Attempting to learn lessons from past events, in late January 2013 the Financial Services Authority (FSA) and the Office of Fair Trading (OFT) issued joint guidance regarding certain types of product which might be seen as an alternative to payment protection insurance (PPI). These alternatives may include short-term income protection, debt freeze and debt waivers. The FSA’s press release states: “The previous failings in relation to PPI must not be repeated.”
PPI has become the most widely mis-sold financial product ever in the UK, with banks and other financial institutions forced to pay billions in compensation to disadvantaged customers.
Short-term income protection (STIP) works in a similar way to existing long-term income protection insurance (permanent health insurance), except that benefits are only payable for a limited period, such as two years. In the event that the policyholder cannot carry out their occupation, or cannot perform specified day-to-day tasks, then the policy pays out a fixed income each month until the plan expires or the customer returns to work. Policies are usually sold with a choice of deferred period – the period following a claim before any benefit is paid – which may be anything between 4 and 52 weeks. Unlike PPI, there is no cover for unemployment with this type of plan. STIP, like PPI, can only be offered by the lender once seven days have elapsed since the loan completion. You are free to shop around for alternative cover.
Debt freeze is where the lender agrees to defer all or part of the borrower’s obligation to make repayments. At the end of the debt freeze period, repayments must recommence, including repayment of the deferred amounts.
Debt waiver is where the lender agrees to waive interest and/or charges on the loan. At the end of the debt waiver period, there is no obligation for the borrower to make up the missed payments, although repayments may recommence at a higher interest rate.
All short-term income protection sales are regulated by the FSA. Debt freeze and debt waiver are regulated by the OFT under the terms of the Consumer Credit Act, unless they are sold with a first-charge mortgage, in which case they are subject to FSA regulation. However, from April 2014 all consumer credit regulation will transfer from the OFT to the new Financial Conduct Authority (FCA), one of the successor bodies to the FSA.
The guidance calls for products to be transparent and targeted at the right customers, with particular emphasis on the cost structure and risk implications of purchase. Providers must avoid creating barriers preventing consumers from comparing, exiting or switching cover.
Firms have been urged to treat customers fairly and not to engage in unfair business practices. The OFT has made clear that failing to comply with the guidance could result in a firm losing their Consumer Credit Licence.
When the FCA is launched, it will have powers to ban products, which the FSA did not have in relation to previous poorly designed products, such as single premium PPI.
The British Bankers Association (BBA), the banking trade association, who contributed to the FSA/OFT consultation on the subject, appeared to welcome the guidance. “We will now be reading the guidance issued today to ensure the instructions are implemented,” said a BBA spokesperson.