online PPI resource
how does the ombudsman approach redress where a PPI policy has been mis-sold?
Where we conclude that the fair and reasonable outcome to a complaint about a mis-sold PPI policy is to uphold it in favour of the consumer, we need to consider what redress is appropriate.
In approaching redress in these cases, the law can provide a useful tool to help analyse the variety of ways in which claims to compensation can be made. But we must arrive at our own view as to what we consider fair compensation.
Where a consumer buys an insurance policy from an intermediary or insurer on the insurer’s standard terms, there are a number of avenues that might be pursued in law – in the event that the consumer has suffered detriment as a result of the sales process.
The various "heads of claim" that might be considered in such cases include negligent advice, breaches of obligation, misrepresentation, mistake, non-disclosure or a failure of contract formation.
The law provides slightly different remedies for a successful claimant in these different "heads of claim". Some give rise to a right for the insurance to be regarded as cancelled from the start (for instance, where an insurer or its agent has failed to disclose significant features of the policy), others to a right to compensatory damages.
If it is right to treat the insurance as cancelled from the start, the premium is refundable, but claims cannot be paid. Compensatory damages for unsuitable advice, or other heads of damage, may amount to the cost of taking out the policy – which arrives at the same general result but by a different route.
Taking account of these considerations, our normal approach is to try to put the consumer back into the position they would have been in but for the failure on the part of the financial business.
Typically, that will mean assessing redress on the basis that the consumer would not have purchased the policy, if the financial business had given a fair recommendation and/or had given appropriate information during the sale – and should be compensated if they have been out-of-pocket in the meantime.
single-premium PPI
This covers the situation where:
- the PPI policy has a single up-front premium; that premium is added to the loan; interest is charged on the premium; and the monthly repayments include repayment of the premium and the interest on it.
Depending on the precise circumstances of the case, redress will normally involve five main considerations:
- a calculation of the monthly payments that the consumer has actually paid towards the overall loan in excess of those they would have needed to make, if the original loan had been sold without the PPI policy;
- a restructuring of the loan going forward (if it is still in place) so that the amount owed, the monthly repayments, the term and the charges reflect those that would have applied, if the original loan had been sold without the PPI policy; or if the loan was terminated early, then a comparison of the settlement costs that the consumer incurred with those they would have incurred, if the PPI premium had not been added to the loan;
- the cancellation of the PPI policy (if it is still in place) – with any rebate in premiums being set against the costs incurred by the financial business in paying the redress;
- the addition of interest (normally at the rate of 8% simple per annum) to any excess payments made by the consumer – from the time each payment was made to the point the financial business pays them back to the consumer. This element of the compensation may be subject to income tax. Our note is compensation taxable? provides more information about the tax treatment of this part of the compensation;
- consideration of a payment for distress and inconvenience – for example, where the financial business rejected a complaint that it knew (or should have known) that the ombudsman service would uphold.
The following case studies illustrate how this approach is applied in individual cases.
case study 1:
loan and PPI policy still in place at time of ombudsman decision
We upheld the complaint made by Mr S on the basis that the financial business had mis-sold him the PPI policy. We concluded that but for the financial business's failings, Mr S would not have purchased the PPI policy. In accepting our decision, Mr S agreed to the cancellation of the PPI policy and the restructuring of his loan. In his case:
- his overall loan repayments were £250 a month but they would have been £200 without the additional lending to fund the single-premium PPI policy;
- the term of the loan and policy was for 60 months; and
- the complaint was settled after Mr S had made 20 monthly payments.
So Mr S had paid the lender £50 a month more than he would have done, had the financial business not mis-sold the PPI policy. Accordingly, we required the financial business to:
- return to Mr S each of these excess monthly payments of £50 that he had made over the twenty months up to the date of settlement (£1,000);
- add interest to each of these excess payments of £50, at a rate of 8% simple, from the date each payment was made until the date the date the financial business repaid Mr S;
- arrange for the loan to be restructured, so that the remaining 40 monthly payments Mr S would need to make were reduced to £200 (and all other charges and fees associated with the loan would be the same as they would have been, if he had taken the same loan without the PPI policy);
- pay Mr S £300 for the extra inconvenience he had been caused in having to refer his complaint to us – because the financial business had rejected his complaint without properly analysing the defects in its sales practices; and
- set out for Mr S the details of its calculations and the facts about his loan going forward.
Because Mr S had already been compensated for the amount he had paid towards the premium on the policy, we allowed the financial business to retain any rebate due on the cancellation of the PPI policy.
case study 2:
loan and PPI policy terminated early before ombudsman decision
We upheld the complaint made by Mr T on the basis that the financial business had mis-sold him the PPI policy. We concluded that but for the financial business's failings, Mr T would not have purchased the PPI policy. In his case:
- his overall loan was for £23,000 (with monthly repayments of £430) – but it would have been £18,000 (with monthly repayments of £340) without the additional lending to fund the single premium PPI policy;
- the term of the loan and policy was for 60 months;
- the loan and policy were cancelled after Mr T had made 24 monthly payments;
- Mr T was required to pay £15,500 to settle the loan (after the business had taken account of the rebate of premium he was due of £1,200); but if he had not had the PPI added to the loan, the smaller loan of £18,000 would have cost £13,000 to settle at the same point.
So Mr T had paid the lender £90 a month more than he would have done, had the financial business not mis-sold the PPI policy; and £2,500 more to settle the loan, when he cancelled the loan and policy after 24 months. Accordingly, we required the financial business to:
- return to Mr T each of these excess monthly payments of £90 that he had made over the twenty months up to the date of settlement (£2,160);
- calculate the difference between the settlement costs Mr T incurred when he ended the loan early and those he would have incurred, had he settled the loan without the additional PPI element at the same time (£15,500 - £13,000 = £2,500) – and to pay that difference to Mr T;
- add interest to each of these excess payments of £90 and to the excess settlement cost (£2,500) – at a rate of 8% simple from the date each payment was made (and from the date that excess cost was incurred) until the date the financial business repaid Mr T;
- pay Mr T £400 for the extra inconvenience he had been caused in having to refer his complaint to us – because the financial business had rejected his complaint without properly analysing the defects in its sales practices and had delayed its responses to his enquiries; and
- set out for Mr T the details of its calculations.
case study 3:
loan and PPI policy ran to term before ombudsman decision
We upheld the complaint made by Mrs U on the basis that the financial business had mis-sold her the PPI policy. We concluded that but for the financial business's failings, Mrs U would not have purchased the PPI policy. In her case:
- her overall loan was for £7,500 (with monthly repayments of £250) – but it would have been £6,000 (with monthly repayments of £200) without the additional lending to fund the single-premium PPI policy;
- the term of the loan and policy was for 36 months;
- Mrs U paid all monthly payments on time and the loan was settled as planned.
So Mrs U had paid the lender £50 a month more than she would have done, had the financial business not mis-sold the PPI policy. Accordingly, we required the financial business to:
- return to Mrs U each of these excess monthly payments of £50 that she had made over the 36 months of the loan (£1,800);
- add interest to each of these excess payments of £50, at a rate of 8% simple, from the date each payment was made until the date the financial business repaid Mrs U;
- pay Mrs U £200 for the extra inconvenience she had been caused in having to refer her complaint to us – because the financial business had rejected her complaint without properly analysing the defects in its sales practices; and
- set out for Mrs U the details of its calculations.
special situations
variable-rate loan
In Miss R’s case, the interest rate on the loan was variable (not fixed, as it was in Mr S’s case – see above) and the monthly repayments required were adjusted to reflect any variations in the interest rate. Our assessment of the required redress was calculated in the same way as in Mr S’s case, on the basis of what the variable monthly repayments would have been if the PPI policy had never been taken out.
default charges
Mrs Q had got a little behind with her loan repayments. The lender had added default charges, and subsequently interest on those charges. We required the financial business to arrange for the restructuring of the loan – and to write off any charges (and any interest on them) which would not have arisen, if the monthly payment had been the lower amount that would have applied if there had been no PPI policy.
regular-premium credit card PPI
This covers the situation where:
- a PPI policy is sold alongside the credit card; and
- premiums are added to the balance, with interest payable on them.
Depending on the precise circumstances of each case, redress will normally involve five main considerations:
- The cancellation of the PPI policy (if it is still in place).
- The reconstruction of the credit-card account, to work out what the current balance would have been (where the account remains open) – or what the closing balance would have been (where the account has been cleared or closed) – if the consumer had made the same monthly payments but without PPI. This should be calculated by deducting the PPI premiums and the interest and charges that resulted from those premiums (including those arising because the ongoing monthly balance on the credit-card account was higher than it would have been, if the consumer had made the same payments to an account without PPI).
- A statement showing the resulting balance on the credit-card account – to be sent to the customer along with details of how it was calculated.
- If the reconstruction produces a credit balance for any period, the payment of interest (normally at the rate of 8% simple per year) on the credit balances for the period that the account was in credit. This element of the compensation may be subject to income tax. Our note is compensation taxable? provides more information about the tax treatment of this part of the compensation.
- The consideration of a payment for distress and inconvenience – for example, where the financial business rejected a complaint that it knew (or should have known) that the ombudsman service would uphold.
The following case studies show how this approach is applied in individual cases.
case study 1:
credit-card account and PPI policy still in place at time of ombudsman decision
We upheld the complaint made by Mr V on the basis that the financial business had mis-sold him the PPI policy. We decided that but for the financial business’s failings, Mr V would not have taken out the PPI policy. In accepting our decision, Mr V agreed to the cancellation of the PPI policy. In his case:
- his account involved an interest rate of 16.9%, with PPI costing 79p per £100 of the outstanding balance each month;
- his outstanding balance was £3,500 when the PPI policy started, and so the PPI policy cost £28.04 in the first month;
- he did not use his credit card in the first month, but after that spent £110 each month (except in the 24th month when he made an extra £3,000 purchase);
- he paid £300 off his credit-card bill each month.
This meant that Mr V’s outstanding balance (after 37 months) was £1,116. But it would have been £268, if he had made the same £300 payment each month without the PPI (which had resulted in a higher outstanding balance on his ongoing credit-card account that had attracted interest each month). His account would also have been in credit in the 21st and 23rd months.
So we told the financial business to:
- reconstruct Mr V’s credit-card account, by deducting the PPI premiums (and the interest or charges that resulted from those premiums) to work out the balance without PPI;
- pay Mr V the difference of £848 (£1,116 - £268) between his actual current balance and the revised balance;
- pay Mr V interest on the credit balances in the 21st, 22nd and 23rd months at 8% simple per year (so, for example, for the 23rd month – when the credit balance would have been £400.61 for 31 days – pay interest of £2.72);
- send Mr V a statement showing how the revised balance, the difference and the interest were calculated; and
- pay Mr V £200 for the extra inconvenience he had been caused in having to refer his complaint to us – because the financial business had handled the complaint badly and rejected his complaint without properly analysing the defects in its sales practice.
case study 2:
credit-card account closed and PPI policy cancelled before ombudsman decision
We upheld the complaint made by Ms W on the basis that the financial business had mis-sold her the PPI policy. We decided that but for the financial business’s failings, Ms W would not have taken out the PPI policy. In her case:
- her account involved an interest rate of 18.9%, with the PPI policy costing 79p per £100 of the outstanding balance;
- the minimum monthly payment on the credit card account was the greater of either 5% of the outstanding balance or £10;
- she transferred a balance of £1,400 to her credit-card account on the first day, but from then on spent £25 every month on this account;
- she paid £75 off her credit-card bill every month; and
- after 30 months, she paid off the remaining £655 balance – using an inheritance she had received – and closed the account.
This meant that Ms W had to pay £655 when she closed the account. But she would only have had to pay £314, if she had made the same £75 payment each month without the PPI (which had resulted in a higher outstanding balance on her ongoing credit-card account that had attracted interest each month).
So we told the financial business to:
- reconstruct Ms W’s credit-card account, by deducting the PPI premiums (and the interest or charges that resulted from those premiums) to work out the closing balance without PPI;
- pay Ms W the difference of £341 (£655 - £341) between the closing balance and the revised closing balance.
- pay Ms W interest on that difference at 8% simple per year from the date the account was closed to the date of settlement; and
- send Ms W details of how the revised balance, the difference and the interest were calculated.
In Ms W’s case we did not require the financial business to make a payment to Ms W to compensate her for distress and inconvenience.
While we did not agree with the overall conclusion the financial business had reached when it replied to her complaint, we recognised that it had given appropriate consideration to the issues raised and that the complaint was not an easy one to decide. We also noted that the financial business had responded promptly to Ms W’s enquiries.
case study 3:
credit-card account still in place but PPI policy cancelled before ombudsman decision
We upheld the complaint made by Mr A on the basis that the financial business had mis-sold him the PPI policy. We decided that but for the financial business’s failings, Mr A would not have taken out the PPI policy. In his case:
- his account involved an interest rate of 17.9%, with the PPI policy costing 79p per £100 of the outstanding balance;
- the minimum monthly payment on the credit card account was the greater of either 4% of the outstanding balance or £10;
- he transferred a balance of £2,000 to the account on the first day, but did not make any further payments using his credit card;
- he paid the minimum monthly payment each month (£81.63 in the first month);
- when he cancelled the PPI policy after 12 months, he had an outstanding balance of £1,664 – which he continued to pay off by making the minimum payment each month.
This meant that Mr A’s outstanding balance was £1,664 when he cancelled the policy – and his current balance after 24 months was £1,201.
But if he had made the same monthly payment each month without the PPI (which had resulted in a higher outstanding balance on his ongoing credit-card account that had attracted interest each month both before and after he cancelled the PPI) it would have been £1,467 when he cancelled the policy – and £966 after 24 months.
So we told the financial business to:
- reconstruct Mr A’s credit-card account by deducting the PPI policy premiums (and the interest or charges that resulted from those premiums) to work out the current balance without PPI;
- pay Mr A the difference of £235 (£1,201 - £966) between his actual current balance and the revised balance;
- send Mr A a statement showing how the revised balance and the difference were calculated; and
- pay Mr A £100 for the extra inconvenience he had been caused in having to refer his complaint to us – because the financial business had handled his complaint badly and rejected it without properly analysing the defects in its sales practice.
special situations
In Mr Y’s case, his credit-card account remained open – and he paid off his credit card balance in full each month before the payment due date.
In these circumstances, where Mr Y had effectively overpaid each month by the amount of the PPI premium – and the PPI premium had not had an ongoing impact on his monthly account balance, because he cleared his account each month – we decided it was reasonable for the financial business to take a different approach to the approach we followed in Mr V’s and Mr A’s cases.
The approach to redress for Mr Y involved:
- refunding the amount Mr Y paid each month for the PPI premium (and, if applicable, any historical interest applied to the account relating to the PPI premium); and
- paying interest on each amount paid at 8% simple per year – from the date of payment to the date of settlement. This element of the compensation may be subject to income tax. Our note is compensation taxable? provides more information about the tax treatment of this part of the compensation.
