FSA and OFT publish draft guidance on payment protection products

By Bridging Loan Directory -

The Financial Services Authority (FSA) and the Office of Fair Trading (OFT) have joined forces to help prevent the problems associated with payment protection insurance (PPI) recurring in a new generation of products.

The FSA and the OFT are consulting on proposed guidance to firms in relation to payment protection products – which can fall within either regulator’s remit.  This is a key time as the market shifts away from PPI and firms begin to develop new products or product features – such as short-term income protection, or debt freeze or debt waiver as elements of a credit agreement or mortgage.

The two organisations will continue to monitor developments in the market, and will take appropriate action under their respective powers where firms’ products or practices risk causing detriment to consumers.

Payment protection products within the FSA’s jurisdiction

The FSA’s guidance stresses that firms should ensure that product features reflect the needs of the consumers they are targeting.  There are four key areas of concern that providers should think about carefully:

  • firms not properly identifying the target market for the protection product;
  • the protection not reflecting the needs of the intended consumers;
  • the benefit of a successful claim not matching the needs of the claimant; and
  • product features or pricing structures creating barriers to comparing products, exiting a policy or switching cover.

Margaret Cole, FSA managing director, said:

“This is the first time that the FSA has issued guidance on the design of a specific product. Firms must learn the lessons of the past and make sure they have consumers’ needs at the heart of new product development.

“That is why we are acting early to ensure firms understand the risks they should bear in mind when designing these products, and how they can manage these risks when developing or distributing the product.

“The FSA cited new forms of payment protection products as an emerging risk in its Retail Conduct Risk Outlook earlier this year, and we are following up on that warning with this important piece of work.  We want to put consumers ‘front of mind’ for the providers and distributors of these products.”

Payment protection products within the OFT’s jurisdiction

The OFT’s guidance sets out how the OFT considers the Consumer Credit Act (CCA) applies to payment protection products such as debt freeze or debt waivers linked to a regulated credit agreement, and what firms can do to ensure compliance with the CCA.

In particular, firms should ensure that consumers are absolutely clear about the nature, price and implications of payment protection products. For example, if an agreement is offered with an option to choose debt waiver terms, upon payment of a fee, it may be necessary to provide financial information including and excluding the cost of the debt waiver.

The guidance also sets out examples of business practices in relation to payment protection products which the OFT is likely to regard as unfair or improper (whether unlawful or not) and so may cast doubt on fitness to hold a consumer credit licence.

David Fisher, the OFT’s Director of Consumer Credit, said:

“It is important that the problems encountered with mis-selling of PPI do not arise in relation to new payment protection products. Firms need to ensure that they comply with relevant legislation and do not engage in unfair or improper business practices. In particular, they should make clear to consumers what they are signing up to, and how much it costs, so that they can make properly informed decisions.”