skip tocontent

online PPI resource

Most businesses pay redress for mis-sold PPI alongside a credit card directly to the consumer, which we think is fair. Occasionally, some businesses reduce the consumer’s credit card balance instead. This might also be fair, but if a consumer says they would prefer the redress to be paid directly to them, we will consider the circumstances carefully.

assumptions about the payments a consumer would have paid to the credit card account without PPI

When a business hypothetically reconstructs a consumer’s credit card account to calculate compensation for a mis-sold PPI policy, it needs to decide how much money the consumer would have paid towards their credit card account if it hadn’t had the cost of PPI added to it.

It is difficult to know for certain how much a consumer would have paid if their credit card balance had been slightly lower each month. But in most cases, we think that what the consumer actually did provides a good indication of what they would have done if things had been slightly different. We think this is the fairest approach in most circumstances.

We find that a lot of consumers pay what they can afford to pay off their credit card each month – and that this would still have been the case if their credit card balance had been slightly lower.

So when a business calculates compensation for PPI policy that was mis-sold alongside a credit card, we will usually say it is reasonable for the business to assume that the consumer would have paid the same payments to their account without PPI as they paid to their account with PPI.

But we recognise that different people use their credit cards in different ways. For example, some consumers clear their credit card balance in full each month, whereas some consumers make the minimum payment each month. These consumers might have paid a different amount to their credit card account if they hadn’t had PPI.

top of page

consumers who clear their credit card balance in full each month

Some consumers always repay their credit card balance in full each month. If PPI had not been added to their account, their credit card balance would have been lower each month. So it seems unlikely that they would have made the same payment as they actually paid – because they would have paid more than was necessary to repay the balance.

In cases like this, we usually say that the consumer’s loss is the extra amount they paid each month to clear their credit card balance that they would not have paid if they had taken out the credit card without PPI. We will also usually tell the business to add interest to each overpayment (usually at 8% per year simple). In effect this amounts to a refund of the PPI premiums the consumer paid, which they would not otherwise have paid – plus interest for the loss of use of that money.

Based on examples of good practice we have seen, the example below shows how a business might set out how it has calculated compensation for a mis-sold regular-premium PPI policy added to a consumer’s credit card – where the consumer repaid their credit card balance each month:

what we know

  • you took out your credit card in March 2004 and took out the PPI policy at the same time; and
  • your credit card balance today is £0.

what we have calculated

  • we looked at your credit card account from the day it started until now. When we did that we saw that you repay your credit card balance in full each month meaning that you have incurred no interest or charges. So the cost to you of having PPI added to your credit card account is the extra payment you needed to pay each month to repay your balance. That is the PPI premium we charged you each month. All the PPI premiums we have charged you since March 2004 add up to £2,519.87.

what we will do

  • We will cancel the policy for you and will refund to you all of the PPI premiums we have charged you since March 2004 - £2,519.87.
  • We will also add interest at 8% per year simple to each PPI premium from the date you paid it until today to compensate you for the loss of use of that money. That amounts to £1,682.65.
  • In total we will therefore pay you £4,202.52 (£2,519.87 plus £1,682.65).

what this means for you

  • Going forward you will no longer have a PPI policy added to your credit card account so you will not be covered should you need to make a claim.
  • top of page

See communicating how redress has been calculated for guidance on what we expect businesses to set out when they have added interest to compensate the consumer for the loss of use of their money.

consumers who consistently make the minimum payment each month

Another example where a consumer might have paid a different amount to their credit card account is where the consumer consistently made the minimum contractual credit card payment each month. In that case, it seems likely that instead of paying the same amount to their credit card account without PPI, the consumer might have paid the (slightly smaller) minimum payment rather than the amount they actually paid to their credit card with PPI.

Based on examples of good practice we have seen, the example below shows how a business might set out how it has calculated compensation for a mis-sold regular-premium PPI policy added to a consumer’s credit card where the consumer consistently paid the minimum contractual payment:

what we know

  • you took out your credit card in January 2003 and took out the PPI policy at the same time;
  • your credit card balance today is £5,832.91; and
  • you have consistently paid the minimum contractual payment to your credit card and no extra payments.

what we have assumed

  • credit card interest at the rate charged on normal purchases applied to the PPI premiums added to your account; and
  • you would have paid the (slightly smaller) minimum contractual payment to your credit card without PPI.

If you do not think that these assumptions should be used in your circumstances, please let us know why not.

what we have calculated

  • if you had instead taken out your credit card without the PPI policy, your credit card balance today would be £2,642.94. We know this because we’ve looked at your credit card account from the day it started until now and worked out what the balance would have been without the cost of PPI and any interest and charges you paid as a result of PPI being included on your account; and
  • the payments you have paid have been slightly higher than the payments we have assumed in our calculation. The difference between the payments you have paid and the payments we have assumed you would have paid to your account without PPI is £518.73.

what we will do

  • We will cancel the policy for you and will pay to you the difference between your credit card balance today (£5,832.91) and what your credit card balance would have been without the PPI policy (£2,642.94), which is £3,189.97.
  • In addition we will refund to you the extra monthly payments you paid as a result of having PPI added to your credit card and we will also add interest at 8% per year simple to compensate you for the loss of use of that money. That adds up to £518.73 plus interest of £127.60.
  • In total therefore we will pay you £3,836.30 compensation (£3,189.97 plus £518.73 plus £127.60).

what this means for you

  • Going forward you will no longer have a PPI policy added to your credit card account so you will not be covered should you need to make a claim.
  • top of page

See communicating how redress has been calculated for guidance on what we expect businesses to set out when they have added interest to compensate the consumer for the loss of use of their money.

where the financial business has incomplete records of the consumer’s credit card account

Creating a hypothetical reconstruction of a credit card account requires detailed records of the consumer’s account. Sometimes, however, a business’s records might be incomplete and might not stretch back to when the consumer took out the PPI. This can cause problems when it comes to calculating compensation because the business cannot accurately assess the consumer’s loss without knowing their credit card balance each month, the amount they paid to the credit card each month and the cost of PPI.

Where a business’s records of the consumer’s account do not go back to the start of the PPI, we do not usually think it is fair for the business to only compensate the consumer as far back as its records go.

Instead we would usually tell the business to take reasonable steps to get that information and to work out the approximate amount of the consumer’s loss. This includes:

  • asking the consumer if they have any records of their account (perhaps credit card statements) that would help the business calculate the consumer’s loss;
  • if there is still a gap in the records, taking what is known about the consumer’s credit card account – and their behaviour during the period for which it does have records – and making reasonable assumptions based on that information about what would have happened to the consumer’s credit card account for the period it does not have records.

When making reasonable assumptions, a business might want to take into account some of the following factors:

  • the consumer’s actual spending and payments over some or all of the period for which it does have records;
  • how its customers generally operated their accounts over the period for which it does not have records;
  • the average credit limit of its customers over the period in question;
  • its knowledge of how its customers generally behave.

These are not the only things a business might want to consider when making its assumptions.

A business should also be prepared to consider – and change where necessary – its calculation when a consumer gives evidence that they acted differently than the business’s assumptions suggest.

Based on examples of good practice we have seen, the example below shows how a business might set out how it has calculated compensation for a mis-sold regular-premium PPI policy added to a consumer’s credit card when it does not have records going back to the start of the PPI policy:

what we know

  • you took out your credit card in January 2003 and took out the PPI policy at the same time; and
  • your credit card balance today is £3,766.18.

what we have assumed

  • credit card interest at the rate charged on normal purchases applied to the PPI premiums added to your account;
  • you would have paid the same payments to your account each month as you actually paid; and
  • our records of your credit card account only go back to January 2005. For the period from January 2003 to January 2005 we have assumed that your credit card spending and your payments to your credit card would have been the same as their average from January 2005 to date. We have based our reconstruction of your credit card account for that period on those assumptions.

If you have any information relating to your credit card account for the period from January 2003 to January 2005 that might help us to carry out a more accurate calculation, please let us know. If you do not think that these assumptions should be used in your circumstances, please let us know why not.

what we have calculated

  • if you had instead taken out your credit card without the PPI policy, your credit card balance today would be £1,553.48. We know this because we’ve looked at your credit card account from the day it started until now and worked out what the balance would have been without the cost of PPI and any interest and charges you paid as a result of PPI being included on your account; and
  • there were some periods when, without PPI, your account would have been in credit.

what we will do

  • We will cancel the policy for you and will pay to you the difference between your credit card balance today (£3,766.18) and what your credit card balance would have been without the PPI policy (£1,553.48), which is £2,212.70.
  • For the periods where your account would have been in credit had you not had the PPI policy, we will also pay you 8% per year simple interest on the amount you would have been in credit for the period you would have been in credit. In your case, this will be £97.88.
  • In total we will therefore pay you £2,310.58 (£2,212.70 plus £97.88).

what this means for you

  • Going forward you will no longer have a PPI policy added to your credit card account so you will not be covered should you need to make a claim.
  • top of page

See communicating how redress has been calculated for guidance on what we expect businesses to set out when they have added interest to compensate the consumer for the loss of use of their money.

redress for mis-sold regular-premium PPI

Stand-alone regular-premium PPI policies are often sold alongside mortgages and are known as mortgage PPI or MPPI – but there are also other types of regular-premium PPI policies. Unlike a single-premium PPI policy, where a regular-premium policy is sold alongside a loan, it does not form part of the credit.

our approach

Where we find that a regular-premium PPI policy has been mis-sold – and tell the business to compensate the consumer – there is no need for the business to restructure the loan because the policy is not part of the credit (unlike where single-premium policies or credit card policies are mis-sold). Instead we tell the business to:

  • refund to the consumer all the premiums they paid to the PPI policy; and
  • pay the consumer interest at 8% per year simple on each premium from the date it was paid until the date compensation is paid. This is to compensate the consumer for the loss of use of their money.

In some cases we may decide to tell the business to pay compensation for any distress or inconvenience caused to the consumer.

Based on examples of good practice we have seen, the example below shows how a business might set out how it has calculated compensation for a mis-sold regular-premium PPI policy:

what we know

  • in April 2005 you took out a regular-premium PPI policy at a cost of £23.15 per month;
  • the policy was cancelled in June 2012; and
  • you paid 86 monthly premiums totalling £1,990.90.

what we will do

  • We will cancel your policy and will refund you the £1,990.90 of monthly premiums that you paid.
  • We will add interest at 8% per year simple to each payment from the date you paid it until now, which in this case adds up to £472.23.
  • In total we will pay you compensation of £2,463.13 (£1,990.90 plus £472.23).
  • top of page

See communicating how redress has been calculated for guidance on what we expect businesses to set out when they have added interest to compensate the consumer for the loss of use of their money.

where the consumer has fallen into arrears on their loan or credit card

Sometimes, consumers fall behind with their debt repayments. If they miss their payments for some time, then by the time the business compensates them for the mis-selling of PPI on that debt, the consumer could have some significant arrears.

In these circumstances, businesses often want to use the compensation to remove or reduce the arrears on the account before paying any compensation that remains to the consumer. Whereas consumers usually say they should be paid the compensation so that they can decide whether to reduce the arrears on this debt – or whether to do something else with it, for example, use it to repay other debts.

our approach

What is fair and reasonable will depend on the individual circumstances of the case. But we will first tell the business to identify whether any of the consumer’s arrears relate to the addition of PPI and, if so, to write off those arrears.

We will then consider what it is fair and reasonable for the business to do with any redress left over after it has restructured the consumer’s loan. We will take into account:

  • the contractual position;
  • what the law might consider is fair; and
  • the consumer’s wider financial circumstances.

The regulator’s guidance to businesses handling PPI complaints says that where the consumer’s loan or credit card is in arrears, the business may use the compensation to reduce the consumer’s loan or credit card balance if it has the contractual right to do so.

Some loan and credit card contracts do include provision for this, but based on the cases we have seen, many do not. Where a contract does not include this provision, we take the view that this does not necessarily mean a business does not have the right to use some of the consumer’s compensation to deal with their arrears. In these situations, we will consider the wider legal position.

We take into account the law, which allows people to “set off” closely connected debts. This means that one person (A) can deduct from a debt that they owe another person (B), money which that person (B) owes to them (some businesses also refer to the “banker’s right of set off”, which is simply an expression of the legal right of set off – which may or may not apply depending on the circumstances).

We often decide that it is fair for the business to “set off” the compensation payable for the mis-sale of a PPI policy against the consumer’s arrears on their account – and remove or reduce those arrears. But we would not consider it fair for a business to require the consumer to reduce the balance below what would be outstanding now if the PPI had not been added.

However, if the business that sold the PPI (and is now compensating the consumer) is not the lender, none of these considerations will apply and the compensation should be paid to the consumer as normal.

There may be other circumstances where we might decide that a business should pay all of the compensation to the consumer. We might decide to do this, for example, where the consumer is able to demonstrate to us that they have arrears on other debts that are more serious or that pose a greater threat to them than the debt to which the PPI is attached. Another example might be where the consumer is able to show us that the other debts came about because they were paying the PPI on this debt.

top of page

case study

Mr P was mis-sold a PPI policy alongside a personal loan. The business accepted it had mis-sold the PPI policy. It restructured Mr P’s outstanding loan, removing what remained of the PPI policy from his loan and writing off arrears that related to the part of the loan used to pay for the PPI policy. But instead of refunding to Mr P the extra payments he had paid, the business wanted to use that part of the redress to reduce the remaining arrears on the loan. Mr P wasn’t happy with that. He wanted to use the compensation to reduce the arrears on another debt because he was in arrears on his mortgage and was being threatened with repossession of his house.

Whereas we might normally allow the business to use the PPI compensation to reduce the arrears on Mr P’s personal loan, taking a wider view of Mr P’s circumstances led us to tell the business to pay the compensation directly to Mr P so that he could deal with his more pressing debt.

where the business has “written off” or “sold on” the consumer’s debt

Some businesses make a commercial decision to “write off” or “sell on” a consumer’s debt when it is significantly in arrears. But different businesses use different terminology. For example, a business may say that it has “sold on” or “written off” a debt when it has actually transferred it from one part of its own business to another.

Where a business has genuinely “written off” a debt – meaning that it has agreed not to seek repayment in any circumstances – it might say that it is unfair for it to pay compensation to the consumer for the mis-sale of the PPI when the consumer did not pay the contractual payments on their debt. The business might say that the compensation should be offset against the amount of the debt it has written off. Where this happens, the consumer will usually say that because the debt does not exist any more they should receive all of the compensation.

In order to fairly compensate the consumer we will consider the position they would have been in if they had not taken out the PPI. We might conclude that the consumer would have fallen behind with the payments to their debt anyway and the debt would ultimately have been written off – but we will consider any evidence that the consumer has that this would not have been the case.

Where we decide that the debt would ultimately have been written off anyway we will usually tell the business to restructure the loan to remove the effect of PPI – that is, reduce the amount written off to what would have been written off if the consumer had taken out the loan without PPI. If there is any remaining compensation owed to the consumer because they have paid more than they would have done without PPI, we would usually say it is fair for the business to offset that compensation against any remaining amount it wrote off.

Where a business simply moved a consumer’s debt from one part of its business to another, rather than selling it on, we would usually apply the approach we take when a consumer is in arrears – set out above. We would also apply this approach if a business chose to buy back a debt it had previously sold on to a third party.

But if the debt was sold on to a third party and it cannot be bought back, or the business chooses not to buy it back, we might take a slightly different approach. That is because the consumer does not owe the business money – it owes money to the third party that bought the debt instead. When selling the debt the business made a commercial decision and accepted an agreeable price for the debt. In those circumstances, we would usually tell the business to calculate the compensation as normal at the point it sold on the debt – and to pay all parts of the compensation to the consumer. The business should also consider the possibility that the consumer might have incurred further losses since the debt was sold on as a result of PPI being included on their debt.

Based on examples of good practice we have seen, the example below shows how a business might set out how it has calculated compensation for a mis-sold PPI policy alongside a loan that has been sold on to a third party:

what we know

  • in 2006 you took out a loan for £10,000 over a term of seven years;
  • we added the cost of your PPI premium to your loan. That was £2,000, so your total loan was for £12,000;
  • you stopped making payments to your loan in 2008 and made no further payments until we sold your loan on to a third party in 2010; and
  • you have not been charged any further interest or incurred any further charges as a result of the PPI being added to your debt since we sold it on.

what we have assumed

  • if you had taken out your loan without the PPI policy, you would have stopped making payments to it in 2008 and we would have sold it on to a third party in 2010.

If you do not think that this assumption should be used in your circumstances, please let us know why not.

what we have calculated

  • when we sold your loan to a third party, the outstanding balance of your loan was £11,250;
  • if you had instead taken out your loan without the PPI policy, the outstanding balance at the point we sold your loan to a third party would have been £9,500; and
  • your loan repayments were £190 per month – without PPI they would have been £160 per month (a difference of £30 per month).

what we will do

  • We will pay you the difference between the balance of your loan when we sold it to a third party (£11,250) and what the balance of the loan would have been without PPI (£9,500), which is £1,750. We will also add interest at 8% per year simple to that amount from the date we sold your loan until now, which is a further £280.
  • In addition we will refund to you the extra monthly costs you paid as a result of having PPI added to your loan, which is £30 (for the period you actually made monthly payments). We will also add interest at 8% per year simple to each overpayment from the date it was paid until now. So in total, to refund these payments, we will pay you £690 plus interest of £275.
  • The total redress we will pay to you is therefore £2,995 (including interest of £555).
  • top of page

where the consumer has been made bankrupt or has entered into an Individual Voluntary Arrangement (IVA).

bankruptcy

If the consumer was mis-sold the PPI policy before being made bankrupt - whether they are still in bankruptcy or whether it has been discharged - the bankruptcy will affect any PPI redress they might be entitled to.

The main effect of bankruptcy on PPI compensation is that when a consumer enters bankruptcy, their assets – including any right to compensation for a mis-sold PPI policy – pass to the trustee in bankruptcy.

However, where the business being complained about also has a claim in the bankruptcy, we understand that it will have a legal right to set off any redress for the mis-sale of the PPI policy that would normally be paid to the consumer against arrears on its debt.

Individual Voluntary Arrangement (IVA)

As an alternative to bankruptcy, some consumers who are significantly in arrears with various creditors enter an Individual Voluntary Arrangement (IVA). An IVA might affect the consumer’s position as far as any PPI redress is concerned, but that will depend on the terms of the IVA.

IVA supervisors often ask for the redress to be paid to them to distribute amongst the consumer’s creditors. Whereas businesses usually want to use any compensation payable to deal with what the consumer owes them first.

Unlike bankruptcy, the consumer’s assets do not pass to the IVA supervisor when the consumer enters the IVA. And an IVA is particular to a consumer, so we will take that into account when deciding what is fair and reasonable.

We will look at the terms of the IVA to see if it has provision for any payment from a creditor – like PPI compensation – to be paid to the IVA supervisor. If a business intends to set off any PPI redress against a consumer’s debt when that consumer is in an IVA, it will need to satisfy itself – and us – that it has the right to do so, and that it would be fair to the consumer.

top of page

where the consumer has made a successful claim from their PPI policy

Where a consumer has made a successful claim under their PPI policy, and we subsequently find that it was mis-sold to them, we will usually consider it fair and reasonable for the business to take away the value of that claim from the consumer’s compensation. That is because we would tell the business to put the consumer back in the position they would have been in if they had taken out the loan without the PPI policy – which in this case means they would not have been able to claim on the policy, and would not have received the benefit from it.

Sometimes we see cases where a business has mis-sold several PPI policies to a consumer. If a consumer has made a successful claim from one of those policies that is larger than the redress for that policy, the consumer wouldn’t receive any redress for the mis-sale of that policy. However, we wouldn’t usually say it was fair for the business to deduct any residual claim from the redress for any other policy it mis-sold.