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January 24, 2013 9:07 pm
Regulators have specified how payment protection insurance (PPI) should work in future, in an attempt to avert a repeat of the widespread mis-selling of policies that became one of the costliest consumer scandals in UK history.
On Thursday, the Financial Services Authority (FSA) and the Office of Fair Trading published joint guidance aimed “to help prevent the problems associated with PPI recurring in a new generation of products”.
Over the past decade, PPI policies – which cover loan repayments if a borrower suffers an accident, sickness or unemployment – were sold to millions of customers, many of whom did not want or need them.
More recently, lenders have scaled back or stopped offering PPI products – but some have started to sell other forms of cover. These have included short-term income protection policies, which will replace a policyholder’s salary for a certain period in the event of illness or redundancy, and temporary ‘debt waiver’ features on credit agreements or mortgages.
However, the FSA said it was wanted to ensure that these products did not give rise to further potential for mis-selling.
“New payment protection products may offer benefits to customers but may also pose similar risks as PPI, if not designed and sold with consumers’ interests in mind,” the regulator said in a statement. “The previous failings identified with PPI must not be repeated.”
The FSA’s guidance, which follows on from a consultation opened in late 2011, is the first to be issued specifically for these types of insurance product.
It emphasises a need for policies to reflect customers’ needs, and the avoidance of any barriers that deter customers from comparing, switching or abandoning their policies. The OFT’s guidance stressed the need for transparency in the terms and pricing of products, and stressed that companies must be aware of the statutory provisions for credit agreements with debt waiver, or debt ‘freezing’, features.
Cuna Mutual Group, which underwrites insurance for credit unions and co-operative groups around the world, said the guidance would pave the way for an increase in the availability of loan waivers. The company is working with numerous mutual lenders to launch this as feature of loans for the first time in the UK.
Paul Walsh, chief executive of Cuna Mutual Europe, argued that there was still a genuine need for this type of cover. “The ‘protection gap’ isn’t some made-up jargon, [it] is about real people who continue to borrow from mainstream lenders and cannot receive the comfort of loan repayment protection or insurance,” he said. “Any lender in Britain that has got consumers of middle or modest income will need to be doing something like this.”
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