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How does the ombudsman approach redress where a PPI policy has been mis-sold?

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Introduction

When we uphold a consumer's complaint, we usually tell the financial business to put the consumer in the position they would now be in if the original problem that led to the complaint hadn't happened.

When we uphold a complaint about the sale of a PPI policy, we usually tell the business to put the consumer in the position they would now be in if they hadn't taken out the PPI policy. The regulator has published guidance that also requires businesses to take this approach when they are dealing with PPI complaints.

We look at all the circumstances of a case to determine what represents fair redress. When we uphold complaints about the sale of PPI, redress can include the restructuring of an account as well as a payment of compensation. What we will require a business to do in terms of calculating redress will depend on the kind of policy the consumer took out - and whether it was attached to a loan or a credit card, or whether it was a stand-alone regular-premium policy:

  • Redress for a mis-sold single-premium PPI policy attached to a loan.
  • Redress for a mis-sold PPI policy attached to a credit card.
  • Redress for a mis-sold regular-premium PPI policy.

What we consider to be fair and reasonable redress will depend on the individual circumstances of the complaint. For example, we may change the calculation of redress where the consumer:

  • has fallen behind in their payments to their creditors (our approach in these cases is set out below);
  • or has made a successful claim on their PPI policy (our approach in these cases is set out below).

Although we can't anticipate every possible set of circumstances, some common scenarios we see are set out in detail below.

The approach set out in this section of our website is based on insight from cases that we have seen to date. But it is important to note that this may be updated 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.

Redress for mis-sold single-premium PPI attached to a loan

These policies have a single upfront premium. The cost of the policy - the single premium - is added to the loan. Interest is charged on the premium, and the monthly loan repayments include repayment of the premium and the interest on it.

Our approach

Where a consumer was mis-sold a single-premium PPI policy and the policy remains in force, we will tell the business to cancel it. We will then tell the business to take steps to compensate the consumer fairly. The way we tell the business to calculate fair redress will depend on the consumer’s circumstances and the current position of the loan, but it will normally involve two steps:

  • A restructuring of the loan (if it is still in place) so that the amount the consumer owes, the monthly repayments, the term and the charges reflect those that would have applied, if the loan had been arranged without the PPI policy. If the loan was repaid early, we will usually tell the business to compare the amount the consumer paid to settle the loan with what they would have paid if the PPI had not been added to the loan.
  • A calculation of how much more the consumer has paid each month than they would have paid if the loan had been arranged without the PPI policy. We will tell the business to add interest to each overpayment to compensate the consumer for the loss of use of their money. Our usual rate is 8% per year simple from 1 April 1993 - and at 15% simple per year before that. Further information about compensation for the loss of use of money and the tax position on that compensation can be found in our note is compensation taxable?

Sometimes, of course, it might not be possible for the business paying compensation to restructure the consumer’s loan. This might happen when, for example, the business that sold the PPI policy isn’t the lender of the money. In these cases we think it is fair for the business to pay all the redress directly to the consumer rather than restructure the loan.

However, when a business makes a payment directly to the consumer it makes no difference to the balance on their loan. The balance will be higher than it should be and the consumer will still be paying interest on the PPI premium that was originally added to the loan. So the consumer will need to use at least some of the compensation to reduce their loan and avoid paying more interest over the rest of the loan than ought to be the case. Where a consumer is charged for making an early payment towards their loan in these circumstances, we would expect the business to compensate the consumer for this charge.

In some cases we may decide to tell the business to pay compensation for any distress or inconvenience caused to the consumer by the business’s mis-sale of the policy or its handling of their complaint.

Other approaches taken by businesses

Some businesses take a slightly different approach to the one set out above - or at least they present their calculations differently to consumers. For example, some businesses present their offers to consumers as:

  • a refund of the total single premium that was added to the consumer’s loan when they took it out;
  • a refund of the loan interest charged on that premium up to the point the business calculates the consumer’s loss (or the date the consumer repaid the loan); and
  • interest on the extra payments the consumer paid each month - because the loan had included PPI.

The business might then pay all the redress to the consumer or it might split the redress - with some being paid to the consumer and some being used to restructure the loan.

Generally speaking, we find offers set out in this way can be confusing for consumers. But if the offers have been calculated correctly, the total value of the redress should be the same as if it had been calculated following the regulator’s guidance and our usual approach. However, it may result in a cash award rather than a restructuring of the loan. 

Communicating how redress has been calculated

It is helpful if a business explains clearly to the consumer how it has carried out its calculation.

Based on examples of good practice we have seen, the examples below show how a business might set out how it has calculated redress for a mis-sold single-premium PPI policy added to a consumer’s loan in four common scenarios:

  • where the consumer’s loan and policy are still in place;
  • where the consumer has repaid the loan and cancelled the policy;
  • where the consumer’s loan and policy have run their full term; and
  • where the consumer’s loan was refinanced into another loan with the business.

When interest is added to redress to compensate the consumer for the “loss of use” of their money, we would expect the financial business to set out whether it has deducted income tax from the interest. If it has not deducted income tax, it should mention that income tax may be payable on the interest. Further information about compensation for the loss of use of money (and the tax position on that compensation) can be found in the section of our website is compensation taxable?

  • What we know

    • you took out a loan for £10,000 over 15 years;
    • we added the cost of your PPI premium to your loan. That was £2,500, so your total loan was for £12,500;
    • and you are 3½ years into your loan.

     

    What we have calculated

    • if you wanted to repay your loan today, you would need to pay £10,700 (after deducting the rebate for cancelling your PPI policy early);
    • if you had instead taken out your loan without the PPI policy, the outstanding balance today would be £8,700; and
    • your loan payments have been £125 per month - without the PPI policy they would have been £100 per month (a difference of £25 per month).

     

    What we will do

    • We will cancel the policy for you and will restructure your loan so that only £8,700 is outstanding - to put you in the position you would have been in had you never had the PPI policy.
    • In addition to reducing the balance of your loan, we will refund you the extra monthly costs you paid as a result of having PPI added to your loan, which is £25 per month. We will also add interest at 8% per year simple on each overpayment from the date it was paid until today. In total, that means we will pay you £1,050, plus interest of £120.

     

    What this means for you

    • Once we have restructured your loan, it will mean you have to pay £100 per month from here on. But you will no longer have a PPI policy added to your loan so you will not be covered should you need to make a claim.

  • what we know

    • you took out a loan for £25,000 over 20 years;
    • we added the cost of your PPI premium to your loan. That was £6,000, so your total loan was for £31,000;
    • and you repaid your loan after 4 years and it cost you £28,000 to do so (after we had credited your loan with the rebate on cancellation of your policy).

     

    What we have calculated

    • if you had instead taken out your loan without PPI it would only have cost you £22,900 to repay it; and
    • your loan payments were £280 per month - without the PPI policy they would have been £225 per month (a difference of £55 per month).

     

    What we will do

    • We will pay you the difference between what it cost you to repay your loan (£28,000) and what it would have cost without the PPI policy (£22,900), which is £5,100. We will also add interest at 8% per year simple to that amount from the date you repaid your loan up to now, which is a further £816.
    • In addition, we will refund you the extra monthly costs you paid as a result of having PPI added to your loan, which is £55 per month. We will also add interest at 8% per year simple to each overpayment from the date it was paid until now. So in total, to refund these payments, we will pay you £2,640 plus interest of £680.
    • The total compensation we will pay you is therefore £9,236 (including interest of £1,496).

  • What we know

    • you took out a loan of £3,000 over 3 years;
    • we added the cost of your PPI premium to your loan. That was £450, so your total loan was for £3,450;
    • you paid monthly payments of £110 per month for 3 years until your loan was repaid - a total of £3,960; and
    • your loan ended 2 years ago.

     

    What we have calculated

    • if you had instead taken out your loan without PPI you would have paid monthly payments of £95 per month for 3 years - a total of £3,420. 

     

    What we will do

    • We will pay you the difference between the monthly payments you paid (£110 per month) and what they would have been without the PPI policy (£95 per month), which is £15 per month (or £540 in total). We will also add interest at 8% per year simple to each overpayment from the date it was paid until the date of settlement, which in this case comes to an additional £120.
    • The total we will pay you is therefore £540 plus interest of £120.

  • What we know

    • you originally took out a loan in 2000 for £18,000 over 15 years (loan 1);
    • we added the cost of your PPI premium to your loan. That was £2,700, so your total loan was for £20,700;
    • in 2003 you took out another loan with us (loan 2), refinancing loan 1, borrowing some more money and resetting the term to 15 years;
    • in 2005 you took out another loan with us (loan 3), refinancing loan 2, borrowing some more money and resetting the term to 15 years. That loan is still in place now; and
    • we sold PPI to you on loans 2 and 3, but we will set out the compensation we are offering you for those elsewhere.

     

    What we have calculated

    • we have calculated that £1,200 of the original PPI premium added to loan 1 is still outstanding on loan 3 today (taking account of the rebate you received on cancellation of the policy when you refinanced loan 1 with loan 2); and
    • the monthly cost of loan 1 was £27 more than it would have been without PPI. Loan 2 cost you £20 per month more and loan 3 was £18 per month more than it would have been had PPI not been added to loan 1.

     

    What we will do

    • We will restructure loan 3 to reduce it by £1,200 - to put you back in the position you would have been in had you never taken out PPI with loan 1.
    • In addition to reducing the balance of your loan, we will refund you the extra monthly costs you paid to loans 1, 2 and 3 as a result of having PPI added to loan 1. We will also add interest at 8% per year simple to your extra monthly costs from the date they were paid until now. In total we will refund to you £2,964 additional costs and interest of £1,356.

Where the consumer received a “cashback” payment at the end of the policy term

Some single-premium PPI policies return some - or all - of the premium to the consumer as cash at the end of the policy term (usually five years) as long as they have met certain conditions - for example, that they have not made a claim on the policy.

The “cashback” does not affect the loan, which will still include the amount added at the start in order to pay for the single-premium policy. But the business should take the cashback into account when it is deciding what would be fair redress, because the consumer would not have received the cashback if they had not taken out the PPI policy in the first place. Our approach in these circumstances is set out below.

Withholding cashback payments

We have seen some lenders withholding cashback payments where there is a complaint, either against themselves or a finance broker. We would usually say it is unfair for a business to withhold a cashback payment simply because a consumer has an ongoing complaint about it or another business. That is because a cashback payment is part of a contractual agreement between the consumer and the lender.

Our approach

Our usual approach to calculating redress in single-premium cases (as we set out above) is to tell the business to:

  • restructure the loan to remove the effect of the PPI from this point on; and
  • refund to the consumer the extra payments they have paid as a result of having PPI added to their loan.

If the consumer has received a cashback payment, we usually take the view that it is fair for the business to take away the value of that cashback payment from the extra payments the consumer has paid as a result of PPI being added to their loan.

If the cashback payment is less than the extra payments the consumer has paid, then the consumer will receive the balance of the extra payments as a cash payment.

But the position is more complicated if the cashback payment is more than the extra payments the consumer has paid. In these cases, the business might be able to use the extra cashback payment to reduce the amount by which it restructures the consumer’s loan - but this will depend on the circumstances.

To decide what is fair in these situations, we will first look at whether the consumer still has the cashback in an identifiable and realisable form. If they do, we are likely to say that it is fair for the business to reduce the amount by which it restructures the consumer’s loan by the amount the cashback exceeds the consumer’s extra payments.

But if the consumer no longer has the cashback, we will look at whether the lender told the consumer (either at the time of sale or at the time the cashback was paid) that to remove the effect of PPI from the loan, they would need to use the cashback payment to reduce the loan balance.

If so, then we are likely to say that it is fair for the business to reduce the amount by which it restructures the consumer’s loan by the amount the cashback exceeds the consumer’s extra payments.

But if the lender did not tell the consumer about the importance of the cashback, and the consumer has spent the cashback reasonably believing they were free to spend it as they saw fit, we are likely to conclude that it would be unreasonable for the business to reduce the amount by which it restructures the loan.

Based on examples of good practice we have seen, the examples below show how a business might set out how it has calculated redress for a mis-sold single-premium PPI policy where the consumer received a cashback payment at the end of the policy term in the following scenarios:

  • where the amount of cashback is less than the consumer’s extra costs to date;
  • where the amount of cashback is more than the consumer’s extra costs to date, but the consumer didn’t know the significance of the cashback payment and has spent it; and
  • where the amount of the cashback is more than the consumer’s extra costs to date, and the consumer was told about the significance of the cashback payment when it was paid to them

See above for guidance on what we expect businesses to set out when interest is added to compensate the consumer for the loss of use of their money.

  • What we know

    • In 2005 you took out a loan for £20,000 over 15 years;
    • we added the cost of your PPI premium to your loan. That was £3,500, so your total loan was for £23,500;
    • if you wanted to repay your loan today, you would need to pay £15,500; and
    • the policy came to an end in 2010 and you received half of your initial premium as a “cashback” payment. That was £1,750.

     

    What we have calculated

    • if you had instead taken out your loan without the PPI policy, the outstanding balance today would be £13,200; and
    • your monthly payments were £240 per month - without the PPI policy they would have been £200 per month (a difference of £40 per month).

     

    What we will do

    • We will restructure your loan so that the amount outstanding today is £13,200 (where you would have been if you had not taken out PPI) and your monthly payments from now on will be £200 per month.
    • In addition to reducing the balance of your loan, we will refund to you the extra monthly payments you have paid as a result of having PPI added to your loan, which is £40 per month.
    • We will also add interest at 8% per year simple on each overpayment from the date it was paid until today. In total, that is £4,450 (£3,600 plus interest of £850). But as you have previously received “cashback” of £1,750, which you would not have had if you had not taken out PPI, we will deduct this cashback from the overall compensation. So we will pay you £2,700 (£4,450 minus £1,750).

  • What we know in 2005

    • you took out a loan for £30,000 over 25 years;
    • we added the cost of your PPI premium to your loan. That was £5,500, so your total loan was for £35,500;
    • if you wanted to repay your loan today, you would need to pay £31,500; and
    • when the policy ended you received all of the initial premium of £5,500 as a “cashback” payment. When that payment was sent to you, we did not tell you that to remove the effect of PPI from the loan, the cashback payment would be needed to reduce the loan balance. You have told us that you have spent the cashback payment.

     

    What we have calculated

    • if you had instead taken out your loan without the PPI policy, the outstanding balance today would be £26,500; and
    • your monthly payments were £300 per month and without the PPI policy they would have been £260 per month (a difference of £40 per month).

     

    What we will do

    • We will restructure your loan so that the amount outstanding today is £26,500 (where you would have been if you had not taken out PPI) and your monthly payments from now on will be £260 per month.
    • In addition to reducing the balance of your loan, we would normally refund to you the extra monthly costs you have incurred as a result of having PPI added to your loan, which is £40 per month. We would also normally add interest at 8% per year simple on each overpayment from the date it was paid to date. In total, that would be £4,450.
    • But as you have previously received “cashback” of £5,500, which you would not have had if you had not taken out PPI, overall you have not paid more as a result of PPI being added to your loan. So while we will restructure your loan and reduce your monthly payments from now on, we will not be paying any further compensation in addition.

     

  • What we know

    • in 2005 you took out a loan for £26,000 over 25 years;
    • we added the cost of your PPI premium to your loan. That was £5,000, so your total loan was for £31,000;
    • if you wanted to repay your loan today, you would need to pay £27,500; and
    • when the policy ended you received all of the initial premium of £5,000 as a “cashback” payment. When we sent that payment to you, we told you that to remove the effect of PPI from the loan, the cashback payment would be needed to reduce the loan balance.

    What we have calculated

    • if you had instead taken out your loan without the PPI policy, the outstanding balance today would be £23,000; and
    • your monthly payments were £260 per month and without the PPI policy they would have been £230 per month (a difference of £30 per month).

     

    What we will do

    • We would normally refund to you the extra monthly costs you have incurred as a result of having PPI added to your loan, which is £30 per month. We would also normally add interest at 8% per year simple on each overpayment from the date it was paid to date. In total that would be £3,340 (£2,700 plus interest of £640).
    • But as you have previously received “cashback” of £5,000, which you would not have had if you had not taken out PPI, you have already had £1,660 more than your additional costs refunded to you.
    • We would also normally restructure your loan, reducing the outstanding balance by £4,500 (the difference between the amount now outstanding and what would have been outstanding if PPI hadn’t been added to it). But because we told you about the significance of the cashback when we paid it to you, we will instead reduce your loan by £2,840 (£4,500 minus the £1,660 of your surplus cashback payment).

We sometimes see businesses asking consumers to repay the cashback they received before they will pay compensation. We will usually say that it is unfair for businesses to require cashback to be repaid before they will pay the compensation - because that is not necessary for the compensation to be paid.

Where the consumer would have taken out a regular-premium PPI policy instead of a single-premium PPI policy

The regulator’s guidance for businesses explains that in certain circumstances, it might be appropriate for the business to compensate the consumer by putting them back in the position they would have been in if they had taken out a regular-premium policy instead of a single-premium policy. This is called “alternative redress”. It can be used where the business’s only failure was:

  • to recommended a single-premium policy with a less than pro-rata refund on early cancellation without taking reasonable steps to establish that there was a prospect that the consumer would repay or refinance the loan before the end of the term of the policy; and/or

the business failed to disclose to the consumer that:

  • the single premium would be added to the loan and that interest would be payable on the premium (and the amount of that interest);
  • or (if applicable) the term of the policy was shorter than the loan and the consequences of that mismatch;
  • or (if applicable) the consumer would not receive a pro-rata refund of the single premium if they repaid or refinanced the loan, or cancelled the policy, before the end of its term.

The regulator’s guidance says that businesses applying “alternative redress” should do so for all consumers “in a relevant category of sale”.

“Alternative redress” involves:

  • A restructuring of the loan (if it is still in place) so that the amount the consumer owes, the monthly repayments, the term and the charges reflect those that would have applied if the loan had been arranged without the single-premium PPI policy. If the loan was repaid early, the business should compare the settlement costs that the consumer incurred with those they would have incurred if the PPI premium had not been added to the loan.
  • A calculation of how much more the consumer has paid each month than they would have paid if the loan had been arranged with a regular-premium PPI policy. Interest should be added to each overpayment (usually at 8% per year simple) to compensate the consumer for the loss of use of their money. The regulator’s guidance indicates that an alternative regular-premium policy would have cost £9 per £100 of benefit.
  • If the single-premium policy is still in place and the consumer wants to keep the cover, the business should arrange to collect regular payments that are equivalent to the regular premium that would have been payable from the start.

Where a business decides to use “alternative redress”, it might help the consumer understand the offer and reduce unnecessary referrals to us if the business explains its reasons to the consumer - and offers the consumer an opportunity to say why they feel alternative redress is not appropriate in their circumstances.

Based on examples of good practice we have seen, the example below shows how a business might explain "alternative redress"

Our investigation of your complaint has found that we recommended a single-premium PPI policy to you that did not have a pro-rata refund on early cancellation. The evidence from the time suggests there was a prospect you would repay or refinance your loan before the end of the policy term. We should have been clearer about what the effects of the early cancellation terms would have meant for you in this situation.

Our investigation of your complaint concluded that this was the only reason why the policy was unsuitable for you. So we think it is reasonable to conclude that, had we explained the nature of the restrictive cancellation terms under the single-premium policy, you would instead have taken out a regular-premium policy which did not contain any such restrictive cancellation terms.

The redress set out below is therefore designed to put you back in the position you would have been in, had you been advised to take out a regular-premium policy instead. This is in line with the Financial Services Authority’s rules on handling PPI complaints.

If you think there were other failings in the way this policy was sold to you, or that the way we have calculated redress in your case is not fair, please let us know why.

What we know

  • In 2008 you took out a loan for £28,500 over 20 years;
  • we added the cost of your PPI premium to your loan. That was £5,500, so your total loan was for £34,000; and
  • you are four years into your loan.

What we have assumed

  • You would have taken out a regular-premium PPI policy costing £22.50 per month. We have followed the regulator’s guidance, which says that a regular-premium policy would have cost £9 per £100 of benefit. The benefit provided by your policy would have been £250 (see below), so the cost of your policy would have been £9 x 2.5 = £22.50.

What we have calculated

  • If you wanted to repay your loan today, you would need to pay £31,000 (after deducting the rebate for cancelling your policy early);
  • if you had taken out your loan without the single-premium PPI policy added to it, the outstanding balance today would be £26,000; and
  • your monthly payments have been £305 per month and without the single-premium PPI policy they would have been £272.50 per month (£250 loan repayment plus £22.50 PPI premium) - a difference of £32.50.

What we will do

  • We will restructure your loan so that only £26,000 is outstanding - to put you back in the position you would have been in if you hadn’t taken out a single-premium PPI policy.
  • In addition to reducing the balance of your loan, we will refund to you the extra monthly costs you paid as a result of having a single-premium PPI policy instead of a regular-premium PPI policy, which is £32.50 per month. We will also add interest at 8% per year simple to each overpayment from the date it was paid until today. In total that means we will pay you £1560, plus interest of £180.

What this means for you

Once we have restructured your loan, it will mean you pay £250 from here on. If you would like the policy to remain in force until the end of its normal term, we will arrange for you to continue paying an additional payment of £22.50. If you would like to cancel the policy, please let us know. Your monthly payment will then remain at £250 per month, but you will no longer have the PPI policy so you will not be covered should you need to make a claim.

Where a business applies alternative redress and where the consumer wants the cover to remain in place, the business should arrange for the cover to continue until the end of the existing policy. The consumer should pay the cost of the regular-premium policy and should be able to cancel the policy at any time.

To help a consumer make an informed decision about whether to continue with the cover, the regulator also says that a business offering alternative redress should:

  • offer to provide details of the existing payment protection contract;
  • inform the consumer that they may be able to find similar cover more cheaply from another provider in the event that they choose to cancel the policy and take an alternative, but remind the consumer that if their circumstances (for example, their health or employment prospects) have changed since the original sale, they may not be eligible for cover under any new policy they buy;
  • make the consumer aware of the changes to the cancellation arrangements if cover continues;
  • explain how the future premium will be collected and the cost of the future cover; and
  • refer the consumer to the Money Advice Service website as a source of information about a range of alternative payment protection contracts.

We will usually use the regulator's guide price of £9 per £100 of benefit as a reasonable starting point for the cost of an alternative regular-premium PPI policy. But if there is something specific to an individual consumer that suggests they would have acted differently or taken out a different policy at a different price, we might say the business should use that price instead.

Businesses should also adapt their calculations to the consumer's circumstances. For example, we have seen cases where the business has deducted the total cost of an alternative regular-premium policy over a five-year term - when in fact the consumer had cancelled their single-premium policy and repaid their loan after just two years. In those cases we would expect the business to carry out a like-for-like comparison of the cost of the single-premium policy and the alternative regular-premium policy.

We sometimes see "alternative redress" cases where the consumer had made a successful claim under the policy in the past. In these circumstances, we would usually say it is unfair for the business to take away the value of the claim from any compensation it pays - because the consumer would probably have been able to make the same claim under the regular-premium policy.

Redress for mis-sold PPI on credit cards

Where a PPI policy is sold alongside a credit card, the premium is added to the credit card balance each month and interest is payable on it.

Our approach

Where a consumer was mis-sold PPI alongside a credit card, and the policy remains in force, we will tell the business to cancel it. The approach we tell the business to take to compensate the consumer fairly will depend on the consumer's circumstances and the current position of the credit card, but compensation will usually involve two steps:

  • A hypothetical reconstruction of the credit card account to find out what the current balance of the credit card account would be if the consumer had paid the same monthly payments, but the PPI policy had not been added to it. This will involve the business removing the PPI premiums, any interest that was charged on the premiums and any charges (and interest on those charges) that would not have applied if the PPI had not been added to the account. The business should then pay the consumer the difference between the current balance and what the current balance would have been without PPI.
  • The addition of interest (usually at our normal rate of 8% per year simple) on any credit balance for any periods when the reconstructed account would have been in credit. In some cases we may decide to tell the business to pay compensation for any distress or inconvenience caused to the consumer.

Other approaches taken by businesses

Some businesses take a different approach, or at least present their calculations differently to consumers. Some businesses present their redress calculations as:

  • a refund of the PPI premiums plus interest at the credit card rate; and
  • interest at 8% per year simple (without identifying what they are adding this interest to).

An offer set out like this could indicate that the business has calculated compensation using a different approach to the one we would usually expect. But it could be that the business has carried out a full hypothetical reconstruction of the account and simply presented its results in a different way. In our experience, setting an offer out like that is likely to be confusing for the consumer.

Communicating how compensation has been calculated

Calculating compensation for a PPI policy mis-sold alongside a credit card can be complicated. A consumer's spending on their credit card - as well as their payments and the cost of PPI - might be different each month. So the calculation can involve many variables, possibly over a long period of time.

It is helpful if a business explains clearly to the consumer how it has carried out its calculation.

Based on examples of good practice we have seen, the examples below show how a business might set out how it has calculated compensation for a mis-sold regular-premium PPI policy added to a consumer's credit card in three common scenarios:

  • where the credit card and PPI policy are still in place;
  • where the credit card and PPI policy have been cancelled; and
  • where the credit card account is still in place, but the PPI policy has been cancelled.

See above for guidance on what we expect businesses to set out when they add interest to compensate the consumer for the loss of use of their money.

  • What we know

    • you took out your credit card in June 2007 and took out the PPI policy at the same time; and
    • your credit card balance today is £2,743.28.

    What we have assumed

    • credit card interest at the rate charged on normal purchases applied to the PPI premiums added to your account; and
    • you would have paid the same payments to your account each month as you actually paid.

    If you do not think that these assumptions should be used in your circumstances, please let us know why not.

    What we have calculated

    • if you had instead taken out your credit card without the PPI policy, your credit card balance today would be £1,976.88. We know this because we’ve looked at your credit card account from the day it started until now and worked out what the balance would have been without the cost of PPI and any interest and charges you paid as a result of PPI being included on your account; and
    • there were some periods when, without PPI, your account would have been in credit.

    What we will do

    • We will cancel the policy for you and will pay you the difference between your credit card balance today (£2,743.28) and what your credit card balance would have been without the PPI policy (£1,976.88), which is £766.40.
    • For the periods where your account would have been in credit had you not had the PPI policy, we will pay you 8% per year simple interest on the amount you would have been in credit for the period you would have been in credit. In your case, this will be £97.35.
    • In total we will therefore pay you £863.75 compensation (£766.40 plus £97.35).

    What this means for you

    Going forward you will no longer have a PPI policy added to your credit card account so you will not be covered should you need to make a claim.

  • What we know

    • you took out your credit card in May 2003 and took out the PPI policy at the same time; and
    • just before you closed your account, your credit card balance was £9,673.41.

    What we have assumed

    • credit card interest at the rate charged on normal purchases applied to the PPI premiums added to your account; and
    • you would have paid the same payments to your account each month as you actually paid.

    If you do not think that these assumptions should be used in your circumstances, please let us know why not.

    What we have calculated

    • if you had taken out your credit card without the PPI policy, your credit card balance just before you closed your account would have been £5,981.27. We know this because we’ve looked at your credit card account from the day it started until the day it closed and worked out what the balance would have been without the cost of PPI and any interest and charges you paid as a result of PPI being included on your account; and
    • there were some periods when, without PPI, your account would have been in credit.

    What we will do

    • We will pay you the difference between what your credit card balance was just before you closed your account (£9,673.41) and what it would have been without the PPI policy just before you closed your account (£5,981.27), which is £3,692.14.
    • Because you haven’t had that money since you closed your account, we’ll add interest to that amount at 8% per year simple from the date you closed your account up to now to compensate you for the loss of use of that money, which is a further £738.55.
    • For the periods where your account would have been in credit had you not had the PPI policy, we will pay you 8% per year simple interest on the amount you would have been in credit for the period you would have been in credit. In your case, this will be £157.38.
    • In total we will therefore pay you £4,588.07 compensation (£3,692.14 plus £738.55 plus £157.38).

  • What we know

    • you took out your credit card in October 2006 and took out the PPI policy at the same time;
    • you cancelled the PPI policy in August 2010;
    • and your credit card balance today is £1,965.32.

    What we have assumed

    • credit card interest at the rate charged on normal purchases applied to the PPI premiums added to your account; and
    • you would have paid the same payments to your account each month as you actually paid.

    If you do not think that these assumptions should be used in your circumstances, please let us know why not.

    What we have calculated

    • if you had instead taken out your credit card without the PPI policy, your credit card balance today would be £1,023.49. We know this because we’ve looked at your credit card account from the day it started until now and worked out what the balance would have been without the cost of PPI and any interest and charges you paid as a result of PPI being included on your account until August 2010; and
    • there were some periods when, without PPI, your account would have been in credit.

    What we will do

    • We will pay you the difference between your credit card balance today (£1,965.32) and what your credit card balance would have been without the PPI policy (£1,023.49), which is £941.83.
    • For the periods where your account would have been in credit had you not had the PPI policy, we will pay you 8% per year simple interest on the amount you would have been in credit for the period you would have been in credit. In your case, this will be £55.18.
    • In total we will therefore pay you £997.01 compensation (£941.83 plus £55.18).

    Most businesses pay redress for mis-sold PPI alongside a credit card directly to the consumer, which we think is fair. Occasionally, some businesses reduce the consumer’s credit card balance instead. This might also be fair, but if a consumer says they would prefer the redress to be paid directly to them, we will consider the circumstances carefully.

Assumptions about the payments a consumer would have paid to the credit card account without PPI

When a business hypothetically reconstructs a consumer’s credit card account to calculate compensation for a mis-sold PPI policy, it needs to decide how much money the consumer would have paid towards their credit card account if it hadn’t had the cost of PPI added to it.

It is difficult to know for certain how much a consumer would have paid if their credit card balance had been slightly lower each month. But in most cases, we think that what the consumer actually did provides a good indication of what they would have done if things had been slightly different. We think this is the fairest approach in most circumstances.

We find that a lot of consumers pay what they can afford to pay off their credit card each month - and that this would still have been the case if their credit card balance had been slightly lower.

So when a business calculates compensation for PPI policy that was mis-sold alongside a credit card, we will usually say it is reasonable for the business to assume that the consumer would have paid the same payments to their account without PPI as they paid to their account with PPI.

But we recognise that different people use their credit cards in different ways. For example, some consumers clear their credit card balance in full each month, whereas some consumers make the minimum payment each month. These consumers might have paid a different amount to their credit card account if they hadn’t had PPI.

 

Consumers who clear their credit card balance in full each month

Some consumers always repay their credit card balance in full each month. If PPI had not been added to their account, their credit card balance would have been lower each month. So it seems unlikely that they would have made the same payment as they actually paid - because they would have paid more than was necessary to repay the balance.

In cases like this, we usually say that the consumer’s loss is the extra amount they paid each month to clear their credit card balance that they would not have paid if they had taken out the credit card without PPI. We will also usually tell the business to add interest to each overpayment (usually at 8% per year simple). In effect this amounts to a refund of the PPI premiums the consumer paid, which they would not otherwise have paid - plus interest for the loss of use of that money.

  • what we know

    • you took out your credit card in March 2004 and took out the PPI policy at the same time; and
    • your credit card balance today is £0.

     

    What we have calculated

    • we looked at your credit card account from the day it started until now. When we did that we saw that you repay your credit card balance in full each month meaning that you have incurred no interest or charges. So the cost to you of having PPI added to your credit card account is the extra payment you needed to pay each month to repay your balance. That is the PPI premium we charged you each month. All the PPI premiums we have charged you since March 2004 add up to £2,519.87.

     

    What we will do

    • We will cancel the policy for you and will refund to you all of the PPI premiums we have charged you since March 2004 - £2,519.87.
    • We will also add interest at 8% per year simple to each PPI premium from the date you paid it until today to compensate you for the loss of use of that money. That amounts to £1,682.65.
    • In total we will therefore pay you £4,202.52 (£2,519.87 plus £1,682.65).

     

    What this means for you

    • Going forward you will no longer have a PPI policy added to your credit card account so you will not be covered should you need to make a claim.

See communicating how redress has been calculated for guidance on what we expect businesses to set out when they have added interest to compensate the consumer for the loss of use of their money.

 

Consumers who consistently make the minimum payment each month

Another example where a consumer might have paid a different amount to their credit card account is where the consumer consistently made the minimum contractual credit card payment each month. In that case, it seems likely that instead of paying the same amount to their credit card account without PPI, the consumer might have paid the (slightly smaller) minimum payment rather than the amount they actually paid to their credit card with PPI.

  • What we know

    • you took out your credit card in January 2003 and took out the PPI policy at the same time;
    • your credit card balance today is £5,832.91; and
    • you have consistently paid the minimum contractual payment to your credit card and no extra payments.

     

    What we have assumed

    • credit card interest at the rate charged on normal purchases applied to the PPI premiums added to your account; and
    • you would have paid the (slightly smaller) minimum contractual payment to your credit card without PPI.

    If you do not think that these assumptions should be used in your circumstances, please let us know why not.

     

    What we have calculated

    • if you had instead taken out your credit card without the PPI policy, your credit card balance today would be £2,642.94. We know this because we’ve looked at your credit card account from the day it started until now and worked out what the balance would have been without the cost of PPI and any interest and charges you paid as a result of PPI being included on your account; and
    • the payments you have paid have been slightly higher than the payments we have assumed in our calculation. The difference between the payments you have paid and the payments we have assumed you would have paid to your account without PPI is £518.73.

     

    What we will do

    • We will cancel the policy for you and will pay to you the difference between your credit card balance today (£5,832.91) and what your credit card balance would have been without the PPI policy (£2,642.94), which is £3,189.97.
    • In addition we will refund to you the extra monthly payments you paid as a result of having PPI added to your credit card and we will also add interest at 8% per year simple to compensate you for the loss of use of that money. That adds up to £518.73 plus interest of £127.60.
    • In total therefore we will pay you £3,836.30 compensation (£3,189.97 plus £518.73 plus £127.60).

     

    What this means for you

    • Going forward you will no longer have a PPI policy added to your credit card account so you will not be covered should you need to make a claim.

See communicating how redress has been calculated for guidance on what we expect businesses to set out when they have added interest to compensate the consumer for the loss of use of their money.

 

Where the financial business has incomplete records of the consumer’s credit card account

Creating a hypothetical reconstruction of a credit card account requires detailed records of the consumer’s account. Sometimes, however, a business’s records might be incomplete and might not stretch back to when the consumer took out the PPI. This can cause problems when it comes to calculating compensation because the business cannot accurately assess the consumer’s loss without knowing their credit card balance each month, the amount they paid to the credit card each month and the cost of PPI.

Where a business’s records of the consumer’s account do not go back to the start of the PPI, we do not usually think it is fair for the business to only compensate the consumer as far back as its records go.

Instead we would usually tell the business to take reasonable steps to get that information and to work out the approximate amount of the consumer’s loss. This includes:

  • asking the consumer if they have any records of their account (perhaps credit card statements) that would help the business calculate the consumer’s loss;
  • if there is still a gap in the records, taking what is known about the consumer’s credit card account - and their behaviour during the period for which it does have records - and making reasonable assumptions based on that information about what would have happened to the consumer’s credit card account for the period it does not have records.

When making reasonable assumptions, a business might want to take into account some of the following factors:

  • the consumer’s actual spending and payments over some or all of the period for which it does have records;
  • how its customers generally operated their accounts over the period for which it does not have records;
  • the average credit limit of its customers over the period in question;
  • its knowledge of how its customers generally behave.

These are not the only things a business might want to consider when making its assumptions.

A business should also be prepared to consider - and change where necessary - its calculation when a consumer gives evidence that they acted differently than the business’s assumptions suggest.

  • What we know

    • you took out your credit card in January 2003 and took out the PPI policy at the same time; and
    • your credit card balance today is £3,766.18.

     

    What we have assumed

    • credit card interest at the rate charged on normal purchases applied to the PPI premiums added to your account;
    • you would have paid the same payments to your account each month as you actually paid; and
    • our records of your credit card account only go back to January 2005. For the period from January 2003 to January 2005 we have assumed that your credit card spending and your payments to your credit card would have been the same as their average from January 2005 to date. We have based our reconstruction of your credit card account for that period on those assumptions.

    If you have any information relating to your credit card account for the period from January 2003 to January 2005 that might help us to carry out a more accurate calculation, please let us know. If you do not think that these assumptions should be used in your circumstances, please let us know why not.

     

    What we have calculated

    • if you had instead taken out your credit card without the PPI policy, your credit card balance today would be £1,553.48. We know this because we’ve looked at your credit card account from the day it started until now and worked out what the balance would have been without the cost of PPI and any interest and charges you paid as a result of PPI being included on your account; and
    • there were some periods when, without PPI, your account would have been in credit.

     

    What we will do

    • We will cancel the policy for you and will pay to you the difference between your credit card balance today (£3,766.18) and what your credit card balance would have been without the PPI policy (£1,553.48), which is £2,212.70.
    • For the periods where your account would have been in credit had you not had the PPI policy, we will also pay you 8% per year simple interest on the amount you would have been in credit for the period you would have been in credit. In your case, this will be £97.88.
    • In total we will therefore pay you £2,310.58 (£2,212.70 plus £97.88).

     

    What this means for you

    • Going forward you will no longer have a PPI policy added to your credit card account so you will not be covered should you need to make a claim.

See communicating how redress has been calculated for guidance on what we expect businesses to set out when they have added interest to compensate the consumer for the loss of use of their money.

 

Redress for mis-sold regular-premium PPI

Stand-alone regular-premium PPI policies are often sold alongside mortgages and are known as mortgage PPI or MPPI - but there are also other types of regular-premium PPI policies. Unlike a single-premium PPI policy, where a regular-premium policy is sold alongside a loan, it does not form part of the credit.

Our approach

Where we find that a regular-premium PPI policy has been mis-sold - and tell the business to compensate the consumer - there is no need for the business to restructure the loan because the policy is not part of the credit (unlike where single-premium policies or credit card policies are mis-sold). Instead we tell the business to:

  • refund to the consumer all the premiums they paid to the PPI policy; and
  • pay the consumer interest at 8% per year simple on each premium from the date it was paid until the date compensation is paid. This is to compensate the consumer for the loss of use of their money.

In some cases we may decide to tell the business to pay compensation for any distress or inconvenience caused to the consumer.

  • What we know

    • in April 2005 you took out a regular-premium PPI policy at a cost of £23.15 per month;
    • the policy was cancelled in June 2012; and
    • you paid 86 monthly premiums totalling £1,990.90.

     

    What we will do

    • We will cancel your policy and will refund you the £1,990.90 of monthly premiums that you paid.
    • We will add interest at 8% per year simple to each payment from the date you paid it until now, which in this case adds up to £472.23.
    • In total we will pay you compensation of £2,463.13 (£1,990.90 plus £472.23).

See communicating how redress has been calculated for guidance on what we expect businesses to set out when they have added interest to compensate the consumer for the loss of use of their money.

 

Where the consumer has fallen into arrears on their loan or credit card

Sometimes, consumers fall behind with their debt repayments. If they miss their payments for some time, then by the time the business compensates them for the mis-selling of PPI on that debt, the consumer could have some significant arrears.

In these circumstances, businesses often want to use the compensation to remove or reduce the arrears on the account before paying any compensation that remains to the consumer. Whereas consumers usually say they should be paid the compensation so that they can decide whether to reduce the arrears on this debt - or whether to do something else with it, for example, use it to repay other debts.

Our approach

What is fair and reasonable will depend on the individual circumstances of the case. But we will first tell the business to identify whether any of the consumer’s arrears relate to the addition of PPI and, if so, to write off those arrears.

We will then consider what it is fair and reasonable for the business to do with any redress left over after it has restructured the consumer’s loan. We will take into account:

  • the contractual position;
  • what the law might consider is fair; and
  • the consumer’s wider financial circumstances.

The regulator’s guidance to businesses handling PPI complaints says that where the consumer’s loan or credit card is in arrears, the business may use the compensation to reduce the consumer’s loan or credit card balance if it has the contractual right to do so.

Some loan and credit card contracts do include provision for this, but based on the cases we have seen, many do not. Where a contract does not include this provision, we take the view that this does not necessarily mean a business does not have the right to use some of the consumer’s compensation to deal with their arrears. In these situations, we will consider the wider legal position.

We take into account the law, which allows people to “set off” closely connected debts. This means that one person (A) can deduct from a debt that they owe another person (B), money which that person (B) owes to them (some businesses also refer to the “banker’s right of set off”, which is simply an expression of the legal right of set off - which may or may not apply depending on the circumstances).

We often decide that it is fair for the business to “set off” the compensation payable for the mis-sale of a PPI policy against the consumer’s arrears on their account - and remove or reduce those arrears. But we would not consider it fair for a business to require the consumer to reduce the balance below what would be outstanding now if the PPI had not been added.

However, if the business that sold the PPI (and is now compensating the consumer) is not the lender, none of these considerations will apply and the compensation should be paid to the consumer as normal.

There may be other circumstances where we might decide that a business should pay all of the compensation to the consumer. We might decide to do this, for example, where the consumer is able to demonstrate to us that they have arrears on other debts that are more serious or that pose a greater threat to them than the debt to which the PPI is attached. Another example might be where the consumer is able to show us that the other debts came about because they were paying the PPI on this debt.

  • Mr P was mis-sold a PPI policy alongside a personal loan. The business accepted it had mis-sold the PPI policy. It restructured Mr P’s outstanding loan, removing what remained of the PPI policy from his loan and writing off arrears that related to the part of the loan used to pay for the PPI policy. But instead of refunding to Mr P the extra payments he had paid, the business wanted to use that part of the redress to reduce the remaining arrears on the loan. Mr P wasn’t happy with that. He wanted to use the compensation to reduce the arrears on another debt because he was in arrears on his mortgage and was being threatened with repossession of his house.

    Whereas we might normally allow the business to use the PPI compensation to reduce the arrears on Mr P’s personal loan, taking a wider view of Mr P’s circumstances led us to tell the business to pay the compensation directly to Mr P so that he could deal with his more pressing debt.

 

 

Where the business has “written off” or “sold on” the consumer’s debt

Some businesses make a commercial decision to “write off” or “sell on” a consumer’s debt when it is significantly in arrears. But different businesses use different terminology. For example, a business may say that it has “sold on” or “written off” a debt when it has actually transferred it from one part of its own business to another.

Where a business has genuinely “written off” a debt - meaning that it has agreed not to seek repayment in any circumstances - it might say that it is unfair for it to pay compensation to the consumer for the mis-sale of the PPI when the consumer did not pay the contractual payments on their debt. The business might say that the compensation should be offset against the amount of the debt it has written off. Where this happens, the consumer will usually say that because the debt does not exist any more they should receive all of the compensation.

In order to fairly compensate the consumer we will consider the position they would have been in if they had not taken out the PPI. We might conclude that the consumer would have fallen behind with the payments to their debt anyway and the debt would ultimately have been written off - but we will consider any evidence that the consumer has that this would not have been the case.

Where we decide that the debt would ultimately have been written off anyway we will usually tell the business to restructure the loan to remove the effect of PPI - that is, reduce the amount written off to what would have been written off if the consumer had taken out the loan without PPI. If there is any remaining compensation owed to the consumer because they have paid more than they would have done without PPI, we would usually say it is fair for the business to offset that compensation against any remaining amount it wrote off.

Where a business simply moved a consumer’s debt from one part of its business to another, rather than selling it on, we would usually apply the approach we take when a consumer is in arrears - set out above. We would also apply this approach if a business chose to buy back a debt it had previously sold on to a third party.

But if the debt was sold on to a third party and it cannot be bought back, or the business chooses not to buy it back, we might take a slightly different approach. That is because the consumer does not owe the business money - it owes money to the third party that bought the debt instead. When selling the debt the business made a commercial decision and accepted an agreeable price for the debt. In those circumstances, we would usually tell the business to calculate the compensation as normal at the point it sold on the debt - and to pay all parts of the compensation to the consumer. The business should also consider the possibility that the consumer might have incurred further losses since the debt was sold on as a result of PPI being included on their debt.

  • What we know

    • in 2006 you took out a loan for £10,000 over a term of seven years;
    • we added the cost of your PPI premium to your loan. That was £2,000, so your total loan was for £12,000;
    • you stopped making payments to your loan in 2008 and made no further payments until we sold your loan on to a third party in 2010; and
    • you have not been charged any further interest or incurred any further charges as a result of the PPI being added to your debt since we sold it on.

     

    What we have assumed

    • if you had taken out your loan without the PPI policy, you would have stopped making payments to it in 2008 and we would have sold it on to a third party in 2010.

    If you do not think that this assumption should be used in your circumstances, please let us know why not.

     

    What we have calculated

    • when we sold your loan to a third party, the outstanding balance of your loan was £11,250;
    • if you had instead taken out your loan without the PPI policy, the outstanding balance at the point we sold your loan to a third party would have been £9,500; and
    • your loan repayments were £190 per month - without PPI they would have been £160 per month (a difference of £30 per month).

     

    What we will do

    • We will pay you the difference between the balance of your loan when we sold it to a third party (£11,250) and what the balance of the loan would have been without PPI (£9,500), which is £1,750. We will also add interest at 8% per year simple to that amount from the date we sold your loan until now, which is a further £280.
    • In addition we will refund to you the extra monthly costs you paid as a result of having PPI added to your loan, which is £30 (for the period you actually made monthly payments). We will also add interest at 8% per year simple to each overpayment from the date it was paid until now. So in total, to refund these payments, we will pay you £690 plus interest of £275.
    • The total redress we will pay to you is therefore £2,995 (including interest of £555).

 

 

Where the consumer has been made bankrupt or has entered into an Individual Voluntary Arrangement (IVA).

Bankruptcy

If the consumer was mis-sold the PPI policy before being made bankrupt - whether they are still in bankruptcy or whether it has been discharged - the bankruptcy will affect any PPI redress they might be entitled to.

The main effect of bankruptcy on PPI compensation is that when a consumer enters bankruptcy, their assets - including any right to compensation for a mis-sold PPI policy - pass to the trustee in bankruptcy.

However, where the business being complained about also has a claim in the bankruptcy, we understand that it will have a legal right to set off any redress for the mis-sale of the PPI policy that would normally be paid to the consumer against arrears on its debt.

Individual Voluntary Arrangement (IVA)

As an alternative to bankruptcy, some consumers who are significantly in arrears with various creditors enter an Individual Voluntary Arrangement (IVA). An IVA might affect the consumer’s position as far as any PPI redress is concerned, but that will depend on the terms of the IVA.

IVA supervisors often ask for the redress to be paid to them to distribute amongst the consumer’s creditors. Whereas businesses usually want to use any compensation payable to deal with what the consumer owes them first.

Unlike bankruptcy, the consumer’s assets do not pass to the IVA supervisor when the consumer enters the IVA. And an IVA is particular to a consumer, so we will take that into account when deciding what is fair and reasonable.

We will look at the terms of the IVA to see if it has provision for any payment from a creditor - like PPI compensation - to be paid to the IVA supervisor. If a business intends to set off any PPI redress against a consumer’s debt when that consumer is in an IVA, it will need to satisfy itself - and us - that it has the right to do so, and that it would be fair to the consumer.

Where the consumer has made a successful claim from their PPI policy

Where a consumer has made a successful claim under their PPI policy, and we subsequently find that it was mis-sold to them, we will usually consider it fair and reasonable for the business to take away the value of that claim from the consumer’s compensation. That is because we would tell the business to put the consumer back in the position they would have been in if they had taken out the loan without the PPI policy - which in this case means they would not have been able to claim on the policy, and would not have received the benefit from it.

Sometimes we see cases where a business has mis-sold several PPI policies to a consumer. If a consumer has made a successful claim from one of those policies that is larger than the redress for that policy, the consumer wouldn’t receive any redress for the mis-sale of that policy. However, we wouldn’t usually say it was fair for the business to deduct any residual claim from the redress for any other policy it mis-sold.