The FSA is rewriting PPI rules in retrospect, and so is placing an impossible burden on the intermediary to act without the benefit of hindsight

The FSA recently published its consultation on the assessment and redress of payment protection insurance complaints. This outlines its view that many firms are not handling complaints correctly because they are not applying the appropriate standards for the sale of the product.

Most conclusions are straightforward, but one section caught my eye. When talking about advised sales, they state that mis-selling will have occurred if the seller did not “take reasonable care to properly establish the customer’s demands and needs; for example … whether the policy would be affordable in light of the customer’s income and outgoings”.

Whoa, just a minute! Is this the standard that the FSA now expects from intermediaries when selling an insurance policy? Is the broker required to assess whether or not the client can actually afford the premium? I can hear the conversation now: “Mr Smith, before I give you a quotation I need to ask a few questions. How much do you earn as a Saturday shop assistant? And how much do you spend on nights out? What do you spend on petrol? I’m sorry, but I don’t think you can afford to run a car, so I can’t advise you to take out this policy. I suggest you sell the car immediately!”

The only mention of affordability in any of the FSA’s ICOB (insurance conduct of business) regulations came in January 2008, when it raised the standards required for selling “higher risk products” like PPI to take into account cost.

I’m sorry, but taking cost into account does not mean the means-tested affordability that this consultation paper suggests. If this is part of the measure that the FSA is advising the Financial Services Compensation Scheme to use when assessing alleged PPI mis-selling, it is no wonder that 89% of complaints are upheld. And what about policies sold between 2005 and 2008, when a lower standard applied? Are different standards required here? There’s no mention of such a distinction in the consultation paper.

Unfortunately, the FSA and its predecessors have form when it comes to moving goalposts. Take pensions mis-selling: the standards applied to complaints far exceeded the standards that a financial adviser had to meet at the time a policy was sold. However, as the mantra was “you are guilty unless you can prove (by applying the new revised standards) that you are innocent”, then it should come as no surprise that most complainants succeeded. Indeed, the form the FSA required advisers to send to customers had just two options: I wish to complain, or I don’t understand. There was no option to say “I don’t want to complain”!

As far as pensions mis-selling was concerned, most complainants were legitimate, but a good number were persuaded to claim despite having not been mis-sold. If the adviser was unable to meet the latest standards when it came to his file notes, which as I said earlier were not as exacting when the policy was sold, he had to pay up.

If the consultation paper is to be taken at face value, we’re facing the same situation with PPI mis-selling. I could suggest that the FSA is doing this deliberately to ensure that most complainants succeed, as this deflects criticism for allowing the situation to arise, but I won’t.

For most of us, the mis-selling of PPI isn’t an issue, except that we have to pick up the tab for any failed seller. But consider this: we’re going to see the abolition of the FSA, replaced instead by the Consumer Protection and Markets Authority (CPMA). The clue is in the name: is the CPMA going to be a regulator or a consumer champion? It surely can’t be both, or can it? If so, we should be worried – we’ll be the scapegoat at some stage. IT

Grant Ellis is chairman of Broker Network Group.