Financial Conduct Authority  

The lessons of PPI mis-selling

In 2012 the FSA and Office of Fair Trading jointly adopted guidance on how payment protection products should be designed. This was the first intervention by the regulator into how firms should design policies. In its mission statement, Journey to the FCA, the new regulator brought product governance into the heart of financial regulation. It stated: “One of the key lessons we have learned from previous market failures, such as payment protection insurance, is that it can be much more effective to intervene early.” 

Under the FCA’s product governance and intervention requirements, firms are expected to design products for specific target markets and monitor how well these products perform for the market for which they had been designed. They are also expected to review sales staff incentives to ensure remuneration is not driving inappropriate sales. Critically, the FCA has been given statutory powers to prevent sales of products that have been identified as harmful for customers.

The IDD, due to come into force early in 2018, requires all insurance distributors to act at all times in the “best interests of customers”. 

This obligation introduces something akin to a duty of care to ensure customers buy insurance products they need and are able to claim under. Similar to the UK Principle 6 on treating customers fairly (TCF), customers’ best interests require both manufacturers of products and those who distribute them – direct-sellers, brokers, intermediaries and IFAs – to ensure customers’ interests are considered throughout the product lifespan. 

Customers’ best interests

It is clear to see how the PPI mis-selling experience in the UK has influenced the IDD. How can insurers and distributors evidence that they are acting in their customers’ best interests? 

Answer: by showing thatthey have designed their products for specified consumer markets and monitor how those products are working in those markets, and by ensuring sales targets do not push inappropriate products onto customers. PPI is the casestudy behind the IDD, showing what can go wrong when customers are left out of product design and sales incentives. 

The decision to provide the FCA with an objective to promote effective competition and competition law powers was driven by recognition that the FSA had been limited in its ability to tackle the competition issues associated with selling PPI alongside primary credit products. In its submission to the Parliamentary Commission on Banking Standards, the FSA said: “Competition is vital in improving products for consumers and this new objective will require the FCA to identify and address competition problems.”

For the Financial Ombudsman Service (Fos), which had the responsibility of picking up the pieces of the scandal, PPI has shown how effective consumer dispute resolution can be. The Fos generally came out of the PPI scandal showing how effectively consumer dispute resolution can work within a regulatory structure.