets. We will continue to work closely with the CC and with the Office of Fair Trading to ensure that our respective regulatory intervention and oversight is effective, proportionate and coherent.
In our response to the CC, we said that no single remedy would comprehensively address the adverse effect on competition. We commented that a package of remedies would be the most appropriate solution. We noted that this package should address the current barriers to consumer choice and should look to remove barriers to entry by stand alone providers.
With regard to the Commission’s point of sale ban, therefore, we believe that tackling the point of sale advantage of bundled selling is critical to ensuring this market works well for consumers. We think the CC’s focus on addressing this advantage and reducing barriers to switching is entirely appropriate.
As far as providing information to consumers goes, we consider that consumers must be provided with the appropriate information about PPI in good time, which means at a time when they are in a position to make a substantive decision about the product. Where PPI is sold after the loan has been taken out, we consider this to be at the point when PPI is sold and not at the credit point of sale.
We see no reason why the point of sale ban should decrease the choice of products and indeed it should operate to reduce the price of PPI available to consumers. We share the Commission's perspective that the likely gains from improved competition will increase, as consumers become more aware that PPI products are available from different providers.
In relation to the CC’s ban of single premium product structures, we have publicly stated we believe that very few, if any, customers need to lose out when it is banned and we fully support the CC’s decision to remove it from the market. More on our regulatory interventions in respect of single premium products in a moment.
These market improvements are also supported by the requirement for all PPI providers to give us information on their PPI policies, along with the recommendation for us to use this information for our PPI comparative tables.
The Commission’s remedies will sit alongside our Insurance Conduct of Business sourcebook (ICOBS). To help firms selling PPI, we’ve taken the opportunity to publish a clarification of the ICOBS PPI requirements on our website. The clarification is designed to remind firms that they cannot rely only on oral information, relating to PPI, provided to consumers during the credit sale, as this will not meet our oral disclosure requirements and the standards for informed decisions on PPI sales. Our regulatory requirements in respect of the sale of PPI will bite at the point when it is sold, which under the Commission’s new requirements will not be at the point of sale of the underlying credit product.
Having spoken about the CC remedies for PPI, I would now like to touch on our retail market strategic aims, captured in our 2009/10 Business Plan, and how our work on PPI relates to them.1.
At the present time, retail financial firms face unprecedented challenges arising from the current global financial and economic crisis. Whilst we have maintained an important regulatory focus on prudential issues, such as capital adequacy and liquidity during these turbulent times, it is also important for us to maintain an effective focus on conduct of business risks in the retail market. The PPI Project is one example among many of the FSA continuing to address important conduct risks in the retail market.
One of our strategic aims in the retail market is focusing on consumer outcomes; seeking to ensure that firms adhere to our conduct principles and treat their customers fairly.
Our work on PPI illustrates the benefit and importance of our enhanced, outcome-focused approach to conduct of business supervision. We made extensive use of mystery shopping at a number of firms to evidence exactly how customers were being treated during the sale of PPI. We intend to deploy more coal-face tools in the future, such as mystery shopping and file reviews and other techniques designed to test whether in practice firms are treating their customers fairly and otherwise complying with our conduct of business principles. We intend through this more intrusive and challenging approach to make clear to firms that the FSA takes compliance with its conduct of business principles very seriously.
The second strategic retail aim I would like to highlight, which is relevant to our PPI work is that we will intervene pro-actively and proportionately to deliver credible deterrence and redress.
One of the core problems we have in the PPI market is that firms have not listened to our repeated warnings about the need to improve sales standards. Perhaps getting caught for non-compliance has simply been seen as a regulatory cost of doing business. Perhaps the remarkable profitability demonstrated by the Competition Commission’s work has been just too good to pass up. Whatever the reason, PPI business models in too many firms have continued to demonstrate poor consumer outcomes. Firms’ failure to translate our warnings into improvements has led us to take a more robust approach to regulatory action.
Following the publication of thematic reports on PPI, we stressed our determination to provide credible deterrence, and indicated that we would escalate our regulatory intervention. Let me turn now to some of the things we doing to deliver this escalation. The bottom line is that failure to comply with PPI sales standards will now be an expensive mistake.
Given this strategic positioning on conduct risk, what are we doing about problems in the PPI market. The primary aims of our work are:
- To push firms to improve their sales standards;
- To limit consumer detriment from inappropriate sales and ensure consumer detriment is redressed; and
- To ensure that consumers are well informed and able to make better purchasing decisions.
After 20 enforcement cases, including the imposition of a record £7 million fine against Alliance and Leicester, as well as issuing a number of clear guidance notes and warnings, it has been an incredible disappointment to continue to see problems with sales standards.
In regulating PPI, we have made explicit five outcomes we are expecting firms to ensure that they deliver. They are:
- Firms should ensure that their consumers are told that PPI is optional, where this is the case;
- That consumers are given clear information about the product and what it will cost;
- Consumers are given the assistance they need to be clear about what they are eligible for under the policy and what the main exclusions are;
- Where advice is given, the consumer must be recommended a policy that meets their needs;
- Consumers must be offered a fair refund if they cancel their policy.
The poor sales practices that we have identified increase the risk of unacceptable outcomes for consumers purchasing PPI policies. We have found instances where a customer may be ineligible to make a claim on a policy they purchased and where they were not provided with adequate information to help them understand that they would be paying interest on their extra borrowing. Firms must do considerably better in order to ensure that consumers are not poorly treated.
In light of this continued poor sales practice we announced in September 2008 that we were escalating our regulatory intervention into the market. We identified the sale of single premium PPI sold with unsecured loans as the sector with the highest risk of consumer detriment and we have focused our regulatory intervention on this sector.
Our statement in January welcomed moves by many firms to stop selling single premium PPI and we are also pleased to see many market players switching from single to regular premium products.
In this respect, a number of firms received a letter yesterday asking them to stop selling single premium PPI with unsecured personal loans. We published this letter today on our website. We expect all firms still selling, distributing or underwriting single premium PPI sold with unsecured personal loans, to write to us by 31 March confirming their intention to stop selling this product by the end of May this year.
This shouldn’t come as a great surprise. We continue to have concerns over the industry’s ability to comply with sale standards in the sale of single premium so we want the selling of that product stopped.
Let me turn to the issue of PPI complaint handling. This is one of the major conduct risks we have highlighted in our Business Plan for 2009/10.
It will be useful for firms to listen to what FOS will be saying this morning. We recognise that the effective operation of FOS is vital for the fair treatment of consumers. We have been actively engaged with FOS regarding concerns about proper handling of complaints by firms. We are taking action with firms and working with FOS to ensure customers are treated fairly, but it is becoming clear that there are systems and controls issues in some firms and we are taking a keen interest in this. Now is not the time for firms to be cutting back on resources in this area.
Firms cannot claim to misunderstand what their obligations are under existing PPI and complaint handling rules and guidance (such as the DISP rules). In addition to the fair handling of complaints, it is fundamental for firms to give consideration to whether flaws in their processes have led to poor consumer outcomes and to take steps to tackle the root cause of the problems. I am sure that the FOS will discuss in detail its comments on complaint handling processes. I would ask that you listen carefully.
In conclusion, the FSA considers that the Commission’s remedies will mark a step change in how the PPI market functions. The remedies will no doubt have a significant impact on firms. The FSA believes that they will deliver a positive improvement for consumers by offering a fairer and more competitive PPI market.
We believe that our regulatory approach complements the work of the Commission. Let me remind you again to review our clarification of the interaction of the Commission’s remedies with our ICOBS requirements and ask that you bear in mind these points when setting up your PPI sales processes as part of implementing the CC remedies. In addition, a message to those firms taking the decision to switch to regular premium policies: we expect the same high standards of sales that we have been demanding in the sales of single premium policies.
Finally, I’ve said it before and I will say it again: PPI is a key priority for the FSA. It is clearly reflected in our Business Plan for 2009/10. We have given more that enough warnings and opportunities to firms to improve their sales practices, and provide suitable outcomes for consumers.
Now is the time for firms to tackle these problems once and for all.
Thank you for you kind attention.
1. FSA Business Plan 2009/10
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