The PPI sector is currently receiving unprecedented regulatory scrutiny. The possible consequences of this scrutiny are as yet unclear but it seems likely that both the terms on which this insurance is offered and the way in which it is sold will need to change significantly.

The PPI market has been in the spotlight over the past few years and two different regulators, namely the FSA and OFT, have been actively investigating a variety of market practices. The FSA published an extensive ‘thematic study’ into the sector in November 2005 and this work is being followed up with a view to producing a further report in the autumn of this year. The FSA has been looking in particular at the risk of inappropriate sales and at the quality of advice given during the sales process.

At present, however, attention is centred around the OFT’s market study, which is due to be concluded by the end of 2006. In launching the study, the OFT referred to a number of areas of concern including the high barriers to market entry, the apparently high profit margins and the lack of information to consumers about alternatives. The first step by the OFT for the purposes of the study has been to issue questionnaires to a wide variety of market participants - the deadline for completing these questionnaires has recently expired. While no conclusions can yet be drawn about the course and likely outcome of the inquiry, some comments can be made.

At one extreme, the OFT may decide to do nothing and, at the other, it can refer the whole market to the Competition Commission for investigation. This is the option that was followed in the case of store cards, for example, but it is a major undertaking both for the industry and for the Competition Commission and is therefore only likely to be undertaken if serious concerns are raised.

In between these two extremes, the OFT can enter into various voluntary arrangements with the sector, for example in relation to the publication of information and in relation to best practice in terms of selling procedures. This may be the more likely alternative and the industry may well prefer to make concessions on such matters rather than undertaking the uncertain route of a full Competition Commission investigation.

However, the market study should not distract attention from another key issue regarding PPI, namely the application of the Unfair Terms in Consumer Contracts Regulations. There have already been a number of cases where the FSA or the Financial Ombudsman Service (FOS) have investigated the terms of these policies and more seem likely.

To date, attention has focussed around terms in PPI policies which limit or exclude refunds for consumers when the policy is cancelled early. The FSA has sought to argue that such terms fall foul of the Regulations although these terms do not obviously fall within the indicative list of potentially unfair terms in Schedule 2 of the Regulations. On the other hand, limiting or excluding refunds may be problematic in terms of the fairness requirements imposed by the Regulations where this does not reflect costs incurred by the insurer. Our own research tends to suggest that the terms of these policies may not have been recently reviewed by all insurers to verify compliance with the Regulations. Given the various external investigations which are underway, insurers may wish to verify the extent of their compliance with the Regulations with a view to fending off at least one of the potential threats to their PPI business.

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