EIOPA-BoS-13/116
28 June, 2013
Background Note on Payment Protection Insurance
2
Contents
Part I – Comparative analysis of consumer protection issues regarding PPI........ 4
1. Some characteristics of PPI products .................................................... 4
1.1. Risk coverage and underlying loan products ..................................................... 4
1.2. Use and some characteristics of PPI ..................................................................... 5
2. Consumer protection issues with PPI .................................................... 6
2.1. Issues in the distributor$customer relationship (mis$selling) ..................... 6
2.2. Market imperfections ................................................................................................... 7
2.2.1. Distorted consumer choice due to cross$selling ....................................... 7
2.2.2. Group insurance contracts ................................................................................ 8
2.2.3. Information asymmetry ..................................................................................... 9
2.2.4. Product design issues .......................................................................................... 9
3. Examples of regulatory and supervisory actions for better functioning
markets in PPI ......................................................................................... 11
3.1. Types of market intervention ................................................................................. 11
3.2. General measures against mis$selling ................................................................ 12
3.2.1. Measures against selling to unsuitable consumers ............................... 12
3.2.2. Measures against misleading information ................................................. 13
3.3. Measures against market power arising from cross$selling ....................... 14
3.4. Comparability of information.................................................................................. 16
3.4.1. Comparability of offers ..................................................................................... 16
3.4.2. Comparison tools ................................................................................................ 16
3.5. Product regulatory measures ................................................................................. 17
Part II –Case studies ................................................................................ 18
4. Rules affecting PPI in the Consumer Credit Directive ............................ 18
5. PPI in France ................................................................................... 18
5.1. PPI market specialities in France .......................................................................... 18
5.2. Regulatory and supervisory action in France ................................................... 19
6. PPI in Hungary ................................................................................ 20
7. PPI in Ireland .................................................................................. 20
7.1. PPI market specialities in Ireland ......................................................................... 20
7.2. Market problems in Ireland ..................................................................................... 21
3
7.3. Regulatory and supervisory actions regarding PPI ........................................ 22
7.3.1. Consumer Protection Code .............................................................................. 22
7.3.2. Supervisory reviews of PPI in Ireland ......................................................... 22
7.3.3. Consumer Complaints ....................................................................................... 24
8. PPI in Italy ...................................................................................... 24
8.1. PPI market specialties in Italy ............................................................................... 24
8.2. Market problems in Italy .......................................................................................... 24
8.3. Regulatory and supervisory actions regarding PPI ........................................ 25
9. PPI in the Netherlands ...................................................................... 27
9.1. Market issues in the Netherlands ......................................................................... 27
9.2. Regulatory and supervisory action in the Netherlands ................................ 28
9.2.1. Thematic work on PPI in 2009$2010 ........................................................... 28
9.2.2. AFM investigation on advisor fees for consumer loan PPI .................. 29
10. PPI in Portugal ................................................................................. 30
10.1. Guidelines on PPI compliance ................................................................................ 30
10.2. Expected effects and planned steps .................................................................... 31
11. PPI in Spain .................................................................................... 32
11.1. PPI market specialities in Spain ............................................................................ 32
11.2. Regulatory and supervisory actions regarding PPI ........................................ 32
11.2.1. PPI requirements for consumer credits ...................................................... 32
11.2.2. PPI related to mortgages ................................................................................. 33
11.2.3. Self regulation by the Insurance Association (UNESPA) ..................... 34
11.2.4. Supervisory actions ............................................................................................ 34
12. PPI in the United Kingdom ................................................................ 35
12.1. PPI market in the United Kingdom ...................................................................... 35
12.2. Description of market problems ............................................................................ 35
12.3. Regulatory / Supervisory responses ................................................................... 36
12.4. Recent market developments ................................................................................ 37
References .............................................................................................. 39
4
Part I – Comparative analysis of consumer protection
issues regarding PPI
1. Some characteristics of PPI products
1.1. Risk coverage and underlying loan products
1. Risks covered: Accident, Sickness, Unemployment, Life. Payment
Protection Insurance (PPI) is an insurance product designed to provide coverage
for the consumer of a financial obligation in case they are unable to fulfil a
payment. The risks covered by PPI generally include accident, sickness and
unemployment, and for certain products often life.
1
2. Related ‘damage to property’ coverage. PPI generally covers risks that
are related to the person having a financial obligation; however, it is sometimes
combined with coverage that is related to the underlying property. Thus,
although generally PPI is understood to provide coverage for the risks listed
above, in some cases a more general coverage is understood under payment
protection. However, it is worth mentioning that in Italy and Spain mortgages
are often sold together with insurance covering damage to the property as well.
3. Underlying loan products. The payment obligation PPI provides
coverage for is generally associated to a loan product.
2
Loan products that are
most frequently associated with PPI are different types of consumer credit (most
notably credit cards and personal loans) or mortgage loans.
4. Alternative PPI products. There might be products that have different
names but serve very similar purposes, with some products appearing as
contractual clauses instead of a separate insurance product. To the extent they
share some of the same characteristics as PPI, these newer products could pose
some of the same risks, unless undertakings take particular care with their
product design and sales practices.
3
5. This background note generally covers both mortgages and
consumer credits. This background note covers both mortgages and unsecured
loans (consumer credits). It must be pointed out that mortgage$PPI has in
certain aspects different characteristics than PPI providing coverage for
consumer credit (CC$PPI). However, these characteristics might differ from
country to country and also from product to product in a given country. The
table below is an indication of likely differences; these differences are reflected
in the analysis and country case studies as well.
1
PPI providing life coverage differs from general life insurance in being adjusted to the loan contract; contracts
often have banks as beneficiaries. Mortgage insurance generally includes life coverage.
2
There are some products that provide coverage for other type of payments. (e.g. utility payments.)
3
This issue has been addressed most extensively in the UK; see chapter 12.
5
Table 1. Differences between PPI related to mortgage and consumer credit (CC)
Mortgage
!
PPI
CC
!
PPI
Unemployment Coverage
Likely Core part of the product
Life coverage
Very likely
Unlikely
Benefits
Likely to be full amount
of the loan
Likely to be a lump sum
Duration of coverage
Very likely to adjust to
loan
Likely to be fixed in a
certain number of moths
Premiums paid
Monthly
, sometimes
single
Monthly, often single
Takes consumer
differences into account
Possibly Unlikely
1.2. Use and some characteristics of PPI
6. PPI can serve legitimate consumer needs. EIOPA acknowledges that
PPI products, when properly designed and sold, serve legitimate consumer
needs. Yet, EIOPA also acknowledges that, in a number of jurisdictions,
significant cases of misselling have occurred, to the detriment of consumers and
negatively affecting the reputation of the insurance sector as a whole.
7. Product complexity and differentiation. PPI combines coverage for a
number of different risks and the numerous limitations and exclusions may prove
challenging for consumers.
4
A part of this complexity is sometimes not reflected
in offers for the consumers. Although consumers may represent very different
risks, and may only need coverage against certain risks, (especially in the case
of consumer credit) PPI tends to be sold as a “onesizefitsall” product, without
any differentiation regarding the consumer. In the case of mortgages a more
differentiated product structure and individualised offers are more likely.
8. Advised vs. non%advised sales. Given the complexity of the coverage
and the sometimes extensive lifetime of the product (especially in the case of
mortgages), some countries may only allow the distribution of certain PPI
products on an advised basis. However, given that sometimes the products
manifest in rather simple offers, some jurisdictions also allow for non$advised
sales.
9. PPI issues must be assessed on a product%by%product basis.
Whereas this note lists the most common issues that have arisen around PPI, it
is generally true that any PPI intervention must take into consideration the
specific characteristics of the local products concerned, i.e it must happen on a
case$by$case basis.
4
There is a unique understanding of coverage for certain products in Spain, as PPI for unemployment or
temporary disability only provides coverage for either unemployment or temporary disability, depending on
the labor situation of the policyholder (see more in the chapter about Spain)
6
2. Consumer protection issues with PPI
10. Overview. Payment protection insurance has been on the agenda for
many different reasons in different jurisdictions. An issue that certainly drew a
lot of public and media attention is mis$selling, where breaches of business
conduct rules resulted in significant consumer detriment, most notably in the UK.
However, apart from mis$selling, there are further market imperfections that
resulted in regulatory and supervisory intervention in a number of countries.
2.1. Issues in the distributor!customer relationship (mis!
selling)
11. Providing misleading information at the point of sale. When buying
PPI, consumers often receive a lot of misleading information that distort their
choice. This distortion may materialize in consumers purchasing PPI in cases
where they did not have to; or consumers purchasing PPI policies that represent
a suboptimal choice for them.
12. Examples of misleading information. There might be very different
pieces of information that influence a decision by the consumer. Some examples
of misleading information are: (the list being obviously not exhaustive):
a) Misleading the consumer into believing that taking out PPI is compulsory
by law, where applicable
b) Misleading the consumer into believing that PPI is an integral part of the
loan product
c) Making the false impression that taking out PPI improves the chances of
obtaining the loan
d) Not disclosing the main features of the policy to the customer on time (or
not disclosing it at all)
e) Misleading the consumer about whether the fees paid are in relation to the
insurance or credit product
13. Eligibility issues. Distributors have often not checked whether the given
policy is suitable for the customer given their demands and needs. PPI
distributors often marketed policies to consumers who were not eligible to claim
benefits at all. These issues frequently involved selling unemployment cover for
self$employed or medical insurance to people who were not able to claim
benefits because of some pre$existing medical condition.
14. Suitability issues. Further, even if being eligible to claim benefits, the
product was not always suitable for the consumer, and thus undertakings have
not acted in the best interest of the consumer. This might have included selling
7
PPI for very small loans or credit card users who generally repay the outstanding
balance in full every month.
5
2.2. Market imperfections
15. Market imperfections. Although there is limited information available to
make general statements on Europe, PPI markets seem to be a highly profitable
in a number of countries. It seems that some market imperfections
6
are quite
frequent for PPI, and they might result in consumers being unable to take
advantage of a properly functioning market.
2.2.1. Distorted consumer choice due to cross!selling
16. Tying. PPI is generally distributed together with a credit product.
Sometimes distributors require that the consumer purchasing the loan purchases
the insurance product from a designated (often the same) company (or group).
The situation where the acquisition of a given insurance product with the credit
product is made mandatory by the loan provider is generally referred to as a
tying practice.
7
17. Potential effects of tying. Tying practices result in a situation where
consumers have no choice between different insurance policies – if they wish to
obtain the loan from a given company, they have to purchase an insurance
policy chosen by that loan provider. This is likely to leave consumers ending up
with a product that is not best suited for their needs, as the policy may offer
suboptimal coverage or may prove to be too expensive.
8
18. Bundling. There might be other forms of packaged distribution where the
packaged services are available separately, but not necessarily on the same
terms. This practice is generally referred to as bundling. This could mean for
example a price reduction for credit products if purchased together with PPI, as
credit risk is reduced with the purchase of an insurance product.
19. Potential effects of bundling. Bundling practices may have the same
harmful effects as tying practices. They are generally considered less harmful, as
they necessarily leave some choice for the consumers, however, they might have
the same distorting effects for consumer choice.
5
Eligibility and suitability issues have been examined e.g. in Ireland, the Netherlands and the UK, see the
respective case studies.
6
The terms ‘market imperfections’ and ’market failure’ are generally used to describe where the allocation of
goods and services by the free market is not efficient, and could potentially be improved by regulatory
intervention.
7
Insurance with a loan may also be obligatory by law.
8
These detrimental effects could theoretically be offset by fierce competition for the packaged product (credit
+insurance), however market developments indicate that this is unlikely to be the case.
8
20. Cross%selling with no rebates. Even when there is no difference
between the conditions for the packaged product and the same products sold
separately, cross$selling can have an effect on consumer choice. Market
characteristics, especially the lack of transparency may result in a situation
where the mere fact of selling two or more products together creates
considerable market power for distributors.
21. Market power in distribution for loan providers. Market power is the
economic concept of the ability of a firm to profitably raise the market price of a
good or service over marginal cost and thus has a great effect on consumer
choice. The most obvious distribution channel for underwriters is through loan
providers and this is likely to result in considerable market power (economic
strength) for loan providers. This market power is likely to be further
strengthened with the application of tying or bundling practices. In PPI markets
consumers are often mainly engaging with the loan product offered and not with
the accompanying PPI product or its cost. This can lead to loan providers having
a potentially captive audience who do not shop around for alternative insurance
cover and thus do not drive down costs through competition. Loan providers are
thus potentially able to exert market power and charge excessive prices for PPI
and make super$normal profits from it.
9
22. Competition for distributors puts an upward pressure on
commissions. Market power for loan providers results in a situation where PPI
underwriters are more likely to compete for distributors and not directly for
consumers. This is often reflected in a business model where a loan provider
issues a tender for PPI underwriters. Among other factors, the profitability for
the banks is an important factor in these tenders, which have exerted an upward
pressure for commission levels.
10
2.2.2. Group insurance contracts
23. Group insurance contracts may have an effect on market power.
There is evidence that some distributors (credit providers) enter into a general
agreement with insurance providers. This might have an effect on the market
power described above, as in certain cases the insurance element becomes a
part of the credit contract, leaving consumers no choice in choosing PPI. On the
other hand, group contracts may result in more favourable offers from insurers,
but the pass through of these benefits to consumers is not confirmed.
24. The effect of vertical integration. Credit providers, the most important
distributors of PPI sometimes sell insurance coverage from a company belonging
9
Market power of economic strength is a key concept in competition law (antitrust). However, antitrust
intervention is likely only when market power amounts to a dominant position in the market; on the other
hand, market power may have a considerable distorting effect on consumer decisions also in cases where the
intervention thresholds for competition law are not met.
10
UK Competition Commission (2009).
9
to the same group. This may lead to higher commissions, although a market
study in the UK found that vertical integration was a less important element in
the very high market power distributors have enjoyed in the PPI market.
25. Uncertainties around beneficiaries. Group insurance may result in a
situation when there is no contractual relationship between the consumer and
the insurance company at the time of contract signing, and as a result of this,
consumers might be deprived of their choice whether they want to take out PPI
at all. Further these uncertainties may make claims more burdensome for
consumers as well.
11
2.2.3. Information asymmetry
26. Lack of information on PPI prices level and comparability. A further
issue making consumer choice more difficult is the fact that consumers do not
receive, or only receive relatively late their personal quote, i.e. the individual
price information. The lack of individual price information makes the comparison
of offers from different providers very difficult.
26. Limited financial literacy on PPI. Generally, consumers showed limited
financial capability when purchasing PPI. Many consumers often do not realize
that PPI is an independent product and separate to the loan. Consumers were
therefore not engaging with or understanding the PPI product because they were
focusing on the loan product. Consumers often believe that purchasing the
insurance policy is compulsory, or that doing so would improve their chances of
obtaining credit.
2.2.4. Product design issues
27. Selling PPI with single premium. In some countries, many firms have
sold PPI with a single premium, meaning that the consumers had to pay a fixed
amount at the beginning of the credit contract. Consumers sometimes were not
aware that the premium will be added to the loan amount, and interest would be
payable on that. The single premium design caused further problems with early
termination of the underlying credit products, as a refund for the insurance
policy was difficult to obtain.
28. Refund issues. A lot of uncertainties have arisen around cancellation of
the policies, where consumers should be entitled to a certain refund.
Undertakings tend to follow diverging policies when determining rate of refunds.
Consumers also often found the refund process very burdensome.
29. Limitations in coverage. In many instances, product design issues made
consumer detriment more likely. PPI products were often designed to provide
11
Consumer protection issues around group insurance have been experienced in France, Hungary and
Portugal; see the respective case studies.
10
only very limited coverage, which are likely to have contributed to frequent
occurrence of poor consumer choice.
30. Duration mismatch. Some PPI products had a duration mismatch, i.e.
the duration of the insurance cover was shorter than the duration of the
underlying credit product. This is less frequently the case for mortgages,
however occurs very frequently for consumer loans.
31. Unfair terms. An example of unfair terms in the contract is when
consumers are given a very limited time period after an event (for example, 6
months after an accident, illness or unemployment) in which they can make a
claim. Another example is terms that prevent consumers from receiving any
refund of the premium if they want to cancel the PPI policy for any reason, for
example if they repay the associated loan early
12
, and they are no longer able to
claim under the insurance, or simply do not want to have the cover any more.
32. Overview. The following picture gives an overview about the causes of
potentially distorted consumer choice in PPI, and gives an overview about the
potential consequences.
Causes for distorted consumer choice in PPI
12
Some insurance contracts terminate with the repayment of the loan. However, in many cases insurance
contracts require further action from consumers to terminate after loan repayment.
11
3. Examples of regulatory and supervisory actions for
better functioning markets in PPI
33. Overview. This chapter gives an overview about regulatory and
supervisory action for better functioning PPI markets. It lists the types of market
intervention and then discusses the measures applied according to the market
problems discussed previously.
3.1. Types of market intervention
34. Supervisory enforcement action. Generally, non$compliance with the
rules governing consumer relations are best tackled by enforcement actions
targeting the poor behaviour of the supervised undertakings. Failings in the
distributor$consumer relationship have been targeted by supervisory action.
35. Sector legislation or guidance. Some of the issues around PPI were so
widespread and amounted to such level of complexity, that in order to achieve
clarity, a supervisory guidance or normative action was necessary.
36. Legislative action. The large number of market imperfections made PPI
an area where regulatory intervention became frequent. Legislative actions on
different levels have been introduced to correct for market imperfections.
37. Industry self%regulation. There have been examples of industry self$
regulation, where undertakings decided to impose restraints on their activities by
themselves, in order to ensure to compliance and the better functioning of
markets.
38. Consumer protection intervention and NCA role. The following picture
gives an overview about types and levels of consumer protection intervention,
and gives an indication of what roles NCAs could probably play in different types
of interventions.
12
Levels of consumer protection intervention in PPI
3.2. General measures against mis!selling
39. Supervisory actions enforcing compliance. The most common tools to
tackle any kind of mis$selling issues are increased supervisory actions. However
it must be borne in mind that this is a very resource$intensive measure, and that
certain problems may justify the use of more general measures.
40. Ensuring proper complaint%handling by firms. Since consumers are
likely to address firms with their issues first, it might prove very useful to ensure
that their complaints are handled properly at this level. Some jurisdictions have
addressed complaints$handling explicitly for PPI, with the UK issuing supervisory
guidance on the issue.
41. Requesting firms to review their sales. Given that the number of
contracts affected by a certain problem may be enormous, some countries
requested their PPI providers to review their sales for a given period, according
to certain criteria. This is a still on$going process in Ireland, for example.
3.2.1. Measures against selling to unsuitable consumers
42. Guidance on identifying suitability of consumer. As mis$selling
problems often involved sales to unsuitable consumers, supervisors might
improve the functioning of the market by issuing guidance on this topic based on
the experience available. There has been a supervisory guidance on this topic by
the Netherlands.
13
3.2.2. Measures against misleading information
43. Mandatory information requirement on certain topics. The fact that
consumers are presented with certain misleading information often stems from
certain omissions, e.g. distributors not mentioning that PPI may not be
compulsory or that PPI is a separate product. These issues can be tackled with
requiring mandatory information on certain topics. For example, in the UK an
offer now must explicitly state that PPI is not mandatory, and that it is available
from other providers as well. French and Italian regulation also requires to
provide general information on risks and payoffs.
13
44. Including references to information sources. A further measure
enhancing the effect of mandatory information requirement is to include
references to other information sources. This is likely to be the case for
information that may not be available at the point$of$sale, such as information
on other offers or comparison measures.
45. Raising consumer awareness by separate application forms. To
ensure that consumers easily realise that the loan and PPI are separate
products, the use of a separate application form is required in Ireland and Italy.
Overview of measures against misselling
13
ISVAP Regulation 40 (2012), Lagarde law France (2010)
14
3.3. Measures against market power arising from cross!
selling
46. There have been several types of measures that are aimed to help
consumer choice by limiting market power arising from several types of cross$
selling.
47. Prohibition of tying. The mandatory purchase of PPI from a given
provider in some jurisdictions triggered special regulation that explicitly
prohibited these tying practices for PPI and loan products. The 2010 changes in
the French legislation made sure that loan providers are not allowed to request
mandatory purchase of insurance from the same provider or group.
14
Furthermore, Portuguese law
15
prohibits certain exclusive agreements as
insurance intermediaries (such as banks, which may act as tied agents) are not
allowed to impose a condition on the consumers to enter into an insurance
contract with a specific insurance undertaking in order to gain access to another
offered good or service. This provision tackles exclusive agreements (i.e. the
imposition of the provider for an additional product)
16
.
48. Ensuring equal assessment of independent PPI policies. To ensure
that consumers may take advantage of their search for PPI, regulators may
prescribe that loan providers must grant equal conditions for the loan
irrespective of the PPI provider. An example for that is a recent Italian regulation
that, in the case of life insurance, allows 10 days for consumers after receiving a
loan and PPI combined offer to come up with an alternative offer; the loan
provider has to accept this alternative coverage without changing the conditions
of the offer. The recent French legislation provides that lenders cannot refuse
equivalent offers from other PPI providers.
17
49. Introducing alternative offers at the loan point%of%sale. A measure
of improving consumer choice at the point of sale is the requirement on loan
providers to present two or more competing offers to the consumer there. This
obviously allows for more choice, however it still may allow for some distortion
by distributors as they may steer customers towards a given offer by not
presenting the most competitive alternative offers. The relative popularity of this
measure could be explained by the limited number of PPI providers.
50. Prohibiting conflicts of interest. Another potential way of influencing
the availability of offers at the point of sale is to put a prohibition on certain
14
France “Code de la consummation” Consolidated version (changes introduced in 2010)
15
Portuguese law on taking-up and pursuit of insurance mediation (Decree-Law no. 144/2006, of 31 July, as
amended). Other specific provisions governing the sale of consumer credit and mortgage loan are also relevant
in this context
16
Please note that the mentioned rule is not only applicable in market power leverage situations; it has the
broader purpose of consumer protection.
17
ISVAP Regulation 40 (2012), Lagarde law France (2010)
15
conflicts of interest. In Italy, for example loan providers are not allowed to be
the beneficiary and distributor of the insurance contract at the same time,
because it conflicts with the distributor’s duty to act in the best interest of the
consumer. However, sales commissions are often high both when selling PPI
products of firms that belong to the same group or not. For the UK, a study
found that vertical integration did not influence commission and price levels.
18
51. Prohibiting PPI sales at the loan point%of%sale. To ensure a proper
“unbundling” of the loan and the insurance products, the UK has introduced a
prohibition of selling PPI at the loan point$of$sale, and requires that PPI is not
sold until after seven days after the loan was sold. This measure certainly limits
the market power on behalf of the loan providers. However it may have a
negative effect on sales, as consumers’ willingness to enter into an insurance
contract may deteriorate with time after signing the loan contract.
Overview of measures against market power from crossselling
18
UK Competition Commission (2009)
16
3.4. Comparability of information
3.4.1. Comparability of offers
52. Obtaining a personal quote. To ensure that consumers can compare
the available offers, an obvious measure is to ensure that they receive personal
information. In the case of PPI, the actual financial obligation is often challenging
to calculate and assess, which is why considerable emphasis is put on ensuring
that consumers receive personal quotes in due time. Italy and the UK are
examples of this practice.
53. Price disclosure. To ensure the comparability of individualized
information, there might be rules that prescribe that the information must be
presented in a standardized format. Generally these rules require providers to
disclose the price of PPI in “monthly euros” (or other currency). These rules may
complement the use of a personal quote or may stand alone by themselves –
price disclosure in a standardized format may in itself help comparability (see
rules in France).
54. Other standardized information. Apart from price, a standard format
for other types of information could obviously further contribute to comparability.
Italy applies a standardised format for presenting price and product
characteristics making it easier for consumers to compare alternative offers.
3.4.2. Comparison tools
55. Comparing at the point of sale. Given that selling PPI with a loan
product is a major way of distribution, it makes sense to introduce competition
at this stage. As already presented among measures against cross$selling, some
jurisdictions (Italy for life insurance)
19
require undertakings to present at least
two competing offers on PPI for the consumer. Again, the fact that this
information covers only a part of the market may allow for some distortion in
consumer choice.
56. Online tools. Online tools play an ever increasing role in ensuring market
transparency, and some countries explicitly targeted improved disclosure
through these channel. The UK has ordered PPI providers to populate a
comparison website run by the FSA, and Italy ordered companies marketing life
insurance linked to loan to have a free online quotation service on their website;
further IVASS lists all these products at its website.
20
19
Decree law N.1 of 24.1.2012 in Italy
20
Competition Commission (2011), ISVAP (2012) Regulation n. 40 of 3 may 2012
17
3.5. Product regulatory measures
57. Minimum content. Uncertainties around the scope of coverage can be
reduced if regulation actually determines some aspects of the product. In Italy,
recent regulation prescribes the minimum content of life insurance contracts
related to mortgages and personal loan products.
21
58. Prohibition of single premium policies. The information uncertainties
(additional interest on premium) and the early termination difficulties led
countries to explicitly prohibit the selling of these types of products. Currently,
the UK has an explicit prohibition on selling single premium policies.
59. Regulating refund process. As early termination issues have resulted in
many uncertainties, some countries decided to focus on the refund process
22
to
ensure a more favourable outcome for consumers. Refund regulations may allow
for deduction of certain administration costs, but generally they aim at a full pro
rata refund of the premium.
60. Price maximum on PPI advice fee. Based on a very special regulatory
environment, there has been a self$regulatory price cap negotiated on PPI advice
fee in the Netherlands. This was largely based on the fact that intermediaries
tried to circumvent the ban on consumer credit advice fee bans by charging
excessive fees on PPI advice.
21
ISVAP (2012) Regulation n. 40 of 3 may 2012
22
There are detailed self-regulatory rules set by UNESPA in Spain, for example.
18
Part II –Case studies
61. The following country case studies are set out in the alphabetical order of
the names of the countries.
4. Rules affecting PPI in the Consumer Credit Directive
62. Rules on PPI for consumer credits. The Consumer Credit Directive
23
adopted in 2008 contained several rules that affect certain ancillary products
which are distributed together with credit products. PPI, as an insurance product
is seen as one of these products, so the rules of the directive carry relevance for
PPI linked to consumer credit. It must be pointed out, that some countries
decided to apply some special (usually stricter) rules regarding PPI when
transposing the directive.
63. Pre%contractual information on whether PPI is necessary. According
to the Consumer Credit Directive, credit providers must give adequate pre$
contractual information if purchasing insurance is necessary. The information
shall specify if there is “an obligation, if any, to enter into an ancillary service
contract relating to the credit agreement, in particular an insurance policy, where
the conclusion of such a contract is compulsory in order to obtain the credit or to
obtain it on the terms and conditions marketed.”
24
64. Total cost for credit includes premiums for mandatory insurance as
well. In cases where insurance is mandatory for obtaining credit (or obtaining it
on the conditions marketed), the indicators depicting the total cost of credit
should include insurance premiums in their calculation as well.
25
If the cost of
that service cannot be determined in advance, the obligation to enter into that
contract shall also be stated in a clear, concise and prominent way, together with
the annual percentage rate of charge.
26
5. PPI in France
5.1. PPI market specialities in France
65. Mortgages. Mortgage protection insurance is not legally mandatory but is
often made mandatory by credit institutions in France. Mortgages have been sold
23
CCD Directive: Directive 2008/48/EC of the European Parliament and of the Council of 23 April 2008 on
Credit agreements for consumers and repealing Council Directive 87/102/EEC
24
CCD Directive Article 5 (1) (k)
25
CCD Article 3 (g) reads as follows: ‘total cost of the credit to the consumer’ means all the costs … the
consumer is required to pay in connection with the credit agreement … costs in respect of ancillary services
relating to the credit agreement, in particular insurance premiums, are also included if, in addition, the
conclusion of a service contract is compulsory in order to obtain the credit or to obtain it on the terms and
conditions marketed;
26
CCD Article 4 (3)
19
together with insurance as a package until recently, where new measures have
been introduced to improve consumer choice.
66. Coverage. Mortgage protection insurance is very closely related to life
insurance as it pays off the whole debt in case of death. Mortgage protection
insurance is a differentiated product, where price may vary according to the
borrower’s status and condition.
5.2. Regulatory and supervisory action in France
67. Case law. Some case law decisions have set out requirements in the area
of consumer protection in relation to PPI. When distributing PPI, credit
institutions have to check the adequacy of the insurance contract to the
consumer’s needs.
68. Rules in the French Insurance Code. The French Insurance Code
provides that insurance intermediaries have the duty to give an advice to their
customers, in the form of a personal recommendation taking into account the
demands and needs of consumers, when distributing insurance products, which
includes PPI.
69. Rules in the French Consumer Code. The French Consumer Code
contains important provisions on mortgage protection insurance. Key elements
of the regulatory framework include:
• Prohibition of tying / Freedom of choice: Lenders are not allowed to
refuse equivalent cover by any insurer even when it does not belong to
the same group as the bank providing the loan. All refusals must be
justified. Moreover, lenders are not allowed to offer more favourable credit
conditions to creditors who choose PPI contract from the same group
where the bank belongs.
27
• Information on freedom of choice: The Consumer Code requires
explicit information that consumers have the freedom to choose the
insurer: the law requires lenders to make a written offer to natural
persons, also stating that the borrower is free to choose his insurance
company.
28
• General information requirement for PPI: A standardised information
document must be provided together with the loan offer listing all
potential risks and the main terms and conditions of the insurance.
27
“Code de la consommation” Consolidated version 01/01/ 2013 Articles L312-9. Le prêteur ne peut pas
refuser en garantie un autre contrat d'assurance dès lors que ce contrat présente un niveau de
garantie équivalent au contrat d'assurance de groupe qu'il propose. and Le prêteur ne peut pas
modifier les conditions de taux du prêt prévues dans l'offre définie à l'article L. 312-7, que celui-ci soit
fixe ou variable, en contrepartie de son acceptation en garantie d'un contrat d'assurance autre que le
contrat d'assurance de groupe qu'il propose.
28
“Code de la consommation” Consolidated version 01/01/ 2013 Articles L312-7 and L312-8
20
Subsequent modifications to these are only possible with the consent of
the borrower.
29
•
Price disclosure in monthly euros: When offering PPI with a consumer
loan, the lender or credit intermediary must inform the borrower of the
standard cost of insurance, using a numerical example in euros per
month.
30
More detailed provisions on price disclosure for mortgage loans
are set out in a report from the Consultative Commission of the Financial
Sector (CCSF) providing for a standardized information sheet
31
.
70. The Lagarde legislation. The current framework is a result of the
Lagarde law
32
, which was aimed at transposing the Consumer Credit Directive
with further consumer protection measures. The relevant provisions of the law
entered into force from September 2010. Some provisions were already a
widespread practice according to a publication by the French Banking
Association.
33
6. PPI in Hungary
71. Group insurance contracts. The Hungarian Financial Services Authority
has highlighted a potential concern for consumers in its 2010 Consumer
Protection Risk Report. According to the report, most of the existing PPI
agreements in Hungary were concluded in the form of group insurance contracts,
where the insurance contract is established between the insurance company that
assumes the risk and the financial institution that grants the loan.
72. This results in a situation when there is no contractual relationship
between the consumer and the insurance company at the time of contract
signing, and since the participation in the group coverage is incorporated to the
loan agreement between the consumer and the bank, consumers might be
deprived of their choice whether they want to take out PPI at all.
34
7. PPI in Ireland
7.1. PPI market specialities in Ireland
73. Size of the market and products affected. It is estimated that around
340,000 Payment Protection policies were sold between 2007$2012 in Ireland.
These policies are sold in connection with personal loans, car finance, credit
29
“Code de la consommation” France Consolidated version 01/01/ 2013 Articles L312-9.
30
“Code de la consommation” France Consolidated version 01/01/ 2013 Articles L311-6 III.
31
http://www.banque-france.fr/ccsf/fr/telechar/publications/rapport_annuel_2008_2009/CCSF_2008-
09_ichapitre_4.pdf
32
LOI n
o
2010-737 du 1er juillet 2010 portant réforme du crédit à la consummation (Consumer credit law)
33
Federation Bancaire Francaise (2011) Fiche 13/04/2011
34
PSZAF (2010) The HFSA’s Consumer Protection Risk Report, H2 2010 p. 37-38.
21
cards and mortgages
35
. In Ireland, life insurance is sold separately to Mortgage
PPI; therefore Mortgage PPI does not include life coverage. However, typically
CC$PPI does include life coverage. For benefits, PPI benefits include the payment
of a number of monthly credit repayments. It is only in the case of death that a
lump sum is paid as a benefit in CC$PPI
7.2. Market problems in Ireland
74. Recent issues. PPI insurance has been subject to a number of
supervisory reviews, regulatory actions and some complaints in Ireland. These
mostly have focused on the sales process, with the most recent issues being the
following:
a) Focusing on eligibility instead of suitability – Undertakings did not
always use the information gathered from consumers to assess the
suitability of PPI to the consumers. Instead they focused only on assessing
consumers’ eligibility for PPI.
b) Timing of information provision – key information such as terms and
conditions were not given to consumers until after they had purchased
PPI.
c) Scope of key information – Key information was not brought to the
attention of consumers, for example, policy restrictions regarding
employment cover for contract workers were not brought to the attention
of consumers.
75. Earlier issues. Other, more historic issues that were addressed prior to
the current Consumer Protection Code include the following:
d) Sales practices: In addition to suitability and information disclosure
issues, there were several other issues around sales practices such as the
provision of explicit information on PPI as an insurance product.
(Undertakings sometimes did not reveal that the purchase of PPI was
optional, or the price of the product was not disclosed.)
e) Refund in case of cancellation – If the underlying loan was repaid or the
insurance policy itself was repaid, the rules of refund were not sufficiently
clear
f) Trainings – Sales personnel lacked sometimes lacked the sufficient
training
These issues are further elaborated below in the section describing regulatory
and supervisory actions.
35
In Ireland Mortgage PPI does not include life cover. Borrowers purchase a separate life insurance policy
when taking out a mortgage, for example, a mortgage protection policy.
22
7.3. Regulatory and supervisory actions regarding PPI
7.3.1. Consumer Protection Code
76. Codes of conduct in Consumer Protection. The Central Bank of Ireland
has a number of statutory codes of conduct. The Consumer Protection Code
2006 set out the requirements that regulated firms must comply with when
dealing with consumers.
36
The Consumer Protection Code 2006 has been revised,
and the Consumer Protection Code 2012 came into effect on 1 January 2012.
37
77. Legal nature of the Consumer Protection Code in Ireland. The
provisions of the Consumer Protection Code are binding on regulated entities and
must, at all times, be complied with, when providing financial services. When
finding contravention, the Central Bank of Ireland has the power to administer
sanctions.
38
78. PPI Rules in the Consumer Protection Code. Ireland’s Consumer
Protection Code contains a lot of provisions that apply regardless of the type of
financial services provided. The rules on information provision, knowing the
consumer, suitability and record keeping have proven to be very relevant for
PPI.
39
79. The Consumer Protection Code also includes some provisions specifically
on Payment Protection Insurance.
40
These rules target two areas:
a) Premiums disclosure: the payment protection premium must be
excluded from the initial repayment estimate of the loan advised to the
consumer, which provision was kept in 2012 as well.
b) Application forms: while the 2006 Code allowed for combined
application form (with requiring a tick box that PPI was optional), the 2012
Code specifically requires separate application forms for the payment
protection insurance and for the loan.
7.3.2. Supervisory reviews of PPI in Ireland
80. 2007 Payment Protection Insurance Review. The Financial
Regulator’s review of PPI in 2007 focused on three key areas, namely sales
practices, refund procedures, and staff training. The review found that
41
:
36
Central Bank of Ireland (2012) Consumer Protection Code 2006
37
Central Bank of Ireland (2012) Consumer Protection Code 2012
38
Central Bank of Ireland (2012) Consumer Protection Code 2012 p. 3.
39
These rules are in Chapters 4, 5 and 11 of the 2012 Consumer Protection Code.
40
Chapter 4 points 6-8 in the Consumer Protection Code 2006 and 3.24 in Consumer Protection Code 2012
41
Central Bank of Ireland (Financial Regulator) (2007) Letter
23
a) Sales practices: There were several issues around sales practices,
among others suitability, information disclosure, the provision of explicit
information on PPI as an insurance product
b) Refund process: It was not sufficiently clear in which cases and to what
extent a refund was due in case the policy was cancelled
c) Training: Staff was not provided adequate training to ensure they are
fully aware of product features
81. 2009 Review of claims processing did not indicate serious issues. A
Central Bank
42
review of claims processing for PPI policies undertaken in 2009
indicated that, where a claim was declined, this was generally in accordance with
the terms and conditions of the PPI policy.
43
82. 2011 review focusing on unemployment / redundancy claims. The
latest review carried out by the Central Bank of Ireland on sales files for PPI
policies aimed to determine compliance with the provisions of the 2006
Consumer Protection Code. The study is focusing in particular on instances
where the consumer has made an unsuccessful
44
claim under the policy for
reasons of unemployment/redundancy. A letter in July 2012 identified issues of
concern in this respect the following way.
45
1) Suitability for consumers: While the consumer may have been eligible for
PPI by virtue of criteria such as age, residency, and employment status,
this does not mean that the PPI was a suitable product for their needs.
2) Execution only sales: For sales to be made on an execution only basis,
the consumer must have specified the product, the product provider and
must not have received any advice. If these conditions are not met, firms
must meet the requirements set out in the Consumer Protection Code on
assessing the suitability of the product for the consumer.
3) Timing of key information: Key information was provided to the
consumers only after the consumers have agreed to purchase the policies
4) Key information should be explicitly drawn to the attention of individual
consumers
5) Record keeping: Firms are often unable to provide key documentation of
their relationship with a consumer
6) Other general principles: Other issues mentioned include the
requirement to act with due skill, care and diligence in the best interests
42
The Irish Financial Services Regulatory Authority (Financial Regulator) was the single regulator of all financial
institutions in Ireland from May 2003 until October 2010 and was a "constituent part" of the Central Bank of
Ireland. It was re-unified with the Central Bank of Ireland on 1 October 2010.
43
Central Bank of Ireland (2009) Financial Regulator concludes examination of claims handling for PPI policies
44
More precisely the claim appears to have been declined in accordance with the terms and conditions of the
relevant policy.
45
Central Bank of Ireland (2012) Letter p.1.
24
of customers; the requirement to seek from customers information which
is relevant to the product or service requested; the requirement on firms
to make full disclosure of all relevant material information, including all
charges, in a way that seeks to inform the customer; and the requirement
that firms do not exert undue pressure or undue influence on a customer.
83. Review of sales by firms. The Central Bank of Ireland expects the firms
to conduct a comprehensive review of their sales processes and procedures in
place since the introduction of the 2006 Code. Currently, six credit institutions
have commenced a review of their sales of PPI policies; these are due to be
completed by the end of 2013.
7.3.3. Consumer Complaints
84. Moderate number of complaints. The Financial Services Ombudsman
received 218 complaints about mis$sold PPI in the last 6 months of 2011. Of
these – just 115 were investigated further and only 20 were upheld in favour of
the consumer, (19 partly upheld) and 78 were not upheld. That is less than 10%
of PPI complaints that were upheld. In the first 6 months of 2012 – PPI
complaints to the FSO totalled 410.
8. PPI in Italy
8.1. PPI market specialties in Italy
85. The Italian PPI market was 2.4 billion euros in 2010.
46
In addition to PPI,
property insurance is often subject to cross$selling in Italy.
8.2. Market problems in Italy
86. Market investigations by the Italian Authority. The Italian Authority
(ISVAP, now IVASS) has carried out an initial investigation on the distribution of
payment protection insurance related to mortgages and personal loans in 2008$
2009.
47
ISVAP revisited the issue with a second survey on PPI in 2011
48
. The
investigation concluded the following
49
:
• Tying: Although PPI is not mandatory in Italy, banks practically treat it as
a precondition to obtain the credit product.
• Single premium: Almost all PPI policies are sold as single premium
policies, where the premium is often added to the loan, generating further
interests for the benefit of the credit grantor.
46
ISVAP Press release 6
th
December 2011
47
The data submission was requested by the ISVAP Circular Letter of 23 July, 2008.
48
The data submission was requested by the ISVAP Circular Letter of 29 April, 2011.
49
ISVAP Press release 6
th
December 2011
25
• Not in the best interest of the consumers: Banks (or financial
intermediaries) use PPI almost exclusively at their own interest, while
requiring their clients to bear the costs and the “exorbitant” commissions.
• High commissions: Policies that are distributed by banks or financial
intermediaries have higher commission rates (44% on average with a
maximum of 79%) compared to policies distributed by agents (20%).
8.3. Regulatory and supervisory actions regarding PPI
87. Requirements on suitable sales. The ISVAP Regulation No 5/2006
50
laying down rules for insurance intermediation contained some general rules on
advised sales that are important for PPI as well. These include detailed
requirements for gathering in$depth information on the consumer needs and
requirements on proposing suitable products, which means that from 2006
onwards the following rules apply in this respect.
[Intermediaries, before concluding an insurance contract, must] acquire from
customers any information useful to evaluate the adequacy of the contract with
regard to the [customer’s]… disclosed insurance and pension needs and his risk
propensity.
Intermediaries shall be required to propose or recommend contracts adequate to
meet the policyholder’s insurance and pension needs. To that end, before
concluding an insurance contract they shall acquire from the policyholder any
information they deem useful in relation to the features and complexity of the
contract offered, and record and keep such information.
51
88. Disclosure regulation. ISVAP Regulation 35/2010 regulating information
obligation and advertisement for insurance contracts contained special provisions
for PPI policies regarding cost disclosure and refund.
52
89. Cost (including commission) disclosure. According to these rules both
in the pre$contractual Information Note, and in the policy itself “the undertaking
shall show all the costs to be borne by the debtor/insured, with the indication of
the average part paid to the intermediary as commission.”
90. Refunds. For single premium policies, there is a special rule governing
refund in the case of early termination or switching of the underlying
loan/mortgage. The regulation orders that “…undertakings shall return to the
debtor/insured the part of the premium paid relating to the remaining period of
insurance with respect to the original expiry.” It allows for the right to “…retain
only the administrative costs actually sustained for the issue of the contract and
50
Regulation N. 5 of 16 October 2006 regulation laying down provisions on insurance and reinsurance
mediation referred to under title ix (insurance and reinsurance intermediaries) and article 183 (rules of
conduct) of legislative decree n. 209 of 7 September 2005 – code of private insurance.
51
ISVAP Regulation N. 5 Article 52 (1)-(2)
52
ISVAP Regulation N. 35 Articles 49-50
26
the premium refund, on condition that these are identified and quantified in the
proposal, in the policy and in the insurance application form. Those costs must
not be such to represent a limit to the portability of loans/mortgages or an
unjustified charge in case of repayment.”
91. Preventing conflicts of interests. The ISVAP regulation No. 5
53
of 2006
contained a general conflict of interest provision in its original form, stating that
intermediaries shall avoid operations that will lead to conflicts of interests,
including “those deriving from group relations, own business relations or from
relations with companies of the group”.
54
This provision was further enhanced by
the ISVAP in December 2011
55,56
, as an explicit prohibition was added, stating
that “it shall be prohibited for intermediaries to directly or indirectly become,
(…) at the same time beneficiary and intermediary of the relevant individual
or collective contract”.
57
92. Competing offers on PPI. Recent national legislation adopted in 2012
58
contained provisions to stimulate competition regarding life insurance linked to
mortgages and consumer credit. The new rules prescribe that if the banks or
others financial intermediaries take out a life insurance policy to obtain a
mortgage or a consumer credit, they must give the client at least two
additional free estimates of two different undertakings (independent from the
loan provider). Customers may also choose another life insurance from a
different undertaking which the banks or financial intermediaries have to accept
without changing the originally offered conditions for the mortgage or consumer
credit.
59
93. Minimum content and standardised format for information.
Implementing the above mentioned national legislation, ISVAP has adopted
another regulation (Regulation 40/2012) on the minimum content of life
insurance contracts related to mortgages and personal loans. Apart from
setting the minimum content, ISVAP also prescribed that information must be
presented in a standardised format to foster comparability. Consumers must
also be informed that if a life insurance contract is required for obtaining a
mortgage or consumer credit, they have 10 days to present an offer from an
alternative insurer. Should the alternative offer meet the necessary content, it
53
Regulation N. 5 of 16 October 2006
54
Article 48 of Regulation N. 5 of 16 October 2006 1
55
ISVAP (2011) Order N. 2946 of 6 December 2011
Provisions on the conflict of interests of insurance
intermediaries $ amendments to ISVAP Regulation n. 5 of 16 October 2006
56
ISVAP first attempt to modify Regulation 5 by Regulation 35 was annulled in 2010 by the Court for
procedural reasons.
57
Article 48 of Regulation N. 5 of 16 October 2006 Para 1bis
58
The decree law N.1 of 24.1.2012, converted into law N.27 of 24.3.2012.
59
Ibid, Article 28.
27
should be accepted by the loan provider without changing any of the conditions
in the initial offer.
60
94. Online comparison tools. Further to these, the same regulation also
envisaged that from September 1st, 2012, the companies marketing these life
insurance products should introduce a free online quotation service on their
website. Insurance undertakings shall also notify IVASS on the products they
market, and these products are then listed on IVASS’s website to further
facilitate consumer choice.
95. Cross%selling regulation in the Consumer Code. The Italian Consumer
Code considers an unfair trade practice any practice by a financial intermediary
requiring the customer to subscribe to an insurance policy sold by the same
intermediary or to open an account with the same intermediary in order to grant
a loan.
61
96. Complaints. Complaints concerning mis$selling practices are under
investigation, with particular reference to policies sold to consumers who are not
entitled to claim for compensation. These issues frequently involved selling
unemployment cover for self$employed or medical insurance to people who were
not able to claim for benefits because of some pre$existing medical conditions.
9. PPI in the Netherlands
9.1. Market issues in the Netherlands
96. Distorted consumer choice. The Netherlands Authority for the Financial
Markets (AFM) observed that consumer in PPI markets are not always able to
differentiate between good and poor quality in products and services. Reasons
for distorted consumer choice included information asymmetry between product
providers (and developers) and consumers and limited financial literacy, that did
not allow consumers to understand and assess the product taking into account
personal risks.
97. Poor market outcomes. As a result of the consumers’ inability to
differentiate between good$quality and poor$quality products and services,
product providers have opportunity to develop poor$quality products and
services. Examples for poor market outcomes are the misselling of single
premium mortgage PPI and general failings in PPI sales by intermediaries.
60
ISVAP (2012) Regulation n. 40 of 3 may 2012 Regulation concerning the definition of the minimum contents
of the life assurance contract referred to under article 28 (1) of Decree-law n. 1 of 24 January 2012, converted
into law n. 27 of 24 March 2012.
61
Italian Consumer Code Law Decree 206/2005 Article 21 para 3
28
9.2. Regulatory and supervisory action in the Netherlands
9.2.1. Thematic work on PPI in 2009!2010
97. AFM thematic work on PPI. In 2009 and 2010 the Netherlands
Authority for the Financial Markets (AFM) has carried out thematic work on the
sale of payment protection insurance. The AFM reviewed several cases of
consumer credit and mortgage credit in which payment protection insurance was
advised.
98. Failings in the advice process. The review concluded that there have
been the following failings in the advice process:
• Suitability of products. Financial service providers have failed to assess
whether PPI was in the interest of the client at all. They failed to assess
whether the client was capable and willing to bear the risk. In some cases
the product was not in the interest of the client at all, for example PPI for
a small credit; or, in other cases, existing covers had not been taken into
account.
• Lack of information. Information provided to the client was not
adequate. For example calculations were not based on the personal
situation of the client and the costs of the premium were not made clear
to the client. Further, the relevant information often had not been laid
down in the advice file.
• Illegal commissions. The commission paid by the product provider were
in breach of the inducement rules and thus not in the interest of the client.
99. Guidance on PPI. The AFM has published guidance with regard to
payment protection insurance. In the guidance the AFM has indicated what steps
have to be taken by a financial service provider to end up with a suitable advice.
The AFM has provided examples of a good advice process. For example the AFM
has indicated that in the case of small consumer credits a payment protection
insurance is usually not in the interests of the client. The reason is that the costs
of such an insurance (costs of advice and the premium) are not in relation to the
risk that is being covered by the product. Furthermore the rules for responsible
lending ensure that consumers are capable of bearing small loses with respect to
small consumer credits. Also the AFM has indicated that a service provider must
do the following: check the existing covers, base the calculation on the personal
situation of the client, check what risk the client is willing and capable to take,
base the advice on the risk appetite, calculations and interests of the client, and
motivate whether the client should choose a premium or a purchase price.
100. Administrative fines. The AFM imposed administrative fines on
companies for providing unsuitable advice to clients wishing to enter into credit
protection insurance policies. The Financial Supervision Act (Wft) requires
financial enterprises to provide consumers with suitable advice. They must
29
therefore obtain information concerning the consumer and take this into account
when providing advice. This means they must act in the interests of the client.
9.2.2. AFM investigation on advisor fees for consumer loan PPI
101. Further AFM work in 2013 on cost of advice. In 2012 and in the first
half of 2013 the AFM has looked at the fees charged by independent advisors for
PPI advice. The study focused on PPI sold with consumer loans through advisors;
AFM found that in some cases the fees were significant and not in the interest of
the consumer.
102. Background on Dutch rules for remuneration. As from the 1
st
of
January 2013 a ban on commissions has been introduced. This ban applies to
financial service providers advising and mediating in complex financial products,
for example unit$linked insurances, annuities, mortgage credit and payment
insurance products to consumers. Further as from 1
January 2012, a regulation
is in place with respect to adviser charging stating that adviser charges should
not be deemed unreasonable given the nature and scope of the financial service
that is rendered. For PPI this means that a fee has to be charged to the
consumer for advising on the PPI. With respect to the consumer credit the
adviser is paid by the product provider on the basis of a monthly commission.
103. Excessive PPI advice fee when mediating in consumer loans. AFM
found that advisors used the fees earned in PPI advice as a tool to safeguard
their business model. This was done by advising consumers on PPI and (in a
relatively limited percentage of cases) mediating in the purchase of one or
several PPI’s. For these activities related to PPI’s the advisors charged very
substantial fees (the market average seemed to vary between €1.000 and
€1.500 with some intermediaries going as high as €3.000 or even €4.000).
Extensive talks with individual market players confirmed that the fees charged
were disproportionate to the effort on advice and mediation of PPI and as such
had to be seen as a disguised (and illegal) fee for advice and mediation in
consumer loans.
104. Misleading consumers into thinking that the advisor fee is linked
to the loan. In most cases consumers were directly or indirectly led to believe
that the fee that the advisor was due was related to his or her effort in advising
and mediating a suitable loan. Consumers appear to be unaware that the fee
payable is only related to the work the advisor has carried out with respect to
the advice on PPI’s.
105. Limited or absent added value of PPI for consumers. Since PPI was
merely used to charge a disguised fee for mediation in consumer loans, PPI is
actually often not purchased by consumers. In these cases consumers merely
pay a fee for the advice and as such do not receive any added value. In a
substantial amount of cases were PPI is actually purchased, the relatively limited
loan amount means that the benefits of the PPI are smaller than the costs.
30
106. Maximum fees on PPI. The AFM work on the cost of advice in 2012$
2013 has resulted in significant reductions in the fee levels that consumers are
charged for advice and mediation in PPI. At the end of 2012 the largest trade
organisation for advisors of consumer loans has lowered the maximum fee in
their code of conduct from €1.500 to €500. By actively engaging in one$on$one
dialogue with numerous of the most active advisors in the field of consumer
loans the AFM has convinced these parties that it is of great importance that any
fee charged for activities performed in relation to PPI is directly correlated to the
actual time spend on those activities and cannot be a disguised means of
obtaining compensation for work done with respect to the actual consumer loan.
Most of the advisors have since confirmed to AFM that they have changed their
business model.
10. PPI in Portugal
10.1. Guidelines on PPI compliance
107. Guideline on compliance. Given the importance and economic and
social function of the product, and based on the findings of an analysis carried
out regarding this matter, the Portuguese authority (ISP) issued a guideline
(“Circular”) in March 2012 on the legal obligations regarding PPI.
62
The guideline
contains recommendations addressed to insurers
63
, which focus on four main
areas: (i) product design, (ii) pre$contractual information and clarification, (iii)
drafting (language) of the policies and (iv) underwriting practices.
108. Suitability and switching (refund) in product design. The guideline
stresses that insurers should take the target market characteristics into account
when designing the product. The profile and needs of consumers should be
reflected in the eligibility criteria
64
as well as on the contractual clauses (notably
the ones concerning coverage limitations and exclusions, deductibles, grace
periods and maximum compensation limits). Also, the guideline points out that
sometimes there are undue obstacles to switching coverage to another insurer
(especially by means of the specific content of certain termination clauses, or
when the contractual terms do not provide adequate clarification on the
customer’s right to get a pro rata refund from the original provider).
109. Pre%contractual information and clarification. The Portuguese
guideline highlights the necessity of sufficient, adequate and clear pre$
contractual information (notably for the policyholder to assess if the offered
62
ISP (2012) Circular no. 2/2012. The guideline (Portuguese version) is accessible at:
http://www.isp.pt/winlib/cgi/winlibimg.exe?key=&doc=21346&img=5190
63
The guideline is aimed at drawing special attention to the legal obligations already imposed on insurers
which are particularly implied when designing and marketing PPI contracts. Furthermore, it also highlights the
potential legal consequences (on insurers) associated with unsound market conduct regarding PPI.
64
For product underwriting / adhesion.
31
product matches his needs and to become aware of the type of risks the product
actually provides coverage for). Standard contractual clauses must be advised in
full to the parties accepting them; failure to do so results in the inexistence of
the given contractual clause. Given that PPI provides complex coverage, specific
clarification duties apply as insurers shall bring to the policyholders’ attention the
exact scope of the proposed coverage (for example, exclusions), taking into
consideration the needs of the policyholder/insured person.
110. Drafting (language used) of insurance policies. Generally, the
Portuguese law on insurance contracts
65
requires that insurance policies are
drafted “in a comprehensible, concise and rigorous manner and in highly legible
print using words and expressions used in everyday language provided that the
use of legal or technical terms is not essential”, and they should avoid the use of
vague or ambiguous expressions (specifically in risk exclusion or limitation
clauses). In fact, the Portuguese authority suggests that coverage and risk
limitation clauses should be drafted with greater care. In particular, ISP
recommends that the coverage concerning employment and incapacity for work
situations should be determined positively (and not by means of exclusions or
limitations).
111. Suitability check at contracting. Insurers are requested to carry out
66
a
proper suitability check before selling the product to the consumer (namely
regarding the type of labour agreement, employment background and prior
periods of incapacity for work). The guideline recommends that this exercise
should be carried out in due time, instead of postponing this assessment to the
moment when the customer makes a claim.
10.2. Expected effects and planned steps
112. Expected effects. In order to assess the degree of compliance with the
applicable legal framework, including the aforementioned recommendations, ISP
conducted an ex post monitoring exercise using a questionnaire addressed at
insurers marketing this kind of insurance products. Prospective surveys and
further supervisory actions will be also launched. By issuing the
recommendations above, the Portuguese authority expects a reduction of the
conflicts associated to this type of insurance product and to achieve greater
efficiency in claims setting. It hopes that the guideline may contribute to better
consumer satisfaction (and consequent reduction of the number of complaints
associated to PPI) and improved reputation of PPI insurers.
65
“Regime Jurídico do Contrato de Seguro” (approved by Decree-Law no. 72/2008, of 16 April).
66
Directly or, where applicable, through the insurance intermediary, or through the policyholder, for group
insurance.
32
11. PPI in Spain
11.1. PPI market specialities in Spain
113. Temporary and permanent coverage. Payment protection insurance in
Spain usually offers combined coverage, with some policies providing coverage
against the risks of unemployment / temporary disability, while others offering
coverage against death / permanent total disability.
114. Alternative coverage for temporary products. In PPI insurance for
unemployment or temporary disability
67
, the coverage is designed to be
alternative. Depending on the labor situation of the policyholder, only one of the
coverage will be consider applicable to the specific contract. This has proved to
be often misleading for consumers, who often thought they were covered for
both risks. This is not the case for permanent coverage.
115. In relation to those products offering life and permanent disability
coverage, sometimes failures have occurred in the absence of an adequate
statement of pre$existing conditions by the policyholder.
116. Amount of coverage. Taking also into account the different design of the
products, there are two types of payment protection insurance products
marketed in Spain as for amount of coverage: for PPI offering coverage for
life/permanent disability, some products covers the whole (original) sum of the
loan, and the lender is only entitled to benefits not exceeding the outstanding
amount; while other policies only cover the outstanding debt, with the lender
being the irrevocable beneficiary of the entire policy.
68
11.2. Regulatory and supervisory actions regarding PPI
11.2.1. PPI requirements for consumer credits
117. Special rules for consumer credits. The Spanish Law on Consumer
Credit
69
regulates pre$contractual information. This law is based on the
transposition of the EC Consumer Credit Directive, however contains additional
rules to the ones included in the directive.
118. Pre%contractual information to help comparability. According to the
rules, the creditor shall provide the necessary information enabling the consumer
to compare offers and make an informed choice when choosing a credit product.
67
For PPI offering coverage for unemployment/temporary disability, the insurance
company will be paying the loan instalments for the duration of the contingency and in
any case, with the limit set in the policy coverage.
68
DGFSP (2009) Information on website
69
Ley 16/2011, de 24 de junio, de Contratos de crédito al consumo.
33
119. Information on refund. In addition to the essential elements of the
contract, the credit agreement documents must contain information if insurance
is necessary to obtain a given credit; and if there is insurance that the consumer
has a right of refund for insurance premiums according to the rules governed by
the insurance policy.
70
120. Termination of contract and refund rules. PPI policies that are sold
with consumer credits for an undefined term shall expire when the underlying
credit is repaid. If there is PPI, in the case of early repayment the consumer is
entitled to a refund of the remaining (unused) premium.
71
Generally, consumers
are entitled to a pro rata refund of the premium.
72
For life insurance in most
cases, the law regulates the unilateral power to terminate the contract without
giving any reason and without penalty within 30 days of the delivery of the
policy.
73
11.2.2. PPI related to mortgages
121. Rules applicable to mortgages. A Circular by the Spanish National
Bank
74
establishes rules for PPI related to mortgages. The Circular represents
binding sector legislation, and contains extensive rules for pre$contractual
information and refund in case of cancellation.
122. Extension of pre%contractual information requirements to
mortgages. The Circular requires that pre$contractual information requirements
are extended to those credit agreements that are excluded from the scope of the
Spanish Law on Consumer Credits. The pre$contractual information should
include that when there are ancillary services (in particular insurance) the
acquisition of the credit (or the acquisition of the credit at certain conditions) is
subject to the purchase of ancillary services. They should also be presented with
the conditions that apply when they do not purchase these ancillary services.
75
123. Cancellation and refund. In the case of early termination of a mortgage
contract, the consumer is entitled to receive refunds for the unused premiums.
76
124. Ensuring effective protection. Additionally, in cases where the loan or
mortgage is linked to PPI, the undertaking must have procedures in place to
70
Ley 16/2011
Article 16 2. (o), (r)
71
Ley 16/2011
Article 27. 4. and Article 30. 6.
72
Ley 16/2011
Article 28 3.
73
For more detail see Spanish Law on Insurance Contracts (1980) Article 83a.
74
National Bank of Spain (2012) Circular Nº 5/2012 de 27 de junio (BOE de 6 de julio) Transparencia de los
servicios bancarios y responsabilidad en la concesión de préstamos
75
Ibid, points 2.5. (l)
76
Norma decimal 1. b.
34
ensure that the products offered can effectively protect the debtor, taking into
account the policyholder’s circumstances and personal characteristics.
77
11.2.3. Self regulation by the Insurance Association (UNESPA)
125. Non%binding best practices by UNESPA. Recently, the Spanish
Insurance and Reinsurance Association (UNESPA) has issued non$binding best
practices addressed to insurance underwriters
78
on pre$contractual information
for products that include PPI. The guidance is a supplement to the general good
practices on transparency to be followed by insurance undertakings.
126. Minimum information content. The insurance undertakings that adhere
to the self$regulation commit themselves to provide consumers with a certain
minimum information content that is laid down in the annex of the self$
regulation; these rules shall apply from June 30
th
, 2013. The insurance
undertakings also commit themselves to modify the texts used in their insurance
policies. The information should include a reference that the product is marketed
as an independent product and/or together with a loan product, and indicate that
to which of these categories the given policy belongs. The guideline also lay
down minimum information content for policies both for unemployment and
temporary disability (separately).
127. Price disclosure and refund. The best practices allow for single
premium policies, with detailed rules on disclosure. The refund process on single
premium policies is also regulated.
128. Limitations of coverage and exclusions. Information about limitations
in coverage must be explicitly stated in the policy and consumers must explicitly
accept them.
11.2.4. Supervisory actions
129. Complaints about extent of coverage. A frequent cause of complaints
to the Spanish Authority was that policyholders believed they are covered
against both unemployment and temporary inability, whereas the coverage was
alternative depending on the situation of the insured.
79
DGSFP published its
views on this issue with the aim to provide clarification to policyholders
80.
The
Spanish Supervisory Authority also conducted onsite inspections with the aim to
identify potential mis$selling conducts and increase transparency on the
distribution process.
130. Complaints about single premium. DGSFP published some case studies
with the aim to enhance financial literacy on the issue. The DGFSP consumer
77
Ibid Annex 6 Point 11
78
Unespa (2013)
79
DGSFP (2009) Consumer protection report 2009 p. 29.
80
DGSFP (2009) Consumer protection report 2009 p. 29.
35
protection report from 2009 also states a case study where
81
the policyholder
had a six$year PPI cover associated to the mortgage. After the loan was repaid
earlier (21 moths), the policyholder required refund, which was objected on the
basis that the policyholder made a claim based on unemployment before. The
case was decided in favour of the complainant.
12. PPI in the United Kingdom
12.1. PPI market in the United Kingdom
125. Size of the market, profitability. Gross written premium of PPI sold in
the UK in the years 2001$2009 inclusive was around £34bn
82
, though sales at
lower volumes had taken place throughout the 1990s. Analysis by the UK
Competition Commission (CC) showed, for distributors of PPI, in the years 2003$
2007, pre$tax profits that were between 50 and 60% of the GWP sold.
83
These
profits reflected high levels of commission from, and also often profit sharing
arrangements with, the insurer.
126. Claim ratios. A market study by the CC found that the claim ratios were
between 11 and 28 per cent of the gross written premium, depending on the
product.
84
12.2. Description of market problems
131. Enforcement actions from different authorities. Payment Protection
Insurance has been under scrutiny by different authorities in the United
Kingdom. A good summary of the UK problems is presented in the FSA 2010
Policy Statement and in the CC’s Market Study.
132. Classifying PPI issues by the FSA. The FSA has classified the common
types of failings in PPI sales the following way.
85
a) General failings in the conduct of the sale
b) Failings around eligibility, exclusions and limitations
c) Failings specific to non$advised sales
d) Failings specific to advised sales
e) Failings around price disclosure
81
DGSFP (2009) Consumer protection report 2009 p. 83.
82
FSA CP10.6 (March 2010) Annex 3 para 10; and the main report by the Competition Commission (CC) of 29
January 2009 (Market investigation into payment protection insurance), Table 2.4 (p26)
83
http://www.competition-commission.org.uk/assets/competitioncommission/docs/pdf/non-
inquiry/rep_pub/reports/2009/fulltext/542_4_4.pdf
84
. Competition Commission (2009) para 2.
85
A detailed description of these failings can be found in Appendix 4 of the FSA (2010) Policy Statement.
36
f) Additional failings specific to single premium policy sales.
133. Market power in distribution. The CC market study found that PPI
providers (distributors, intermediaries, stand$alone providers) did not face
significant competitive pressure, possibly allowing them to make supra$
competitive profits. PPI underwriting (insurance companies) on the other hand
were making reasonable, but not excessive rates of return, suggesting a
significant level of competition.
The vertical integration of the two activities,
however, was not found to further contribute to the lack of effective
competition.
86
12.3. Regulatory / Supervisory responses
134. Remedies introduced by the Competition Commission. As a
conclusion of its investigation, the CC proposed remedies on distributors,
intermediaries and where relevant underwriters.
87
After legal challenges from
market participants, the CC published its final Order on 24
th
March 2011.
88
The
most important areas of remedies are listed below.
a) Prohibition on selling PPI at the credit point of sale. Prohibition on
selling PPI at the point of sale of the credit until after seven days after the
credit sale or, if later, seven days after the supply of a personal PPI quote.
b) Prohibition on selling single!premium PPI policies. Premiums can be
charged monthly or annually. Where an annual premium is paid by a
consumer, then a rebate must be paid to consumers in direct proportion if
the consumer terminates the policy during the year, and no charges for
early termination are allowed.
c) Provision of a personal quote. This provision is expected to help
consumers get information that is tailored to their individual needs.
d) Information provision in marketing materials on the following:
• The monthly cost of PPI per £100 monthly benefit
• PPI is optional
• PPI is available from other providers
• Reference to information sources
e) Provision of information to regulatory agencies, to help monitoring
market activity, and disclosure of claims ratios.
f) Provision of an annual statement.
86
Competition Commission (2009) paras 5-71 and chapter 2 and 4.
87
Competition Commission (2009) para 7, paras 79-89 and chapter 10
88
Competition Commission (2011) a short summary can be found in the press release Competition Commission
(2011b)
37
135. Legal nature of the Competition Commission remedies. Competition
Commission orders have a regulatory effect on the market as these orders are
enforceable in the courts by civil proceedings.
89
136. Policy Statement by the FSA. In August 2010 the FSA published
finalised:
• Handbook text (Guidance and Evidential Provisions) and supporting material
(including examples of fair redress calculations) concerning the fair
assessment and, where appropriate, redress of Payment Protection Insurance
(PPI) complaints;
• statements on root cause analysis of PPI complaints and firms’ obligations
toward non$complainants potentially affected by recurrent sales problems;
• an open letter that listed common failings in PPI sales; the letter reflected
the concern that one reason many firms are not handling PPI complaints
correctly is because they are not applying the appropriate standards for the
sale of this product.
137. Enforcement action by the FSA. The FSA has conducted 28
enforcement cases (with fines) concerning PPI. 26 of these during (2006$2012)
concerned poor PPI selling practices (largest fine £7mn)
90
. 2 other cases (in
2013) concerned failings in the handling of complaints about PPI sales (largest
fine £4.3m).
138. Refund on mis%sold policies. According to FSA statistics, firms have
paid out compensation exceeding £8.9 bn since January 2011.
91
The FSA has
also issued guidance on PPI consumer contact letters in July 2012, describing the
FSA’s view on the fair and clear content of communications sent by distributors
to customers who they think may have been affected by recurrent sales
failings.
92
12.4. Recent market developments
139. New forms of protection. Recently, according to the UK Supervisory
authorities, some firms have developed, or are seeking to develop, new forms of
protection that aim to meet similar consumer needs to payment protection
insurance (PPI). These protections can take a form of an insurance policy, such
89
Competition Commission (2006) In Chapter 7 Enforcement powers and procedures; para 7.8 reads as
follows.: “…Any person to whom an undertaking or order relates owes a duty of compliance to any person
affected by a contravention of the undertaking or order. Any person who has sustained loss or damage through
a company’s contravention of the undertaking or order may bring an action before the courts. The CC and the
OFT may also bring proceedings for the enforcement of undertakings and orders accepted or made by the CC.
(…)”
90
FSA (2008) Final Notice to Alliance & Leicster plc
91
FSA(2013) information on monthly refund and compensation
92
FSA (2012) Finalised Guidance on Customer Contract Letters
38
as shortterm income protection (STIP), or other, potentially non$insurance
forms where the terms of a credit agreement are modified on the occurrence of
specified events. (E.g. debt freeze or debt waiver).
140. Regulatory response: Guidance document on Payment Protection
Products. In January 2013, the FSA and the OFT jointly finalised guidance on
payment protection products. The FSA and OFT recognise that the market for
payment protection products continues to develop, and that some of the issues
which previously contributed to poor outcomes for PPI may be less evident in the
current market (e.g. more flexible/modular products may help consumers to buy
protection which better aligns with their needs). However, the FSA/OFT wanted
to help ensure that firms mitigate the risks appropriately, and design and sell
products that are not only commercially viable but also deliver good consumer
outcomes. By setting out the regulators’ views at an early stage, firms can be
aware of relevant regulatory requirements and expectations and can factor these
into their business planning and processes.
141. Key messages of the guidance. The FSA and OFT key messages
included:
• When designing new payment protection products (or reviewing the design
and distribution of existing products) firms should
i. identify the target market for the protection,
ii. ensure that the cover offered meets the needs of that target
market, and
iii. ensure that the product does not create barriers to comparing,
exiting or switching cover.
• Firms should be able to demonstrate that they have sound product
governance arrangements in place.
• Firms should be aware of the relevant statutory provisions and how these
may apply in relation to credit agreements with debt freeze/waiver or
similar products or product features.
• In particular, there should be adequate transparency to consumers
regarding the nature, price and implications of such products.
• Firms should ensure that they treat actual and potential customers fairly
and do not engage in unfair or improper business practices.
39
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40
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41
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