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The Financial Services Authority (FSA) has published recommendations for companies writing to customers who have been mis-sold payment protection insurance (PPI).

As some lenders have already started contacting customers to let them know they may have been mis-sold a PPI policy, the FSA has produced a set of guidelines detailing best practice for these firms.

As it is still at consultation stage, the guidance is not legally binding at present. Nevertheless, it outlines the regulator’s assessment of what PPI customer contact letters (CCLs) should contain, with a view to providing a framework for clear, fair and transparent communication between PPI providers and consumers.

You can download the full PDF here.

Background on the PPI mis-selling scandal

In November 2005, the FSA identified dishonest sales practices and a lack of compliance controls in the PPI industry. The FSA published a report on its findings and wrote to chief executives summarising the problems it had discovered.

In September and October 2006, a number of small firms were fined by the FSA for mis-selling PPI, and ‘enforcement procedures’ were served against 24 companies.

In January and February 2007, the FSA fined a number of major PPI providers for unfair treatment of customers, and the Office of Fair Trading (OFT) referred the issue to the Competition Commission.

Over the next 18 months, more PPI providers were fined, the Competition Commission published 2 papers detailing additional issues in the PPI market, and the Financial Ombudsman Service asked the FSA to investigate whether firms are dealing with PPI complaints satisfactorily.

In May 2009, the FSA banned the sale of single-premium PPI bundled with loans, and in September 2009, the FSA launched a consultation into how firms could handle PPI complaints better.

In October 2010, the banks sought a judicial review of the new rules, but the High Court ruled against them in April 2011. In May, the British Bankers’ Association confirmed it wouldn’t be appealing.

To date, over £2 billion has been paid out in compensation to victims of PPI mis-selling.

Context for the FSA’s latest intervention

In the second quarter of 2011, PPI providers were advised that they should begin sending customer contact letters (CCLs) to any victims of mis-selling, and were given 6 months to act on this advice.

The 6-month period has now ended, prompting the FSA to issue guidance on the content and presentation of CCLs.

Key points from the FSA’s guidance on PPI CCLs

PPI providers should contact all customers they believe may have been mis-sold PPI.

CCLs shouldn’t contain any marketing material or content that may distract from the key message.

Letters should indicate to customers that they have been mis-sold PPI, how this happened, that this may have caused them financial loss, and what steps they should take to resolve this.

Once customers have been contacted, their complaint will only remain valid for 3 years, after which they will no longer be able to claim compensation.

What does all this mean for consumers?

The Good

The fact that the FSA is advising PPI providers to contact potential victims of mis-selling is a positive step, as it means that customers may be alerted to the problem in cases where they would otherwise have been oblivious.

The FSA’s advice puts the onus on the industry to take responsibility for the problem, and aims to shift the emphasis back to fairness and accountability in a market where customers’ trust has been massively eroded in recent years.

The Bad

As things stand, PPI providers still have a long way to go before they regain the trust of consumers.

There is a possibility that, having made contact with customers directly, PPI providers may seek to settle cases as cheaply as possible. Some customers may accept settlements that are lower than what they’re entitled to because they don’t want to wait for the money or get into a protracted dispute with their bank.

According to a survey conducted by the Post Office, consumers in the UK are thinking about their finances more than ever before, since the start of the recession. In particular, 16 – 30 year olds have changed perceptions of finances, with a quarter of this group claiming to have saved more money since the start of the recession.

The improved attitudes are largely being attributed to the fact that conversations around personal finances are being held more openly now and frugality and conservative spending are commonplace. Attitudes towards frugal living, in fact, have changed drastically since the beginning of the recession. Frivolous spending simply was not possible in the face of rising unemployment, continually rising living costs and less disposable income and so thrifty spending habits were adopted by families on all income levels. It is hoped that these habits long outlive the recession itself.

So is this a silver lining to the worst recession to have gripped the nation (and the world) in a generation? If the attitudes persist, then that in itself could go a long way to eradicating the huge personal debt problem prevalent in the United Kingdom and USA. Or will the attitudes fade as the global economy recovers? Will we start spending as thoughtlessly as we ever had and find ourselves, another generation from now, facing the same economic crisis?

In much the same way that Great Depression changed the lives of the Americans who lived through it and permanently altered their perception of money and spending habits, I believe that the scars of the current downturn will probably serve as enough of a reminder to have a long lasting impact on spending. For those of us who lived through it, at least.

Accountants, PricewaterhouseCoopers have released figures today that indicate the largest drop in income for a generation, for those considered middle class in the UK. And this is set to take place in 2010.

Taking into account forecasted increases in mortgages and tax, a family on an annual income of £30000 will find themselves approximately £6 a week worse off – or £300 worse off over the course of the year.

The wealthier are also expected to suffer, by around £5000 per year.

So while the forecasted recovery of the economy is certainly a good thing on a global level, it could see some short term belt tightening and potential debt problems for consumers in the UK. As well as tax rises, a freeze in the tax free personal allowance (as announced in the pre-budget report), petrol rises and general increases in the cost of living, those on above average incomes are expected to feel the pinch.

Financial experts are advising the well off to make the most of the incredibly low current interest rate to get as much of their mortgages paid off as is possible, as the repayments will certainly rise in line with the economic recovery in the UK.

January 2010 will also see the VAT rate return to 17.5%, following 12 months at a 15% rate, which was designed to stimulate consumer spending.

It’s no secret that personal debt is something of a problem for the consumer driven society that we are. Credit cards, store cards, loans, buy now pay later, overdrafts… the list goes on and they all amount to one thing – spending money that we don’t really have. This in turn contributes hugely to growing debt problem facing a number of Britons. In fact, the average adult in the UK now has personal debt of over £30000 – or 133% of their annual income.

In a bid to curb this monstrous debt habit, the experts are advising that children should be taught how to manage their money. And it’s with this in mind that the Associated Press report today on three books about finance for children.

The Berenstain Bears’ Trouble With Money by Stan and Jan Berenstain is a picture and story book for young children aged 4 – 7. The Berenstain Bears are popular characters in children’s books and have been used to deal with a number of issues previously. And this is not a new book either – it was first published in 1983.

The Teen’s Guide to Personal Finance by Joshua Holmberg and David Bruzzese is a newer offering having been published for the first time last year. This offers information for young adults, much like the third book, Prepare to be a Teen Millionaire by Kimberly Spinks-Burleson, Robyn Collins.

Teaching Money Management is being recommended by personal finance experts who believe that educating younger people now can potentially prevent them from becoming debt ridden adults.