General Information on PPI

PART 1

DECEMBER 2012

GENERAL INFORMATION ON PPI 

31.9A.3 Scope of this part

This part provides background on The Service’s treatment of a possible complaint by the official receiver, as trustee of the bankrupt’s estate, in respect of mis-sold PPI.

 

31.9A.4 What is a PPI policy?

PPI is an insurance policy typically sold at the time when a personal loan or some other form of personal credit is granted.  The policy is designed to provide monies to meet the repayments of the loan in the event of the unemployment (or similar) of the borrower.  It can be sold in relation to either secured loans e.g. on a bankrupt’s property (see Part 3), or unsecured loans  such as credit cards and personal loans (see Part 4).  It is also possible for an individual to buy a stand alone PPI policy.

 

31.9A.5 How is a PPI policy paid for?

PPI is usually a policy paid for in full and up front by the loan company, with the loan company granting a further loan for payment of the PPI policy.

Therefore the resultant monthly loan payment is actually made up of a proportion of: 

  • Capital repayment of the main loan;
  • Interest on the main loan;
  • Capital repayment of the PPI loan;
  • Interest on the PPI loan.

The only exception to this is where PPI is obtained on a store card or credit card. The PPI premium is then usually calculated on the outstanding balance on an ongoing basis.

 

31.9A.6 Mis-sold PPI policy complaint process

The Financial Services Authority (FSA) receives general complaints regarding the financial industry, and issues guidance to that sector. The number of complaints received by the FSA with regards to mis-sold PPI policies increased significantly in 2009-2010.

Where an individual believes he/she has been mis-sold a PPI policy, a specific complaint is made firstly to the financial institution involved.  Where a satisfactory solution is not found, the individual may then raise the complaint to the Financial Ombudsman, see (http://www.financial-ombudsman.org.uk/publications/technical_notes/ppi.html

 

31.9A.7 The FSA and PPI

Recent guidance from the FSA requires banks to analyse past sales of PPI for the purpose of identifying and compensating policy holders, without the need for the policy holder to first commence a complaint.  

 

31.9A.8 Lenders to check for bankruptcy prior to paying out PPI compensation

Financial institutions have been asked by The Service to check if an individual has been the subject of a bankruptcy order before making a compensation payment in respect of a mis-sold PPI policy (see paragraph 31.9A.15). However, this is not always happening in practice.  Where a bankruptcy order has been made, the financial institution should contact the relevant official receiver to ascertain if the compensation payable under the PPI complaint is a bankruptcy asset.

 

31.9A.9 Vesting of PPI complaint in trustee

The right to pursue a complaint for a mis-sold PPI policy entered into before the bankruptcy order and the right to receive related compensation from that complaint, will vest in the official receiver, as trustee of a bankrupt’s estate [note 1] (see also paragraph 31.9A.21).

An insurance policy (PPI is a type of insurance policy) taken out by a bankrupt prior to the date of the bankruptcy order, comprises property which forms part of a bankrupt’s estate [note 2].  Case law [note 3] has held that damages in a personal injury claim are not property but that payment out of an insurance policy which covers the same type of injury is property.  By analogy this will also apply to a PPI policy so that any payment from the policy will form part of the bankrupt’s estate.

Any complaint arising from the sale of the insurance policy is property, as the right to make a complaint can be said to be ‘an interest arising out of or incidental to’ that property [note 2] [note 4].

 

31.9A.10 Time limit for bringing action

The law sets time limits in which a legal claim or complaint to the Financial Ombudsman must be brought. Although this matter can be complex, the basic principle where a complaint is raised for mis-selling by contract, is that the complaint must be commenced within six years from the date the cause of action accrued i.e. the date the PPI was mis-sold [note 5], or three years from the knowledge that there is a cause of action (right to complain) [note 6], see paragraph 31.9.143.

In some circumstances, the Financial Ombudsman may consider a complaint where the PPI policy was sold more than six years ago, see paragraph 31.9A.12.

 

31.9A.11 Time limit to complain to Financial Ombudsman

The Financial Ombudsman follows set rules on complaints handling.  Where a complaint to a financial institution has resulted in an unsatisfactory final response, the complaint must be referred to the Financial Ombudsman within 6 months, see Part 4, paragraph 31.9A.74 to 77.

 

31.9A.12 Financial Ombudsman – discretion in relation to time limits

Under the rules, the Financial Ombudsman has the discretion to look at complaints that fall outside the time limits specified in paragraph 31.9A.10 and 31.9A.11 in “exceptional circumstances”.  An example of this might be if the consumer was incapacitated during the period when they could have complained. 

 

31.9A.13 Relevant date for deciding if PPI complaint vests in official receiver as trustee

The relevant date for considering whether any PPI complaint forms part of the bankruptcy estate, is the date that the PPI policy was mis-sold.  Provided the date that the mis-selling of the PPI policy took place pre-dates the bankruptcy order date, any complaint will form part of the bankruptcy estate, see paragraph 31.9A.9.

 

31.9A.14 Official receiver to obtain information regarding all PPI policies

The official receiver should ensure that details regarding all PPI policies taken out by the bankrupt and any action taken to make a complaint are obtained at the earliest opportunity.  See Part 2 for guidance on what action to take and what information to obtain from the bankrupt.

 

31.9A.15 Amount of compensation

Any compensation paid in relation to a mis-sold PPI policy will usually comprise reimbursement of all PPI premiums paid, together with any interest charged (where the premium has been added to the loan).  However, where a mis-selling complaint relates to a debt that is still in existence at the date of the bankruptcy order, the amount due in compensation may be off-set against the outstanding debt (see Part 5).

 

31.9A.16 Common grounds for a mis-selling complaint

The most common instances of PPI mis-selling fall into the following categories: 

  • The consumer did not realise they were taking out PPI.
  • The policy was not properly described and is unsuitable, e.g. debtor is not covered as he/she is self-employed, over 65, etc. or debtor has adequate other insurances, only income is benefits, etc.
  • The policy failed to pay out as anticipated.

 

31.9A.17 Where a payment has already been made from PPI policy (amended August 2013)

Even where a successful insurance claim has been made on the policy in the past, it does not mean that the policy was not mis-sold at the time the loan was taken out.  For example, a complaint of mis-selling may be on the basis that the bankrupt did not want or know that he/she was purchasing PPI. However, any payout received under the policy is likely to be taken into account when calculating any compensation.

The official receiver should exercise discretion on a case-by-case basis as to whether to pursue such cases beyond the initial questionnaire (see Part 2 paragraph 31.9A.34). 

 

31.9A.18 Bankrupt makes post bankruptcy payments

Where a PPI policy has been sold at the same time as a loan and the bankrupt has made payments towards a PPI loan after the date of the bankruptcy order, any mis-selling complaint in relation to the PPI policy will still form part of the bankrupt’s estate.  This is most likely to happen with a secured debt e.g. on a bankrupt’s family home. 

A secured loan is a bankruptcy debt and a bankrupt is released from the loan on discharge [note 7] [note 8].  A bankrupt may choose to continue the secured loan repayments, e.g. where continuing to reside in the property, but any claim that the bankruptcy estate has received ‘unjust enrichment’ from the bankrupt’s continued repayments is incorrect.  The bankrupt’s motivation to continue repayments is a desire to retain the property and he/she is not forced (to his/her detriment and the trustee’s benefit) to continue paying the loan.  

The continued repayments also represent a repayment of the loan granted for the purchase of the PPI policy and not the PPI policy itself (see paragraph 31.9A.5).

 

31.9A.19 Jointly purchased PPI policy

Where there is a potential mis-selling complaint in relation to a single PPI policy purchased by two or more customer, e.g. a husband and wife, then it is likely both parties will have their own separate PPI complaints, see Chapter 31.9, paragraph 31.9.13.

When considering the split of compensation payments following a complaint the following matters should be considered:

(a) The rights of each party under a joint PPI cover.  If the policy provides for greater cover for one party, then it may be appropriate that that party receives a larger proportion of any compensation paid.

(b) In a jointly held PPI policy whether a separate complaint has been brought by each party.  If so, then any payment would most likely only relate to that party.

(c) Who made the PPI loan  repayments.  If each party contributed towards the repayments it would appear that there is an equal right to any mis-selling complaint (see paragraph 31.9A.20 below), but if evidence can be provided that only one party paid the premiums, it may be appropriate for that person to benefit from the compensation. .

The financial institution involved may advise the official receiver of any joint policy holder entitlement to a PPI compensation payment, although the official receiver should rely on the accuracy of the information provided by the bankrupt initially.

 

31.9A.20 Payments made jointly towards PPI policy held in one parties name

Where a PPI policy covers a joint loan but is only in the name of one party, it is possible that any compensation following a complaint will be divided between both parties.  Where the PPI insurance premium is added to the loan taken out, which is a joint loan, both parties will be liable for the repayments on the total loan, regardless of who is named on the policy.  The issue of who is named on the policy would only be relevant if a claim is made under the policy.  Only the person named on the policy would be able to make a claim. However redress comprising of a refund of the premium plus interest following a complaint that the policy was mis-sold would be split between the two parties who were liable to pay it.

Where the PPI insurance premium in the name of one person on a joint loan has not been added to the mortgage loan, but is to be paid separately from the loan, any PPI compensation would be payable to that person alone.

 

31.9A.21 Mis-selling complaint vests even where loan re-paid prior to bankruptcy order

As the PPI policy is a separate product to the debt it was obtained to protect, the right to compensation for mis-selling will vest in the trustee whether or not the loan has subsequently been repaid.  This would apply even if the loan had been repaid in full prior to the bankruptcy order [note 9], although see paragraph 31.9A.22 below.

 

31.9A.22 Where loan repaid but later loan obtained

The official receiver should consider the possibility that a creditor may claim set off where a loan has been repaid but a later loan obtained, see Part 5.

 

31.9A.23 Compensation payment where guarantor subsequently repaid loan post bankruptcy

Where a loan company is owed money at the date of the bankruptcy order, and a third party (such as a relative) has guaranteed that debt, that third party will remain liable for the loan despite the bankrupt being released on discharge from that debt [note 7]

Where the third party then repays that debt in full and subsequently PPI compensation is agreed, it is possible that some or all of that payment may be rightly made to the third party.   This would be appropriate if the loan creditor could have applied set-off at the date of the bankruptcy (see Part 5).  It could be said that if set-off had been applied by the loan creditor, then the guarantor who repaid that debt has overpaid by the amount that would have been recoverable under the right of set off.

However, if the loan was not outstanding at the date of the bankruptcy order, then set-off could not apply, and the PPI payment would come into the bankruptcy estate.

 

[Back to Introduction] [On to Part 2 – Action to be taken in relation to PPI]