Simon burgess is managing director ofbritishinsurance.com
It now has to be hoped that the payment protection industry (PPI) market is referred to the Competition Commission and the stiffest possible recommendations are made to the Financial Services Authority (FSA) over many of the market’s current practises and procedures, which are so incompatible with regulation.
The FSA talks about marketing and advertising which should be easily understood and not misleading and yet the Office of Fair Trading (OFT) report highlights practices that leave consumers confused at best and hoodwinked at worst, in regards to selling PPI.
The FSA talks about ‘Treating Customers Fairly’, but the OFT report highlights areas where it is difficult to justify the fees being paid to distributors for the work they are doing. It also questions the amount being paid out in claims and the poor value that is being delivered to consumers.
What is most disturbing is that these findings are not of any surprise to the market. Research has been critical of this market for years and independent papers have pinpointed the huge profits that are being made by providers, the suspect sales processes that are often in place, the inflated costs of many of the policies being sold and their poor design.
Taking action
What is required now is action. If the market was prepared to make changes for itself then it would already have done so. Indeed, it has already been given the chance to do so by the FSA, which told PPI providers, distributors and industry bodies that if they did not get their houses in order, then the regulator would be forced to take unilateral action. This was back in the Spring and when the PPI market brought its suggested improvements to the table, it proved simply to be the start of ongoing discussions, rather than a mark in time after which things would really change. Discussions are ongoing, but what the market and its mistreated consumers really need is action.
Now that the OFT’s report has been completed, it is set to refine its findings in light of feedback received from the industry and make its formal recommendations towards the end of the year or early into next. Given that there was nothing of any real note said in defence of the criticisms made, it seems inconceivable that the OFT will not recommend the need for some real change in this market if it is to begin to deliver in any meaningful way.
How can secured loan PPI, which pays out only 10 per cent of the premiums earned, be delivering for its policy holders? Surely the basic design of the product must be flawed, or the insurance is simply not needed and is being mis-sold?
Mortgage payment protection insurance (MPPI) had the highest claims ratio in the protection sector, but even at 35 per cent it still left many questions hanging in the air. Household insurance has a claims ratio of 55 per cent and this rises to 74 per cent for motor insurance and even though the sectors and insurances are different, this does not satisfactorily explain the gulf, according to the OFT.
Neither did the OFT feel insurance providers should be able to advertise their credit products’ APR excluding insurance, but then include the insurance unannounced when giving out quotes. Not only did this hugely inflate the cost of the loan, but it also made it incredibly difficult for consumers to assess the cost of the product and therefore its value.
Improvement needed
Despite the problems in the market, there is no doubt that distributors are being paid handsomely and across the PPI market in general the average commission rates are over 60 per cent according to the OFT. This fell to 35 per cent in the MPPI market which again faired better than other product sectors. However the OFT still felt compelled to comment: ‘It is difficult to see how commissions at this level can be driven by the costs of selling this product alongside the associated credit.’
There still needs to be real improvement made in the MPPI market, but at least the Association of British Insurers (ABI) and the Council of Mortgage Lenders (CML) are reviewing the benchmark standard they have already put in place and are looking to drive things further forward. Elsewhere in the PPI market, nothing is being done to drive improvement despite the huge and irrefutable criticisms that have been made.
Surely action is now required to force PPI product providers and distributors to deliver much better value and service to their customers and help open up the whole market to real competition.
Providers and distributors at the point-of-sale have made the most of their advantageous position, but it now seems they are simply abusing it. How long can this continue and how many reports, complaints and damning research papers have to be brought to bear before real improvements are introduced?
