FSA and OFT publish landmark guidance on designing PPI

The FSA and the OFT are consulting on guidance to firms in relation to payment protection products - the first time the FSA has become involved in the design of a specific product.

The two bodies have joined forces to help prevent problems linked with payment protection insurance (PPI) recurring in a new generation of products such as short-term income protection, debt freeze or debt waiver as part of a credit agreement or mortgage.

Payment protection products can fall within either regulator's remit.

In its guidance the FSA stresses firms should ensure that product features reflect the needs of the consumers they are targeting.

Providers should think carefully about failures to properly identify the target market for the protection product, and the protection not reflecting the needs of the intended consumers, the FSA said.

The regulator is also focusing on the benefit of a successful claim not matching the needs of the claimant, and product features or pricing structures that create barriers to comparing products, exiting a policy or switching cover.

Firms must learn the lessons of the past and make sure they have consumers' needs at the heart of new product development, said  Margaret Cole, FSA managing director.

"That is why we are acting early to ensure firms understand the risks they should bear in mind when designing these products, and how they can manage these risks when developing or distributing the product."

The OFT's guidance sets out how the OFT considers the Consumer Credit Act (CCA) applies to payment protection products such as debt freeze or debt waivers linked to a regulated credit agreement, and what firms can do to ensure compliance with the CCA.

In particular, firms should ensure that consumers are absolutely clear about the nature, price and implications of payment protection products, it said.

The guidance also sets out examples of business practices in relation to payment protection products which the OFT is likely to regard as unfair or improper (whether unlawful or not) and so may cast doubt on fitness to hold a consumer credit licence.

The guidance consultation paper can be found on the FSA website, and the consultation will be open for 10 weeks, closing on 13 January 2012.