Warning on new-style PPI policies

The authorities are going to keep a close eye on new types of PPI policy that may emerge

Financial services firms have been warned not to devise harmful new versions of discredited payment protection insurance (PPI) policies.

The warning comes from the Financial Services Authority (FSA) and Office of Fair Trading (OFT).

They say they will use their powers to stop firms selling new types of loan insurance that might damage customers.

The current clampdown on past mis-selling will cost banks and other firms billions of pounds in lost income.

Big banks in the UK were the main sellers of PPI policies, to people who took out mortgages, credit cards or other loans.

As a result of a comprehensive defeat in the High Court earlier this year, the banks have now been forced to set aside at least £6bn to pay compensation to hundreds of thousands of customers to whom they mis-sold the policies.

In the wake of this, the authorities are worried that financial services firms will simply invent new types of "insurance", which could equally expose customers to being bamboozled into buying a policy they do not need and which might not cover them in any case.

Margaret Cole, FSA managing director, said: "This is the first time that the FSA has issued guidance on the design of a specific product."

"The two organisations [FSA and OFT] will continue to monitor developments in the market, and will take appropriate action under their respective powers where firms' products or practices risk causing detriment to consumers," she added.

Tough stance

The PPI mis-selling scandal, which followed similar episodes involving personal pensions and mortgage endowment policies, has at long last forced the financial authorities to adopt a tougher attitude.

Instead of waiting for problems to develop and then clearing up the mess afterwards, they will now intervene to try to stop these problems developing in the first place.

The FSA is due to be dismembered, with responsibility for consumer protection being passed to a new Financial Conduct Authority (FCA).

The current head of the FSA, Lord Turner, recently said it was vital the FCA had the power to ban financial policies before they were sold.

"In financial services, the potential for the customer to be ripped off is simply far greater than in other sectors of the economy - and the consequences potentially more significant," he said.

In a consultation on their proposed new guidance, the FSA and OFT say they are worried that:

• firms are not properly identifying which groups of people might genuinely benefit from their "protection" insurance.

• the policies may not meet the customers' real needs.

• the payout from a successful claim may not be good enough for a customer.

• the policies may be too complex or opaque for customers to compare.

"This is a key time as the market shifts away from PPI and firms begin to develop new products or product features - such as short-term income protection or debt freeze or debt waiver as elements of a credit agreement or mortgage," the FSA said.

The OFT warned that it would take action, using its powers to regulate providers of credit under the Consumer Credit Act, to stop improper or unfair selling practices.