Credit card providers warned off PPI-like small print

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LENDING regulators have released guidance which aims to prevent another payment protection insurance (PPI) style mis-selling scandal.

The Financial Ombudsman Service (FOS) saw a dramatic drop in the number of PPI cases that it had to resolve in the last quarter as banks finally began to sort through claims of mis-selling themselves.

A total of £215m million was repaid between January and August this year to consumers who had taken out an insurance policy alongside a credit card or loan that was unsuitable for their needs or that they hadn't realised was an optional cost.

But there are fears that lenders will try to recoup the massive loss in their earnings by introducing new, similarly low value, additional products.

"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.

"We want to put consumers 'front of mind' for the providers and distributors of these products."

Warning for credit card applicants

The Financial Services Authority (FSA) and Office of Fair Trading (OFT)'s joint guidance - they're both responsible for slightly different areas of the consumer borrowing market - warned that lenders could introduce short-term income protection, debt freeze of debt waiver polices, for example.

Let's look at how just one of those three possibilities could be similar to PPI.

A debt freeze policy is offered to credit card users on application in return for either a fixed monthly payment or a small percentage fee on the amount spent on the card every month.

The monthly fee gives the credit card holder access to a 'debt suspension' period should they experience a sudden fall in income, because they lose their job, for example, or have to go on maternity leave.

Debt freeze, sometimes known as debt suspension, means that the card balance will no longer accrue interest and cardholders are free to pay off the debt over a long period, although cardholders can no longer spend on the card.

However, like PPI, income usually needs to more or less fall off a cliff for the debt freeze period to apply.

If most of us lost our jobs we'd get redundancy payments and those on maternity leave continue to be paid income, so in most cases reduced income wouldn't be low enough to stop the debt under the policy terms.

Stopping PPI-alikes

The regulator's guidance should put a stop to policies like that because it emphasises that lenders' products should reflect those they're lending to.

Firms should identify the target market for the protection product and make sure that they reflect the needs of their intended consumers.

The guidance also warns banks and other lenders against creating products or pricing structures that make it too difficult for consumers to accurately compare products or leave a borrowing commitment when they should be entitled to.

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