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Has the financial business assessed suitability fairly?

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If the financial business has made a recommendation (or given the consumer advice) about the purchase of a PPI policy, we need to consider whether the financial business has assessed the consumer's needs fairly - and made an appropriate recommendation in the circumstances.

Assessing the needs of the consumer

We will look to see how the financial business has gone about assessing the consumer's needs.

Has it asked clear and relevant questions? Or has it simply assumed that there is a need to "cover the loan"? Has it asked questions more designed to encourage the consumer to make the purchase than to elicit relevant information? Or has it taken into account the information available to it from related sources (importantly, the information the consumer has given as part of the loan assessment)? Has the financial business considered whether the consumer already has other insurance that covers some or all of the risk that would be covered by the PPI?

In considering these points, we take account of what we believe reasonable enquiries by a financial business would involve. Financial businesses are not required to undertake a complete audit of the consumer and their circumstances.

But we would normally expect the financial business to be exploring issues that it knew (or ought to have known) were likely to be of significance, given the general circumstances of consumers and the particular features of the product.

The FCA's rules say (at DISP 4.3.6R):

In assessing whether a non-investment insurance contract is suitable to meet a consumer's demands and needs, an insurance intermediary must take into account at least the following matters:

  1. whether the level of cover is sufficient for the risks the consumer wishes to insure;
  2. the cost of the contract, where this is relevant to the consumer's demands and needs; and
  3. the relevance of any exclusions, excesses, limitations or conditions in the contract.

We recognise that a financial business, in recommending a product, does not need to restrict itself only to those products that fully meet the consumer's needs. The FCA rules, for example, say that a financial business can still recommend a product that does not meet all of the consumer's needs, so long as it identifies to the consumer at the same time those demands and needs not met by the product it is recommending (ICOB 4.3.1R).

There is more information about this in the section of our website our approach to payment protection insurance (PPI) mis-sale complaints.

Cost and suitability

In assessing issues around suitability, we will also consider the extent to which the financial business has taken into account the cost of the product it is recommending. The fact that "cost" may not be specified on a statement of demands and needs is not likely to be relevant - it can be safely assumed that cost was a consideration for all consumers (unless there is clear evidence to the contrary).

The cost to the consumer of many of the policies we see is significant. For example, in the case of single-premium products, the premium may amount to around a quarter of the total loan. The premium needs to be considered in the context of the benefits that are payable under the policy.

A policy that costs more than the benefits that are obtainable under the policy cannot be suitable. In assessing complaints, the ombudsman will not normally take account of benefits from life or critical-illness elements of the policy, if these could be obtained more economically.

There is more information about this in the section of our website our website our approach to payment protection insurance (PPI) mis-sale complaints.

Considering eligibility and restricted benefits issues in PPI policies

A significant feature of PPI policies involves the eligibility criteria. In some cases, these are absolute - in other cases, whilst the consumer may still be eligible to make a claim, the benefits available may be restricted.

Because an ineligible consumer will never be able to make a successful claim, we expect financial businesses to check that the consumer meets the policy’s eligibility criteria before selling it. We would also look to see whether the financial business had taken into account any restricted benefits available to that consumer. A financial business that recommends a product where there are significant eligibility issues is unlikely to be successful in defending its case.

There is more information about this in the section of our website our approach to payment protection insurance (PPI) mis-sale complaints.

When considering joint loans, it is important to note that in many PPI policies, benefits for the second-named individual may be limited (or even no cover offered at all). Which person should be covered is an important consideration for the consumer.

For example, in the case of Mr and Mrs B (PDF 62KB) [ombudsman decision opens in PDF format] the financial business recommended a policy that gave only limited benefits to Mrs B (as the second-named applicant) - even though she was employed whilst Mr B was self-employed. The financial business also failed to highlight the significance of this to Mr and Mrs B.

There is more information about this in the section of our website our approach to payment protection insurance (PPI) mis-sale complaints (PDF 62KB).

Flexibility and PPI policies

A significant feature of single-premium PPI policies is that the premium is paid in advance - and the cost (normally) added to the loan. Interest is payable on this "PPI loan". Typically, the policy is terminated when the loan is terminated and cannot be transferred to another loan. If a single-premium policy is terminated before the end of the planned term, the insurer is likely to offer only a limited premium-refund.

For example, in the case of Mr A (PDF 62KB) [ombudsman decision opens in PDF format] the terms of the policy said that after two years of a three-year policy the rebate would be just 11% of the premium.

This means that a single-premium policy is unlikely to be suitable for a consumer where there is some prospect that they will terminate the loan before the end of the policy term. We are likely to look at the circumstances of the complaint, to see whether the financial business has made relevant enquiries and taken this into account in making its recommendation.

Considering this point, in the case of Mr A the ombudsman said:

In any event, it seems to me that, in thinking about any loan and connected insurance policy, a relevant consideration is how far that arrangement is flexible, should the consumer's circumstances change. In this market it is not uncommon for consumers to re-arrange their loans before the end of the planned term. The financial business has provided no evidence to show that this was not, in fact, a relevant consideration for Mr A. Indeed, in my view the balance of evidence suggests that it was.

I conclude that the financial business did not consider whether or not Mr A required flexibility in his PPI policy, when considering the product it should recommend. It should have done so. It is not sufficient for the financial business to say that the consumer did not emphasise the issue (and/or that the issue was not set out in a demands and needs statement by the consumer).

The financial business was the professional insurance adviser which had (or should have had) a knowledge not just of the products available, but also of the way in which the substance of those products was likely to interact with the common demands and needs of its consumers - particularly where the feature was significant and unusual.

I note that ICOB (4.3.2R) requires an insurance intermediary in assessing its consumer's demands and needs to:

"seek such information about the consumer's circumstances and objectives as might reasonably be expected to be relevant in enabling the insurance intermediary to identify the consumer's requirements. This must include any facts that would affect the type of insurance recommended, such as any relevant existing insurance"

- and that the intermediary should "have regard to any relevant details about the consumer that are readily available and accessible to the insurance intermediary."

I have seen no evidence to suggest that the financial business asked questions about this matter - or otherwise sought to clarify Mr A's needs on this point or to consider the information readily available to it from its other sources.

The financial business suggests that Mr A had the opportunity to become aware of the relevant facts surrounding the cancellation terms and that, accordingly, I should not uphold his complaint. But this ignores the fact that the financial business recommended the product.

Mr A was entitled to place trust in the professional advice of the financial business that this was a suitable product for him. I have concluded that the financial business did not take reasonable care to ensure the suitability of its advice to Mr A.

There is more information about this in the section of our website our approach to payment protection insurance (PPI) mis-sale complaints.