The power to settle financial complaints.
The power to settle financial complaints.
If the firm has made a recommendation (or given the customer advice) about the purchase of a PPI policy, we need to consider whether the firm has assessed the customer’s needs fairly – and made an appropriate recommendation in the circumstances.
We will look to see how the firm has gone about assessing the customer’s needs.
Has it asked clear and relevant questions? Or has it simply assumed that there is a need to "cover the loan"? Has it asked questions more designed to encourage the customer to make the purchase than to elicit relevant information? Or has it taken into account the information available to it from related sources (importantly, the information the customer has given as part of the loan assessment)? Has the firm considered whether the customer already has other insurance that covers some or all of the risk that would be covered by the PPI?
In considering these points, we take account of what we believe reasonable enquiries by a firm would involve. Firms are not required to undertake a complete audit of the consumer and their circumstances.
But we would normally expect the firm to be exploring issues that it knew (or ought to have known) were likely to be of significance, given the general circumstances of customers and the particular features of the product.
For example, a typical single-premium policy is unlikely to meet the needs of customers who may expect to re-finance the loan or repay it early (for example, to get a lower interest rate or a larger loan). The firm will have knowledge of the historical persistence or cancellation rate of its customers.
The FSA’s rules say (at DISP 4.3.6R):
In assessing whether a non-investment insurance contract is suitable to meet a customer's demands and needs, an insurance intermediary must take into account at least the following matters:
(1) whether the level of cover is sufficient for the risks the customer wishes to insure;
(2) the cost of the contract, where this is relevant to the customer's demands and needs; and
(3) the relevance of any exclusions, excesses, limitations or conditions in the contract.
Accordingly, some of the things we would look for – depending on the circumstances of the case – might include consideration of:
We recognise that a firm, in recommending a product, does not need to restrict itself only to those products that fully meet the customer’s needs. The FSA rules, for example, say that a firm can still recommend a product that does not meet all of the customer's needs, so long as it identifies to the customer at the same time those demands and needs not met by the product it is recommending (ICOB 4.3.1R).
There is a wider interaction between the steps taken to assess need and suitability, and the information that needs to be given to the customer. For example, in some cases firms do not ask questions about a customer’s health – although previous ill-health may be of great relevance to the suitability of the product, given the restrictions that are typically imposed on claims resulting from "pre-existing medical conditions".
In some cases we see, the firm may already be aware of a health problem – and they will therefore need to take that into account in making their recommendation. But if they are not aware of a problem, and make no enquiries, then we would consider what steps the firm had taken to draw this important provision on pre-existing conditions to the attention of its customer.
For a consumer to be able to make an informed choice, the FSA says it is important that the firm ensures its customer understands what a pre-existing medical condition is – and where to look for more information.
In assessing issues around suitability, we will also consider the extent to which the firm has taken into account the cost of the product it is recommending. The fact that "cost" may not be specified on a statement of demands and needs is not likely to be relevant – it can be safely assumed that cost was a consideration for all customers (unless there is clear evidence to the contrary).
The cost to the customer of many of the policies we see is significant. For example, in the case of single-premium products, the premium may amount to around a quarter of the total loan. The premium needs to be considered in the context of the benefits that are payable under the policy.
A policy that costs more than the benefits that are obtainable under the policy cannot be suitable. In assessing complaints, the ombudsman will not normally take account of benefits from life or critical-illness elements of the policy, if these could be obtained more economically.
Evidence from the regulatory authorities (and especially the Competition Commission) suggest that the sale of PPI policies can involve customer detriment arising from higher prices – because of restrictions on competition in credit point-of-sale transactions.
The ombudsman may also need to consider questions around the handling of conflicts of interest, where it appears that the firm’s actions have been motivated by its own interests in achieving a significant return on the sale (sometimes called "commission bias").
The provision of "clear, fair and not misleading" information about cost (and benefits) is also a critical factor in assessing sales.
A significant feature of PPI policies involves the eligibility criteria. In some cases, these are absolute – typically, these polices do not offer unemployment cover to people working fewer than 16 hours a week. In other cases, whilst the customer may still be eligible to make a claim, the benefits available may be restricted.
For example, typically the self-employed can only make unemployment claims if their business is wound-up. So we would normally consider whether the firm has taken these issues into account, in assessing the suitability of the product.
In some cases we see, the firm treats eligibility as an absolute filter on its recommendations. So, for example, a firm might not recommend the product to a 12-hour-a-week part-time worker (as they are excluded from many benefits) – but would recommend the product to a self-employed worker.
However, in assessing complaints, we would look to see whether the firm had also taken into account the restricted benefits available to that self-employed customer. A firm that recommends a product where there are significant eligibility issues is unlikely to be successful in defending its case.
When considering joint loans, it is important to note that in many PPI policies, benefits for the second-named individual may be limited (or even no cover offered at all). Which person should be covered is an important consideration for the customer.
For example, in the case of Mr and Mrs B [ombudsman decision opens in PDF format] the firm recommended a policy that gave only limited benefits to Mrs B (as the second-named applicant) – even though she was employed whilst Mr B was self-employed. The firm also failed to highlight the significance of this to Mr and Mrs B.
A significant feature of single-premium PPI policies is that the premium is paid in advance – and the cost (normally) added to the loan. Interest is payable on this “PPI loan”. Typically, the policy is terminated when the loan is terminated and cannot be transferred to another loan. If a single-premium policy is terminated before the end of the planned term, the insurer is likely to offer only a limited premium-refund.
For example, in the case of Mr A [ombudsman decision opens in PDF format] the terms of the policy said that after two years of a three-year policy the rebate would be just 11% of the premium.
This means that a single-premium policy is unlikely to be suitable for a consumer where there is some prospect that they will terminate the loan before the end of the policy term. We are likely to look at the circumstances of the complaint, to see whether the firm has made relevant enquiries and taken this into account in making its recommendation.
Considering this point, in the case of Mr A the ombudsman said:
In any event, it seems to me that, in thinking about any loan and connected insurance policy, a relevant consideration is how far that arrangement is flexible, should the customer’s circumstances change. In this market it is not uncommon for customers to re-arrange their loans before the end of the planned term. The firm has provided no evidence to show that this was not, in fact, a relevant consideration for Mr A. Indeed, in my view the balance of evidence suggests that it was.
I conclude that the firm did not consider whether or not Mr A required flexibility in his PPI policy, when considering the product it should recommend. It should have done so. It is not sufficient for the firm to say that the customer did not emphasise the issue (and/or that the issue was not set out in a demands and needs statement by the customer).
The firm was the professional insurance adviser which had (or should have had) a knowledge not just of the products available, but also of the way in which the substance of those products was likely to interact with the common demands and needs of its customers – particularly where the feature was significant and unusual.
I note that ICOB (4.3.2R) requires an insurance intermediary in assessing its customer’s demands and needs to:
"seek such information about the customer's circumstances and objectives as might reasonably be expected to be relevant in enabling the insurance intermediary to identify the customer's requirements. This must include any facts that would affect the type of insurance recommended, such as any relevant existing insurance"
– and that the intermediary should "have regard to any relevant details about the customer that are readily available and accessible to the insurance intermediary."
I have seen no evidence to suggest that the firm asked questions about this matter – or otherwise sought to clarify Mr A’s needs on this point or to consider the information readily available to it from its other sources.
The firm suggests that Mr A had the opportunity to become aware of the relevant facts surrounding the cancellation terms and that, accordingly, I should not uphold his complaint. But this ignores the fact that the firm recommended the product.
Mr A was entitled to place trust in the professional advice of the firm that this was a suitable product for him. I have concluded that the firm did not take reasonable care to ensure the suitability of its advice to Mr A.