Clive Briault, FSA managing director of retail markets, said:
"This is an excellent outcome that delivers concrete benefits for consumers. When properly sold, PPI can provide valuable protection. But we have been particularly concerned with so called 'nil refund terms'. These are contract terms that prevent consumers from receiving a partial refund if they cancel a single premium PPI policy for any reason. Such reasons could include consumers repaying the associated loan early or no longer being able to make claims due to changed circumstances."
The agreement, secured in collaboration with a number of trade associations, means that on single premium PPI policies, firms should:
· not include nil refund terms in contracts with new customers;
· not apply nil refund terms in contracts with existing customers;
· contact existing customers if their contracts contain nil refund terms to inform them of how refunds will be dealt with in practice;
· treat their customers fairly if they need to reissue the associated loan in order to cancel the PPI;
· calculate the refund fairly, taking into account their reasonably incurred costs, which may or may not result in a pro-rata refund; and
· include in new policies examples or a table to illustrate how refunds will be calculated to improve transparency.
The FSA has been concerned with the overall fairness and transparency of refund terms in single premium PPI policy contracts and particularly the operation of nil refund terms. While there are firms that already provide a refund, the agreement is designed to make refunds clear and fair for all consumers.
Single premium policies involve the consumer paying for the cover for the duration of the loan by a lump sum at the start of the contract. The premium is usually added to the total value of the loan with interest charged on top. This is in contrast to regular monthly premium payments which incur no further cost to the consumer if cancelled.
Existing customers with nil refund terms in their policies should be contacted by their firm to be informed of how refunds will be dealt with in practice. They should consider this communication carefully and contact the firm if they have any questions. Also, customers who are thinking about cancelling their policy should ask their firm what refund they would receive. Customers may not receive any refund if they cancel very close to the end of the policy or if they have already made a successful claim under the policy.
