The relationship between the payment protection insurance (PPI) mis-selling scandal and the recent changes to conduct supervision has been symbiotic – the former shaping regulatory policy as the true scale of the problems emerged.
The scale of PPI mis-selling became evident as the Financial Services Authority (FSA) took over responsibility for the regulation of sales of general insurance products in 2005 – sales of insurance had been self-regulated before that time. The extent of mis-selling unfolded during the FSA’s tenure, but proved difficult to fix.
The regulator was determined the same structural errors should not be repeated. It therefore sought the mandate to intervene sooner to prevent widespread harm to consumers from financial products. Its successor, the Financial Conduct Authority (FCA), was given that fiat.
The lessons learned from PPI can be seen in most of the FCA’s policy developments. However, the UK’s experience with PPI has also been used as the blueprint for the new European directive governing the sale and distribution of insurance policies – the Insurance Distribution Directive (IDD).
The scale of PPI mis-selling needs no introduction, but the headline figures are worth repeating. The FCA estimated that more than 64m PPI policies were sold between 1990 and 2010; UK banks have set aside more than £40bn for consumer redress payments (not counting additional interest sums); redress payments to strapped UK householders helped maintain GDP up in the aftermath of the financial crisis; the largest single fine imposed for PPI failures was £117m, paid by Lloyd’s Bank in 2015.
PPI is not a flawed product as such. It was originally designed to ensure policyholders could receive payments to cover credit commitments in certain circumstances, for example covering payments when the policyholder was ill or had lost their job.
- Lessons learned from PPI can be seen in most of the policy developments of the FCA.
- The problem with PPI was not the product but how it was sold.
- The ombudsman's work on PPI has shown how effective consumer dispute resolution can be.
The problem was not the product, but how it was sold and who it was sold to. PPI policies were frequently sold by banks to customers who would never be able to claim under their policies or offered on the basis that policies were a pre-requisite to the approval of a loan. The insurance was often bundled with the credit product, leaving customers unable to shop around for more suitable cover.
The root cause of this mis-selling was seen to be a culture within distributors that failed to protect customers in various ways – allowing aggressive sales targets for staff to sell PPI and confusing information about the product.
So, how does FCA and European regulatory policy reflect lessons learned through PPI mis-selling? Several regulatory measures originate from the PPI scandal. Most significantly, there has been a step change from regulation of solvency and point-of-sale information towards more intrusive supervision that looks at how financial products are designed, which customers products are suitable for, what incentives operate to make the sale and how sales to the target market are monitored.