Insurance, in any guise is often a product drastically overlooked by the borrower. Although realising it is a necessity rather than a luxury, it is fair to suggest that many consumers are confused by the options available, and over recent years a number of organisations have exploited this naivety to financial gain.
With insurance products central to the financial sector, the Financial Services Authority (FSA) quickly realised the need to improve the market, to benefit borrowers and stamp out bad practices and it was only a matter of time before the regulator took action; action that has led to a study by the Office of Fair Trading (OFT), and subsequently a referral to the Competition Commission (CC).
While some of these problems centred around systems and controls, the FSA, in an early indication of its feelings about the insurance markets, and in particular payment protection insurance (PPI) and mortgage payment protection insurance (MPPI), stated that improvements were needed over quality of advice and the transparency of costs involved.
Indeed, before the regulator cast its net over the PPI and MPPI markets, the sector had already experienced criticism over the past year from regulators, outside commentators, intermediaries and consumers for failing to respond to the needs of its users. While PPI and MPPI both have a valid part to play in the wider financial market, there has been a cloud hanging over the market for some time – a dark cloud that has continued to build above the sector.
Stepping up the investigation
The FSA, in one of its boldest moves, took the decision to refer the PPI and MPPI markets to the OFT for further investigation, which then decided to step ladder the investigation to the CC, following concerns over a lack of market transparency, particularly related to costs. Announcing this directive, John Fingleton, chief executive at the OFT, said: “It is clear that many consumers are failed by PPI – insurance which gives them a poor deal and often less protection than they think. There is limited evidence that the industry is taking steps to improve the situation, but we believe they will not make major improvements to competition in the market. Given our evidence and the scale of this market, our view is that it would be appropriate for the CC to investigate further.”
However, since the announcement there has been a period of unsettling disquiet from the CC, until it was revealed that various trade bodies had been called to give evidence. The CC also announced that its review would take ‘as long as was necessary’ but this has not stopped the FSA conducting its own market review.
Despite the investigation by the CC, the FSA has also continued its drive to improve standards within the market, and in one of its first acts following its initial review, the regulator fined loans.co.uk – former sponsor of Watford FC – £455,000 for failing to treat its customers fairly when selling PPI. Redcats (Brands) Limited was also fined for PPI selling failures. Fined £270,000 as a result of inadequate systems and controls in place, the FSA admitted that Redcats’ breaches reached over 160,000 consumers during an 18-month period.
Following the fine to Redcats in December 2006, Margaret Cole, director for enforcement at the FSA, reiterated that improving standards within the PPI sector was a key issue for the regulator. She said: “We have highlighted PPI as an FSA priority due to the potential risks to consumers. As a result of its systems and control failures Redcats exposed its customers to an unacceptable level of risk. Firms offering PPI must operate in a way that treats their customers fairly and meets regulatory requirements.”
More recently, the FSA has taken action against Capital One and a number of other organisations for failings in its systems and controls when selling PPI.
With the FSA set to announce the next round of its studies into the markets within the next few months, the regulator expects that firms’ controls and systems within this market have improved, along with the advice they give to borrowers.
Mortgage protection
A trend with all of the fines handed out is that they revolve around PPI, rather than MPPI. Following the original decision by the FSA to refer both market sectors to the OFT, the Association of Mortgage Intermediaries (AMI) and the Council of Mortgage Lenders (CML) both expressed their disappointment at the choice to refer MPPI for further scrutiny. In giving evidence to the CC relating to its study into PPI and MPPI, Chris Cummings, director-general of AMI, urged the commission to look at the benefits that MPPI provides to the end user. He said: “MPPI can be part of the solution to a consumer’s protection requirements. However, an intermediary will only consider MPPI as one of a suite of potential products.
“Good advice begins with an assessment of the consumer’s attitude to risk together with a review of personal and family assets that can be called on if necessary. It includes an assessment of any employer’s scheme. An independent intermediary can also explain MPPI’s context within other protection products.”
CML director-general, Michael Coogan, mirrored these sentiments in his announcement after the original decision to include MPPI in the market study. He said: “The OFT should exclude MPPI from the CC referral, because of the significant differences that set it apart from the wider PPI market. The damage to confidence and take-up of MPPI that would be created by a referral cannot possibly be in the consumer interest.”
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