FSA warns of insurance mis-selling risk

The City watchdog today told financial services firms to take urgent action over the way they sell payment protection insurance (PPI).

The warning followed a mystery shopping exercise by the Financial Services Authority (FSA) which uncovered examples of poor sales practices and breaches of its regulations.

It found there was a risk that the policies, which cover debt repayments if the holder loses their income, were being mis-sold to people who would never be able to claim on them.

In some cases staff were giving advice when they weren't qualified to do so, people were not being warned about exclusions and the policies were not being properly explained to consumers.

The regulator found that companies selling the insurance alongside mainstream mortgages were generally complying with the regulations, but there were problems among companies selling it with other products, such as credit and store cards and loans.

It found that half of the 30 firms selling PPI with unsecured credit failed to take reasonable steps to ensure policies were not sold to people who would not be able to claim on them, or which would provide them with only limited cover.

Around half of the firms that sold the policies on a non-advised basis also did not have adequate systems in place to stop their staff giving advice.

The FSA also found that the level and structure of inducements and sales targets for staff could encourage mis-selling at some firms.

It plans to give detailed feedback on its findings to the companies that sold the policies and the insurers who provided them, and those firms involved in some of the more serious breaches will be referred for further investigation.

A second round of work will take place early next year to make sure compliance levels have improved.

Clive Briault, FSA managing director for retail markets, said: "When properly structured, explained and sold, PPI can provide worthwhile cover for consumers against unexpected changes in their personal circumstances.

"We were therefore pleased to see that sales of regular premium PPI sold with prime mortgages are generally compliant.

"However, compliance standards in other areas of the market, notably single-premium PPI business, are generally weak. Those firms where these problems exist must take urgent action to address them."

The three main trade associations, the Association of British Insurers (ABI), Apacs and the British Bankers' Association said they would work to address the FSA's concerns.

Stephen Haddrill, the ABI's director general, said: "We will look closely at the particular concerns highlighted by the FSA, and will discuss these with them, as well as discussing our own improvements.

"In particular, we want to raise the bar to ensure there is a good basic policy standard that all customers can rely on."

In September, Citizens Advice made a supercomplaint about PPI to the Office of Fair Trading (OFT), saying the cover was "very expensive, mis-sold to people who cannot claim on it, and designed to exclude many of the most common situations that can lead to debt".

Today the charity's head of social policy, Dan Vale, said: "The FSA report highlights the extent to which poor sales practices are endemic within the industry, and the extent to which incentives are leading to mis-selling.

"It confirms many of the problems we have highlighted, including inappropriate sales and very poor information on cost and cover.

"But the FSA report does not deal with all the issues, namely the cost of PPI and the content of policies. That is why, with increasing independent evidence of market abuse, the case for an OFT investigation is now overwhelming."

Citizens Advice urged people with payment protection insurance to check their policies.

"If, having done this, they think they may have been mis-sold payment protection insurance, they should complain to the firm concerned and ask for a full refund," said Mr Vale.

Q&A: Payment protection insurance