“Nil refund” clauses to be removed from payment protection policies

Under a deal with the Financial Services Authority, banks and insurance carriers have agreed to remove “nil refund” clauses from contracts for payment protection insurance policies (PPI). The FSA has been critical of such provisions and the Competition Commission has been investigating the whole issue of PPIs.

Payment protection insurance is meant to pay off loans when the person taking out the loan cannot do so in the event of illness or other circumstances beyond their control. And in some cases, the insurance is needed and helpful. However, there have been accusations that such policies have been mis-sold, sold to individuals who do not need them, or sold in cases where the holder of the policy could not make a claim in any case.

“Nil refund” clauses have been seen as a particular problem because it means that an individual cannot get a refund from a single-premium PPI if the policy is cancelled. The FSA has called this unfair because there can be good reasons for canceling such a policy, for example in the case of someone who pays off their loan early. Under the new deal, not only will such clauses not be written into new contracts, they will be removed from contracts already in force. The only time a policy holder might not be able to claim a refund under the new rules, according to the FSA, is when the policy is cancelled close to the end of its term or if the policyholder has already made a successful claim against the policy.

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