Payment protection products are scoped in the guidance as:
"products or product features which are designed to offer individual consumers short-term protection against potential loss of income, by providing the means for them to meet (or temporarily suspend) their financial obligations including repayments under a credit agreement or regulated mortgage contract (RMC)".
The products that are addressed specifically by the guidance are: short-term income protection (STIP), debt freeze, and debt waiver. STIP is characterised in the guidance as having an insurance element; whereas debt freeze and debt waiver are not. This has consequences as to the extent to which these types of products fall into regulation under the Financial Services and Markets Act 2000 (FSMA), the Consumer Credit Act 1974 (CCA), or both. The guidance is at pains to point out that it will cover products and product features which are developed in the future to meet a similar consumer need or which have a similar object or effect. This indicates a clear desire by the regulators to lay down markers for future product development. This is hardly surprising in an area where there has been significant consumer detriment as a result of widespread mis-selling.
The key elements stressed by the FSA in their section of the guidance is the importance of:
- identifying the target market for the protection;
- ensuring that the cover offered meets the needs of that target market; and
- avoiding the creation of barriers to comparing, exiting or switching cover.
The OFT section of the guidance is a step by step walk through of the statutory obligations that the product providers are required to address: from advertising to assessing creditworthiness, to pre-contractual information and contractual form and content requirements.
It is worthwhile making the point that the guidance does not apply to forbearance where this constitutes a unilateral concession by the creditor and is not contractually binding or otherwise enforceable by the consumer. Debt freeze and/or debt waiver is considered by the guidance to be something which provides "added value" over and above the creditor’s normal forbearance arrangements, and they should complement each other. Opting for debt freeze/waiver should not impact on the creditor’s usual forbearance arrangements – for example, once the period of the benefits from debt freeze/waiver has expired.
One technical CCA point that the guidance calls out, which may not be immediately obvious, is that where the consumer has the option to select debt freeze and/or debt waiver under an unsecured credit agreement, the creditor is in effect offering two separate agreements, one with debt freeze/waiver and one without. It follows in the OFT's view that two separate pre-contractual information (PCI) forms must be provided, unless the consumer has indicated clearly that he does (or does not) intend to opt for debt freeze/waiver. However, if the consumer then changes his mind, before he enters into the credit agreement, then a second PCI form should then be provided in good time before the agreement is entered into.
The finalised guidance is an essential read for the providers and developers of these types of payment protection products. If you would like further assistance in connection with any aspect of the guidance, please contact John Lunn, head of our consumer finance team.