Our approach to Payment Protection Insurance (PPI) mis-sale complaints

This section of our online PPI resource gives an overview of the ombudsman's approach to some of the common issues raised in disputes about the mis-sale of payment protection insurance (PPI):

Introduction

Our approach to PPI cases is based on those cases that we have seen. But it is important to note that this may change in light of cases we receive in the future. We may also decide to adopt a different approach to a particular case to ensure we reach a fair decision.

The law requires us to assess each case on the basis of our existing powers - and what is fair and reasonable in the circumstances.

What evidence do we use to investigate PPI cases?

When we investigate cases involving PPI, the evidence we examine might include:

• Documents produced at the time a policy was taken out;
• Both parties' recollections of the sales process;
• Recordings of relevant phone conversations;
• Sales scripts and staff training material;
• The typical outcomes of the sales process at the time; and
• Information from regulatory authorities.

We also take into account the relevant law, codes, regulators' rules and guidance and good industry practice.

What do we usually consider when we investigate PPI cases?

This will depend on the case, but we will usually consider:

• Whether a consumer was eligible for a policy;
• Whether a financial business made it clear that a policy was optional;
• Whether a consumer would have been caught by any important limitations in a policy; and
• Whether a policy's costs and benefits were made clear to a consumer.

Different types of PPI policy

What types of PPI policy are there?

There are two main types of PPI policy:

• Single-premium policies - where a consumer makes a one-off, upfront payment. The cost of the policy is added to the loan and paid for monthly - on top of the monthly loan repayments; and
• Regular-premium policies - where a premium is paid on a regular basis - usually monthly.

Was the policy a single-premium or a regular-premium policy?

PPI policies sold in connection with credit cards are generally regular-premium policies. PPI policies sold in connection with loans can be either single-premium or regular-premium policies.

When we investigate a case involving PPI, we will need to determine which type of policy a consumer has taken out - and will examine all the policy documents available to do this. The type of policy a consumer took out will affect what circumstances we take into account when deciding whether it was mis-sold.

Types of sale - "advised" and "non-advised"

How are PPI policies usually sold?

• "Non-advised" sales (sometimes known as "informed choice" sales) - where a financial business provides a consumer with information about a policy - but does not give them any advice and does not make a recommendation; and
• "Advised" sales - when a financial business either gives a consumer advice or makes a recommendation.

Financial businesses have different obligations depending on the type of sale.

In cases involving non-advised sales, we would expect a financial business to have given the consumer information that is clear, fair and not misleading - to enable them to make an informed choice about whether the policy is suitable for them. This includes the need to draw the consumer's attention to any significant terms and conditions of the policy.

In cases involving advised sales, we would expect a financial business to have taken adequate steps to make sure the policy they recommended was suitable for the consumer's needs.

See below for further guidance.

Was a sale advised or non-advised?

PPI can be sold on an advised or non-advised basis through any sales channel. In many cases it will be clear whether advice was given - for example, postal and internet sales are usually non-advised. However, the position will not always be so clear.

When we are considering whether a sale was advised or non-advised, we look at the circumstances of the actual sale to establish what did happen, rather than what was supposed to have happened.

Regardless of how a policy was actually sold, we will examine the evidence to see whether the financial business made the basis of the sale clear to the consumer. For example, we will look at the language used by the business - to see whether it was reasonable for the consumer to have understood the nature of the sale.

Sometimes, when a consumer complains to a financial business about a sale, they are told that it was non-advised. But if the case reaches us, and we look at the evidence, we find the financial business communicated in a way we would expect to see in an advised sale. In these cases, if it seems likely that the way the business communicated affected the consumer's decision to take out the policy - by the consumer placing some weight on what was said - we may decide that the sale was advised.

Eligibility

What are initial eligibility criteria?

All PPI policies have initial eligibility criteria that a consumer has to meet to take out a policy. If a consumer did not meet the eligibility criteria when they took the policy out, they can never make a successful claim under the policy.

What responsibilities do financial businesses have in relation to initial eligibility criteria?

In the cases we see where initial eligibility is an issue, we would expect a financial business to have set out the eligibility criteria in the policy document and, if they issued one, in the policy summary/key features document.

Because an ineligible consumer will never be able to make a successful claim, we would expect a financial business to have checked that a consumer met a policy's eligibility criteria before taking it out.

In cases involving sales that took place without an adviser present (for example, postal or internet applications) we would expect a financial business to have made sure that the consumer was given the eligibility criteria before being given the option to take out the policy.

Which initial eligibility criteria do we see?

The most common types of initial eligibility criteria we see are:

• Age - where a policy specifies age limits, a consumer must usually be between 18 and 65 at the time they take the policy out. Sometimes there will also be a requirement that a consumer must not exceed a certain age at the end of the policy term - or the term of the associated loan.
• Employment - some policies require a consumer to be working for a minimum number of hours a week at the time they take the policy out (normally 16 hours). Sometimes a policy is less specific - and a consumer simply has to be "working" at the time they take the policy out. 
  
  Some policies do not require a consumer to be working at all when they take the policy out - and only require that they meet specific employment criteria in the period leading up to a claim. This is not an initial eligibility criterion because all consumers, whether they work or not, will be eligible at the time they take the policy out.
• Residency - where there is a residency criterion, it will often be that a consumer should ordinarily be resident in a specific country (usually the UK).

In addition, some policies will not cover:

• People who are self-employed;
• Casual or temporary contract workers.
• Consumers on maternity leave (at the time the policy would be taken out).

Policies vary in the eligibility criteria they include and the exact scope and wording of those criteria.

Was the consumer eligible for the policy when they took it out?

If a consumer has a claim declined, it does not necessarily mean that they were ineligible for the policy. It may simply be that the claim related to a specific exclusion under the policy's terms and conditions.

Similarly, there is a difference between a consumer not being eligible to take out a policy at all and their not being eligible for certain elements of cover.

In most cases, it is straightforward to determine whether a consumer was eligible for the policy when they took it out. We look at the eligibility criteria in the policy document alongside the information provided by the consumer at the time of the application.

Pressured sales

What is a pressured sale?

We sometimes see cases where a consumer complains that they were pressured into taking out PPI.

A complaint of being pressured into taking out a policy is different to issues of consent to take out a policy, whether the consumer knew the policy was optional and/ or whether the sale was assumed - that is it was sold on the basis that it was expected the consumer would take the policy out and the consumer would have needed to opt out of the sale - which can be much more difficult.

Was the consumer pressured?

When a consumer complains that a sale was pressured, we will examine all the evidence to find out what happened. We will establish whether the financial business said or did something that made the consumer feel they had little choice about whether to take out the policy. In some cases, the consumer might have felt that they had to take out the policy to proceed with their loan or credit card application.

In some cases this will be relatively straightforward - for example, where there is a recording of the phone conversation between a consumer and a business.

In a lot of cases we see, there will be no recorded evidence. In these cases we will ask each party to give us an account of what happened - as well as looking at any relevant sales scripts.

If there is evidence to support the consumer's complaint that they were pressured by the financial business into taking out the policy, we usually decide that the policy was mis-sold.

Consent, optionality and assumed sale

Sales practices - and how they affect a consumer's decision to take out a policy

In the cases we see, we would expect a financial business to have made it clear to a consumer that a PPI policy was optional - and to have got their consent before adding a policy to a loan or credit card. They should not have added the policy automatically.

In some cases we see, a consumer says that they:

• Were not aware the policy was optional;
• Did not want the policy;
• Did not know they had the policy; or
• Only agreed to the policy because they were led to believe it was necessary to get the loan or credit card.

Did the financial business make it clear that the policy was optional - and get the consumer's consent?

We will establish whether a business explicitly said (or used language that ought to have made it clear to a consumer) that:

• The policy was optional;
• It was a separate thing to the loan or credit card; and
• The consumer's decision whether or not to take it out would have no impact on whether they got the loan or credit card.

We will also examine the evidence to establish whether a business got a consumer's agreement to taking out a policy before it added it the loan or credit card.

Some of the other things we will look at in these cases include:

• Was the cost of the policy set out separately from the cost of the loan or credit card? Setting out the cost of the policy separately would have helped to make clear to the consumer that there was a separate cost for taking out the policy and therefore that it was a separate transaction.
• Did the consumer sign separately for the policy?
• Did the financial business say the policy was optional - and go on to do or say anything to undermine this message? For example, a business might contact a consumer to tell them that a lender had decided not to give them a loan - but that another lender might give them a loan if they agreed to take out PPI.

In some cases, we will need to look into exactly when a policy was added to a consumer's account. For example, PPI may not have been added at the point a credit card was taken out, but at a later point - for example, when the consumer rang up to activate the card, or during a subsequent marketing phone call to the provider's existing customers. We will consider whether it is likely the consumer would have been aware that a PPI was optional, and whether they would have been aware - for example, from their statements - that it had been added.

In internet and postal sales, did the consumer make an "active selection" of PPI?

An "active selection" of PPI takes place when a consumer is asked clearly whether they want it, and has to do something to respond. For example, they might have to tick a box. This usually takes place during postal or internet sales. When these cases are referred to us, we look at the evidence to establish whether the option to select PPI was set out clearly - and whether the consumer had to make an active selection.

Some forms ask a consumer to "deselect" PPI - usually by ticking a box if they do not want PPI. Where this happens, we are likely to conclude that a policy was mis-sold - because the consumer doing nothing would have been interpreted as the consumer choosing to have PPI. This might not have been the case.

Adequacy of product information

Was a consumer given adequate information about a product?

When investigating PPI cases, we would expect a financial business to have drawn the significant features of a policy to a consumer's attention. This would have allowed the consumer to make an informed decision about whether to take out the policy.

We would also expect a business to have taken additional steps to highlight any policy terms that are particularly unusual - or that had significant implications for the consumer. These might include:

• Exclusions relating to a pre-existing medical condition;
• Requirements for self-employed consumers to make unemployment claims; and
• The cost and benefits of the policy.

In cases involving single-premium policies, we might also expect a business to have highlighted:

• The terms for cancelling the policy early; and
• Any "term mismatch"

If we conclude that significant features of a policy were not adequately drawn to a consumer's attention, we will consider whether this affected their decision to take out the policy. In other words, we will decide whether the consumer would have taken out the policy if it had been explained adequately.

Was a recommendation made to a consumer suitable?

In cases involving "advised sales" - where a recommendation is made to a consumer - we would expect a businesses to have taken adequate steps to identify and consider a consumer's needs, and to make an appropriate recommendation to them.

Sometimes, a business cannot make a fully suitable recommendation. In these cases, we would expect it to have highlighted the shortcomings in its recommendation so the consumer can make an informed choice about whether to take out the policy. This is sometimes referred to as "advice with caution".

When we see cases involving advised sales, we weigh up the consumer's circumstances and the policy terms to determine whether the recommendation was suitable. Things we may consider include:

• Who the policy was set up to cover;
• Pre-existing medical conditions;
• The consumer's employment status; and
• The cost and benefits of the policy.

For single-premium policies, we may also consider:

• The consumer's need for flexibility;
• The affordability of the policy; and
• Any "term mismatch"

For monthly premium policies, we will also consider the period of cover available.

If we conclude that the business made an unsuitable recommendation, or that any shortcomings were not adequately highlighted, we will consider whether this affected the consumer's decision to take out the policy. In other words, we will consider whether the consumer would have taken out the policy if they had been aware it was not suitable for their needs.

Joint borrowing - who was policy set up to cover?

Why is this important?

When consumers take out loans in joint names, many PPI policies only provide cover for the consumer whose name appears first on the credit or loan agreement. This person is often referred to as "the first named person".

Other policies will provide life cover for both consumers - but will only provide the main elements of cover (that is, accident, sickness and unemployment cover) for the first named person.

Credit card PPI policies only provide cover for the credit card account holder(s). They do not provide any cover for an additional card holder - that is, someone who the account holder says can use the credit card.

What are financial businesses required to do when setting up policy cover for joint borrowers?

In cases involving non-advised sales, we would expect the financial business to have given the consumer(s) clear information so that they could understand who would have been covered by the policy and what they would be covered for.

In cases involving advised sales, we would still expect the financial business to have given the consumer(s) clear information. But we would also expect them to have taken into account the consumers' circumstances (including their incomes) to make sure it recommended the right policy cover.

If the sale was advised, was the recommendation suitable for the joint borrowers?

When we see cases involving advised sales of PPI to joint borrowers, we examine the evidence to establish whether the recommendation was suitable. We assess whether the policy was set up to cover (or provide the main elements of cover) to the "wrong" consumer - that is, the consumer with the lower income.

Pre-existing medical conditions

What are pre-existing medical conditions?

Most of the PPI policies we see exclude or limit the cover available to consumers who had medical conditions or disabilities at the time they took out the policy - or for a defined period before that point. These conditions or disabilities are usually referred to as "pre-existing medical conditions".

Did the pre-existing medical condition exist when the policy was sold?

When considering whether a policy was mis-sold, we will look at whether a consumer was affected by an exclusion for pre-existing medical conditions at the time they took out the policy.

We will also consider the nature of the pre-existing medical condition because the exclusion may not have, in real terms, a significant effect on cover. For example, having a dislocated toe at the time of sale may not have a significant practical effect on the value of cover under a policy for someone whose employment involves working at home at a computer all day.

If a consumer was not aware of an existing medical condition when they took out a policy, but it becomes clear that they did have one at that time, we will usually conclude that a policy was not mis-sold. The financial business would have been unaware of the condition or its impact on the cover available to the consumer.

In cases where a consumer knew they had a pre-existing medical condition but did not tell the financial business about it, we will find out why - and use this information to determine whether the policy was mis-sold. If a consumer knowingly withheld relevant information, we are unlikely to uphold the complaint. But if they did not tell the business about a relevant condition because the business had given them no reason to believe it might be relevant, we are likely to uphold the complaint.

Do the policy terms exclude the consumer's pre-existing medical condition?

Most of the PPI policies we see exclude pre-existing medical conditions entirely. That means that in the majority of cases, a consumer is not able to make a claim under the policy that relates to a pre-existing medical condition. However, not all PPI policies exclude them. Others, although they exclude them initially, will later start to cover them if a consumer stays symptom-free for a defined period.

Some policies we see do not use the term "pre-existing medical condition" at all. Instead, they refer to "any illness or disability on the date the cover commences".

It is important to carefully check the exact terms of any exclusion.

Even if a consumer had a pre-existing medical condition when they took a policy out, we will usually conclude that the policy was not mis-sold if the policy terms do not exclude that condition.

What do financial businesses have to do in relation to pre-existing medical condition exclusions?

In the cases we see, we would expect a financial business that sold a policy with restricted cover for pre-existing medical conditions to have pointed this out to the consumer. This is because the restricted cover was a significant feature of the policy, and it might have affected the consumer's decision whether to take it out.

In cases involving non-advised sales, we would expect a financial business to have pointed the exclusion out to the consumer. The same applies in cases involving advised sales - but we would also expect the business to have checked that the policy was suitable for the consumer's needs.

Were exclusions pointed out to a consumer during the sales process?

We look at the evidence to establish:

• Whether the financial business did enough to make the consumer aware that pre-existing medical conditions were excluded. We look at the relevant policy documentation to see whether it set out the exclusion with "sufficient prominence" - as well as recordings of phone conversations and sales scripts; and
• Whether, if this had been pointed out to the consumer, this would have affected their decision to take out the policy.

Where a business did not point out exclusions that were relevant to a consumer before they took out a policy, we usually find that a policy was mis-sold. We take the view that it was not enough to simply have reminded the consumer to read the policy.

Did the policy documentation set out the exclusion with "sufficient prominence"?

To determine this, we look at:

• The length of the document;
• The size of the print;
• Whether the document was closely worded;
• Whereabouts in the document the exclusion appeared; and
• Whether the exclusion was set out in full and in one place - or whether it required the consumer to read more than one section to fully understand it.

We also consider whether the exclusion was set out in clear language that could be easily understood by the consumer.

Was an exclusion drawn to a consumer's attention before they decided to buy a policy?

We look at the evidence to establish whether:

• A financial business told a consumer about a relevant exclusion before it asked them to agree to take out the policy; and
• The business explained the exclusion clearly, in straightforward language.

In cases involving face-to-face sales, we ask the financial business for evidence summarising the discussion that took place when the policy was taken out - for example, a demands and needs statement.

For sales that took place over the phone, we listen to recordings of the relevant conversations. Where recordings are not available, we ask financial businesses to give us copies of their sales scripts, so we can establish what is likely to have been said.

In cases involving internet sales, we examine any relevant screen shots. If the consumer had to access the terms and conditions (including the exclusion relating to pre-existing medical conditions) before agreeing to take out the policy, or if they were clearly and visibly prompted to read them, we will usually be satisfied that the financial business drew them to the consumer's attention before they decided to buy the policy.

In cases involving postal sales, we look at the way the financial business presented written information about the exclusion. We will decide whether the way it was presented was sufficient to draw it to the consumer's attention.

We sometimes see situations where a financial business did not tell the consumer about the exclusion until after they had agreed to take out the policy. But when it became clear later in the conversation that pre-existing medical conditions were not covered, the consumer was given a further opportunity to decide whether to take out the policy. In these cases we may decide that the financial business had done enough to draw the exclusion to the consumer's attention before they committed to buying the policy.

If the sale was advised, was the recommendation suitable?

In cases involving advised sales, we would expect a financial business to have made sure that a policy was suitable for a consumer's needs. If a business recommended a policy to a consumer who had a pre-existing medical condition that would be excluded from cover, we will often conclude that its recommendation was unsuitable.

Employment status

In considering PPI complaints, why is a consumer's employment status - at the time they took out the policy - important?

Many PPI policies we see contain exclusions to – or limitations on – the unemployment cover provided to consumers it defines as "self-employed". Policies might also exclude or limit the unemployment cover provided to company directors with shares in the company, temporary/fixed term contract workers and casual workers. Sometimes, restrictions also apply to consumers who are employed by relatives.

When the policy was sold, was the consumer affected by an employment term - or were they planning a change in their employment status that meant they were likely to be affected in the future?

When considering whether a policy was mis-sold, we will look at whether a consumer was affected by an employment term at the time they took out the policy. We will also look at whether they were planning a change in their employment status that meant they were likely to be affected in the future.

Was a consumer affected by an employment term at the time they took a policy out?

To establish this, we look at any relevant definitions in the terms of the policy document.

If the evidence suggests that they were affected, and that they could reasonably have understood this from the information they were given, we will usually conclude that the policy was not mis-sold. However, if the evidence suggests that they could not have reasonably understood this, we may conclude that the policy was mis-sold.

In those cases where a consumer gave a business incorrect information about their employment status, and it later became clear that they were affected by an employment term, we will consider the circumstances. If the consumer knowingly withheld relevant information, we are unlikely to uphold the complaint. But if the consumer did not disclose information about their employment status because the financial business had given them no reason to believe it might have been important, we may be more likely to uphold the complaint.

Did a consumer plan to change their employment status at the time they took a policy out?

To establish whether this was the case, we will look at:

• When the policy was taken out, whether the consumer had definite plans to change their employment status within the next 12 months; and
• Whether the change would result in them being caught by the employment terms from that point on.

Were the policy's employment terms "onerous or unusual"?

When we deal with complaints relating to a policy's employment terms, we generally view an "onerous or unusual" employment term as one that:

• Is not in line with what consumers would reasonably expect; or
• Completely excludes a consumer from cover because of their employment status; or
• Suggests that a consumer's employment circumstances must change with some degree of permanency or finality for them to successfully claim unemployment benefit; or
• Requires a self-employed consumer looking to claim for unemployment to do something over and above what an employed person who had just been made redundant would have to do to make a successful claim.

Employment terms vary between policies so it is important to carefully check the exact wording of the terms.

What responsibilities do financial businesses have in relation to employment terms?

When dealing with cases involving policy terms that we consider to be onerous or unusual for the consumer, we usually expect the financial business to have brought them to the consumer's attention when they took out the policy. This is the case in both advised and non-advised sales.

In cases involving non-advised sales, we would expect the financial business to have drawn the terms to the consumer's attention to allow them to make an informed choice.

The same applies in cases involving advised sales, but we would also expect the financial business to have checked that the policy was suitable for the consumer's needs.

Were the exclusions drawn to the consumer's attention during the sales process?

Where a financial business did not bring the employment terms to a consumer's attention when they took out the policy - and where those terms were relevant to the consumer's circumstances - we may uphold the complaint. In the cases we see, we usually conclude that it is not enough simply to have reminded the consumer to read the policy.

In deciding whether a policy was mis-sold we will:

• Examine whether the policy documentation set out the terms with "sufficient prominence"; and
• Ask the financial business for evidence to help us establish whether the terms were drawn to the consumer's attention before they committed to taking out the policy.

However the policy was sold, our main considerations will be whether the financial business did enough to make the consumer aware of the employment terms - and if it didn't, whether this would have affected the consumer's decision to take out the policy.

Did the policy documentation set out the terms with "sufficient prominence"?

We approach this in the same way as pre-existing medical condition exclusions.

Were the terms drawn to the consumer's attention before they committed to taking out the policy?

We approach this in the same way as pre-existing medical condition exclusions.

If the sale was advised, was the recommendation suitable?

In cases involving advised sales, we would expect the financial business to have ensured that the policy was suitable for the consumer's needs. This includes taking into account the terms of the policy alongside the consumer's current and short-term future employment status.

If a consumer's employment status when they took out the policy meant they were caught by an employment term, or if they had definite plans to change their employment status in the short-term (that would limit their cover), we will often conclude that the policy was unsuitable for them.

Cost disclosure in single-premium policies

What is cost disclosure?

Regardless of whether financial businesses give advice, they are required to provide consumers with adequate cost information.

In cases involving single-premium policies, because of the way they were paid for, we expect financial businesses to have made the consumer aware of the following:

• The total cost of the policy - should it and the associated loan both have run for their full terms. This means the financial business should have set out for the consumer the amount of the single-premium, the amount of interest it could attract and the possible total cost.
• That the policy was going to be paid for by an interest-bearing loan that added to the cost of the arrangement they were entering into.
• The monthly cost of the policy (this was not a specific regulatory requirement but did represent good industry practice).

Did the financial business make the consumer aware of the total cost of the policy?

If a financial business did not bring the total cost of the policy to a consumer's attention before they took out the policy, we may conclude that it was mis-sold.

In deciding whether the policy was mis-sold we will:

• Examine whether the policy documentation set out the total cost with "sufficient prominence"; and
• Ask the financial business for evidence to help us establish whether the consumer was made aware of the total cost before they committed to taking out the policy.

However the policy was sold, our main consideration will be whether the financial business did enough to make the consumer aware of the total cost of the policy (that is, the amount of the single-premium; the amount of interest it could attract; and the amount of those two added up).

Did the policy documentation set out the total cost with "sufficient prominence"?

When we are considering whether policy documentation set out the total cost with "sufficient prominence" we will look at:

• The length of the document in question;
• The size of the print;
• Whether the document was closely worded;
• Whereabouts in the document the total cost appeared; and
• Whether the total cost was set out in full in one place, or whether the consumer would have needed to read more than one section in order to fully understand it.

We will also consider whether the total cost was set out clearly, and in a way that was not confusing.

Was the total cost drawn to the consumer's attention before they committed to taking out the policy?

For cases involving phone or face-to-face sales, we will examine the evidence to determine whether the financial business set out the total cost of the policy to the consumer before asking them to agree to take out the policy. We will also look at whether it explained the cost clearly - and in a way that was not confusing.

For phone sales we often use recordings of phone calls to do this.

If there is no recording available, we will often examine a sales script to establish what is likely to have been said.

In cases involving face-to-face sales, we ask the financial business for evidence that summarises the discussion that took place when the policy was taken out - for example, a demands and needs statement.

We do see cases where the financial business did not tell the consumer about the total cost until after they had agreed to take out the policy - but later gave them a further opportunity to decide whether to take out the policy. In these cases, we may decide that the financial business had done enough to draw the total cost to the consumer's attention before they committed to taking out the policy.

For cases involving internet sales, we will examine any relevant screen shots. We use these to establish whether information about the total cost was given to a consumer before they agreed to take out the policy. If a sales process required a consumer to view the information before they agreed to take out the policy, or if they were clearly and visibly prompted and recommended to do so, we will usually be satisfied that the financial business had drawn the total cost to the consumer's attention before they committed to taking out the policy.

For cases involving postal sales, we will examine the relevant documents to establish whether the financial business provided information about the total cost to the consumer before they agreed to take out the policy.

Did the financial business make the consumer aware that the policy was being paid for by an interest-bearing loan that added to the cost?

Where a financial business did not make a consumer aware of how a policy was funded, we may uphold the complaint.

To determine whether a policy was mis-sold we will:

• Examine whether the policy documentation set out how the policy was funded with "sufficient prominence"; and
• Ask the financial business for evidence to help us establish whether the consumer was made aware of how the policy was funded before they committed to taking it out.

However the policy was sold, our main consideration will be whether the financial business did enough to make the consumer aware of how the policy was funded.

Did the policy documentation set out how the policy was funded with "sufficient prominence"?

We approach this in the same way as cost disclosure in single-premium policies.

Did the financial business draw the way the policy was funded to the consumer's attention before they committed to buying the policy?

We approach this in the same way as cost disclosure in single-premium policies.

Cost and benefits in single-premium policies

Examining the cost and benefits in single-premium policies

We may decide a policy was mis-sold where:

• There is a "term mismatch"; and/or
• It is either impossible or unlikely that the consumer could ever claim enough to get back the cost of the policy.

What is a "term mismatch"?

Some single-premium policies do not provide the consumer with cover for the full term of the associated loan. For example, a five-year single-premium policy attached to a ten-year loan. This is referred to as a "term mismatch".

In this example, the policy would stop providing the consumer with cover at the end of five years. However, unless the consumer paid off the loan at that point, they would have no cover and the policy would continue to cost them money.

This is because single-premium policies were funded by adding the amount of the single-premium to the associated loan - and that total amount attracts interest for the full term of the loan.

If a consumer wants to continue being covered, they have to take out and pay for a new policy - while still paying for the original one. They may also be unable to get the same cover - because any new medical conditions may not be covered under a new policy.

Was it impossible or unlikely that the consumer could ever claim enough to get back the cost of the policy?

Many policies limit the number of months they will pay out benefit for, in relation either to individual claims or in total over the term of the policy.

For example, a policy might only pay out accident and sickness benefit for a maximum of 12 months, and the consumer would have to return to work for a period of six months before they could make another accident or sickness claim. Or a policy might limit the number of months it will pay out unemployment cover - for example, to 24 months over the full term of the policy.

Sometimes, these limits mean it will either be impossible or unlikely that the consumer could ever claim back enough in accident, sickness and/or unemployment benefit to get back the total cost of the policy.

When we look at the cost of a policy against the benefit it offers, we consider that for most consumers, the most important benefits are cover for accident, disability and unemployment. Although policies often provide additional benefits - such as life and critical illness cover - in the majority of cases we see, consumers have taken out a policy to protect their ability to maintain their loan repayments in the event of accident, disability and unemployment.

What responsibilities do financial businesses have in relation to cost and benefits?

If we are dealing with a case where there is a "term mismatch" and/or it is impossible or unlikely the consumer could ever claim enough to get back the cost of the policy, we would usually expect the financial business to draw this to the consumer's attention. This approach applies to advised and non-advised sales.

In cases involving non-advised sales, we would expect the financial business to have drawn the cost and benefits to the consumer's attention to enable them to make an informed choice.

The same applies to cases involving advised sales - but we would also expected the financial business to have checked that the policy was suitable for the consumer's needs.

Were the cost and benefits drawn to the consumer's attention during the sales process?

Where a financial business did not bring the cost and benefits to the consumer's attention when they took out the policy, we may uphold a complaint.

However a policy was sold, we will consider whether the financial business gave the consumer sufficient information to allow them to work out how long they would have to claim benefit for to get back the potential total cost of the policy.

Our approach to deciding whether a financial business gave a consumer adequate information about the total cost of a policy is covered here "cost disclosure in single-premium policies". If we conclude that a financial business did not, it follows that they could not have given the consumer sufficient information to work out how long they would have to claim benefit for to get back the potential total cost of the policy.

If we conclude that a financial business did provide a consumer with adequate information about the total cost of the policy, we will then need to establish whether it also made the policy benefits clear to the consumer.

We will therefore:

• Examine whether the policy documentation set out the benefits with "sufficient prominence"; and
• Ask the financial business for evidence so that we can establish whether the benefits were drawn to the consumer's attention before they committed to taking out the policy.

Did the policy documentation set out the benefits with “sufficient prominence”?

We approach this in the same way as pre-existing medical condition exclusions.

Were the benefits drawn to the consumer's attention before they committed to taking out the policy?

We will examine the evidence to determine whether a financial business made a consumer aware of:

• The amount of the monthly benefit they would receive if they made a successful claim;
• For each benefit - whether there was an initial exclusion period and if so, how long it lasted;
• For each benefit - whether there was a limit on the period that an individual claim would be paid, and if so, what that limit was;
• For each benefit - whether the consumer had to return to work for a defined period before they could claim the benefit again - and if so, what that period was;
• For each benefit - whether there was limit on how long the benefit would be paid out over the full term of the policy - and if so, what that limit was.

We approach this in the same way as pre-existing medical condition exclusions.

If the sale was advised, was the recommendation suitable?

In cases involving advised sales, we would usually expect the financial business to have ensured that the policy was suitable for the consumer's needs. This includes the business identifying whether there was a term mismatch and/or whether the consumer could ever claim enough in benefit to get back the cost of the policy.

We often conclude that a policy with a term mismatch was an unsuitable recommendation for a consumer. We also often conclude that a policy that cost more than the main benefits obtainable under it was an unsuitable recommendation.

Cost and benefits in monthly premium policies

What responsibilities do financial businesses have in relation to cost and benefits in monthly premium policies?

In cases involving non-advised sales, we would expect the financial business to have drawn the cost and benefits to the consumer's attention.

The same applies to cases involving advised sales - but we would also expect the financial business to have checked that the policy was suitable for the consumer's needs.

Were the cost and benefits drawn to the consumer's attention during the sales process?

Where a financial business did not bring the cost and benefits to the consumer's attention when they took out a policy, we may uphold the complaint - if we conclude that this would have affected the consumer's decision to take out the policy.

We will consider how clearly the financial business explained to the consumer the cost of the policy and the benefit they would receive if they made a successful claim. To do this we will look at:

• The way the costs and benefits were set out and whether the consumer would have been able to calculate the cost of the policy in real terms based on future expenditure/the account balance.
• If a consumer had to continue paying the policy premium during a claim - which would reduce in real terms the monthly benefit of the policy - whether this was made clear to them. If it was not, then it may have been difficult for them to work out what benefit they would receive.

If we are not satisfied that the cost and benefits of a policy were made clear to a consumer, we will consider whether this is likely to have affected their decision to take out the policy.

Would the consumer have taken out the policy if they had understood the cost and benefits?

To determine whether a consumer would have bought a policy if they had understood the cost and benefits, we will look at:

• The level of benefit provided by the policy when it was taken out;
• The cost of the policy when it was taken out; and
• The consumer's savings and benefits that would come from elsewhere - compared with their monthly income at that time.

We will also consider whether the policy provided any unusual benefits. For example, some policies associated with credit cards will pay benefit for up to 12 months. After that, they will pay off what is left of the balance that had been outstanding on the account at the start of the claim period.

We consider a consumer's savings and benefits that would come from elsewhere because it helps us establish how long the consumer might have been able to cope financially if anything had gone wrong. The more their need for protection was already satisfied elsewhere, the more likely it is we will decide that the consumer would not have taken out the policy had the financial business made the cost and benefits of the policy clear.

Although we will take into account any other insurance policies that a consumer held, we are unlikely to conclude that their need for protection was satisfied elsewhere on this basis alone. This is because we think it is likely they would have been relying on those policies to protect other commitments.

Where a consumer says that they would have received financial help from family and friends, we would not usually take this into account unless it was supported by evidence. This is because circumstances change - and such assistance is not guaranteed.

If the sale was advised, was the recommendation suitable?

In cases involving advised sales, we would expect the financial business to have ensured that the policy was suitable for the consumer's needs. This includes considering the total cost of the policy, whether the consumer could afford it and whether they needed the benefits it offered.

To decide whether the recommendation was suitable, we will look at:

• The level of benefit provided by the policy when it was sold;
• The cost of the policy when it was sold; and
• The consumer's savings and benefits that would come from elsewhere - compared with their monthly income at that time.

See "would the consumer have bought the policy if they had understood the costs and benefits?" for further details.

Even if we conclude that a recommendation was not suitable, we may decide not to make an award if the consumer suffered no loss. This might happen if we conclude it is likely that a consumer would still have taken out a policy - even if they had been made aware it was not suitable for their needs.

Successive sales of single-premium policies

What are successive sales?

If a complaint relates to more than one single-premium policy, we will decide whether the policies were "successive sales". Policies are considered successive sales if they were sold as part of a continuous chain.

Why is it important whether there were successive sales?

When we assess a case involving successive sales, we will consider all the sales and their combined impact. Successive sales may also indicate that a consumer is consolidating debts, and in these cases there may be issues of affordability or flexibility.

Flexibility in single-premium policies

Would the consumer receive a refund if they cancelled the policy early?

If a single-premium policy is cancelled early, the consumer usually receives a refund. However, the refund they receive is usually much less than "pro rata" - especially if the policy was cancelled early (and after the initial cooling off period).

In this context, "pro rata" means "in proportion to the remaining term of the policy". An example of a pro rata refund would be a policy that offered a 50% refund of the premium amount if it was cancelled half way through its term.

In many cases we see involving consumers with "non-pro rata" policies, they have not been able to reorganise their finances before the end of the policy term without losing money.

Would the consumer have received a pro rata refund on cancellation?

When we look at whether a policy was mis-sold, we will only consider the issue of flexibility if a policy did not offer a pro rata refund. If it did, a consumer would not have been disadvantaged by cancelling the policy and repaying the loan early.

We sometimes see policies that refer to a premium refund being calculated in accordance with the "rule of 78". This means that the policy does not offer a pro rata refund.

We also sometimes see policies that offer a pro rata refund, but require the consumer to pay an administration charge on cancellation. Depending on the amount of the administration charge (relative to the cost of the policy), we may still conclude that the policy effectively offered a pro rata refund.

What responsibilities do financial businesses have in relation to cancellation terms?

If a case involved a policy that did not offer a pro rata refund on early cancellation, we would usually regard that as a significant term - and would expect the financial business to have drawn it to the consumer's attention. This would apply in advised and non-advised sales.

In cases involving non-advised sales, we would expect the financial business to have drawn the cancellation terms to the consumer's attention.

The same applies to cases involving advised sales, but we would also expect the financial business to have checked that a policy was suitable for a consumer's needs.

Were the cancellation terms drawn to the consumer's attention during the sales process?

In cases where a financial business did not bring cancellation terms to the consumer's attention before they took out the policy, we may uphold the complaint. We usually take the view that that it is not enough simply to have reminded the consumer to read the policy.

To determine whether a policy was mis-sold we will:

• Examine whether the policy documentation set out the cancellation terms with "sufficient prominence"; and
• Ask the financial business for evidence to help us establish whether the cancellation terms were drawn to the consumer's attention before they committed to taking out the policy.

However the policy was sold, our main consideration will be whether the financial business did enough to make the consumer aware of the cancellation terms - to enable them to make an informed choice.

Did the policy documentation set out the terms with "sufficient prominence"?

We approach this in the same way as pre-existing medical condition exclusions.

Were the terms drawn to the consumer's attention before they committed to taking out the policy?

We approach this in the same was as pre-existing medical condition exclusions.

If we are not satisfied that a policy's cancellation terms were made clear to a consumer, we will consider whether this is likely to have affected their decision to take out the policy.

Would the consumer have bought the policy if they had understood the cancellation terms?

To determine whether a consumer would have bought a policy anyway - even if they had understood the cancellation terms, we look at:

• The main purpose of the loan;
• The term of the loan; and
• Whether there was an indication - at the time they took out the policy - that they might settle the loan early.

To determine whether there was an indication that the loan may be settled early, we look at a number of things, including whether the consumer:

• Had refinanced or consolidated debt at least once before;
• Had either told the financial business they were hoping to pay off the loan early or had asked the financial business questions About paying off the loan early;
• Was expecting to receive money that would have been sufficient to pay off the loan, eg an inheritance; or
• Was borrowing money to make improvements to their home with a view to selling it.

If the sale was advised, was the recommendation suitable?

In cases involving advised sales, we would expect a financial business to have ensured that a policy was suitable for a consumer's needs. To do this, they would be expected to have considered the cancellation terms.

In deciding whether a recommendation was suitable we look at:

• The main purpose of the loan;
• The term of the loan; and
• Whether there was an indication - at the time the policy was taken out - that the consumer might repay the loan early.

See "would the consumer have bought the policy if they had understood the cancellation terms?" for further details.

Even if we conclude that a recommendation was not suitable, we may still decide the policy was not mis-sold. This may happen if we are satisfied that a consumer would still have taken it out had they been made aware that it was not suitable because of the limited refund on cancellation.

Affordability in advised sales of single-premium policies

Why is affordability important in the sale of single-premium policies?

Some single-premium policies significantly increase the monthly payment on a loan - as well as increasing the total cost of borrowing. This means that, in certain cases, a single-premium policy may not have been an appropriate recommendation for a consumer who was seeking to keep costs down.

What responsibilities do financial businesses have in relation to affordability in the sale of single-premium policies?

In cases involving non-advised sales, we would not expect a financial business to have assessed the affordability of a policy. It would have needed to provide the consumer with sufficient information about the policy, including its costs and benefits "cost and benefits in single-premium policies" to enable them to make an informed choice.

However, in cases involving advised sales we would expect a financial business to have considered the cost of a policy and whether the consumer could reasonably afford it when making its recommendation.

This note relates to the responsibilities of financial businesses when selling PPI. Lenders have separate responsibilities when determining the affordability of the loan itself. See financial hardship and unaffordable lending for more information.

Was the need to keep costs down important to the consumer at the time they took the policy out?

We look at the evidence to establish whether a financial business ought reasonably to have known that keeping costs down was important to a consumer. We examine the evidence to see whether the consumer told the financial business that they needed to keep costs down (or said something that amounted to the same thing). We also assess whether it was obvious from the consumer's circumstances that keeping costs down (both monthly and total cost) was of critical importance to them.

It is important to note that needing to keep costs down is not the same as wanting to. We will usually conclude that a consumer needs to keep costs down if not doing so would cause them financial difficulty. Whereas wanting to keep costs down is more concerned with getting the best possible deal.

The period of cover in advised sales of monthly premium policies

Why is the period of cover important in sales of monthly premium policies?

Many PPI policies stop covering consumers when they reach the age of 65. This usually applies to cover for accident and sickness and unemployment - as well as life and critical illness cover. From that point on many policies only provide cover for hospitalisation, accidental death and permanent total disability. However, the cost of cover usually stays the same.

What responsibilities do financial businesses have in relation to the period of cover?

In cases involving non-advised sales, we would not expect a financial business to have assessed whether the period of cover was suitable for a consumer. It would have needed to provide clear information to enable the consumer to make an informed choice.

However, in cases involving advised sales, we would expect a financial business to have taken into account the consumer's age at the time they took out the policy. We would expect a financial business to have recommended a policy only if the consumer would be covered for accident, sickness and unemployment for a reasonable period.

Given the consumer's age, was a reasonable period of cover available?

In cases involving advised sales, we check the policy documentation to identify any age requirements the consumer had to meet to continue to be eligible for accident, sickness and unemployment cover. We will also check how old the consumer was when they took the policy out.

If the consumer would have been covered for accident, sickness and unemployment for only a short period of time after they took out the policy, we may decide that the recommendation was not suitable. We give careful consideration to the duration of "a short period". We will often conclude that where a consumer would only benefit from the policy for 24 months or less, this may not have been suitable - depending on their circumstances at the time they took out the policy.

Redress

What is the appropriate redress where a PPI policy has been mis-sold?

See "how does the ombudsman approach redress where a PPI policy has been mis-sold?".

Distress and inconvenience