Following numerous beatings over the past year, will the PPI sector be able to survive? Simon Burgess investigates
In having to regulate the troubled payment protection insurance (PPI) sector, the Financial Services Authority (FSA) can at least take heart that the improvements it makes should be significant, highly public and deliver benefits that make a considerable difference to consumers. Whether these rewards will in any way compensate for the huge amount of work required is surely the subject of debate in the corridors of Canary Wharf.
PPI has been right at the top of the FSA's hit list for the last 18 months, and reports have followed investigations that have come on the back of mystery shopping rounds.
It is not only the FSA investigating the sector, but PPI has also come under scrutiny by the Office of Fair Trading (OFT), Citizens' Advice and numerous market commentators.
At the beginning of the year the FSA announced details of the new phase of its work, aimed at improving sales standards within the PPI market. The scale of the problem was best demonstrated by the regulator's assertion that the programme of work was among the largest it had ever undertaken.
Not only will firms selling protection insurance be subjected to further rounds of mystery shopping, but those found wanting in the past will be revisited and new firms will also be looked at during the exercise. While firms selling PPI as their main line of business will be included, there will also be a focus on those selling the insurance as a secondary or tertiary product, so no one should believe they will avoid the net being cast out over the market.
At the time of the announcement, Clive Briault, FSA managing director of retail markets, said: "By the end of June, the FSA will have visited over 200 PPI firms in two years. Around 10 firms have so far been referred to enforcement, with the outcomes published in relation to six of these. The FSA will continue to take disciplinary action against firms that fail to meet appropriate standards."
In the last quarter of 2006, the FSA showed its intention to punish firms failing to operate compliantly or refusing to make improvements where problems were highlighted. A number of enforcement actions were announced as the year drew to a close and there are currently a significant number still in the pipeline.
This is a trend that will continue in the months ahead, and the only regret is that the FSA does not have more manpower and resources at its disposal to ensure its rules are adhered to across the board, and those disregarding them can be held to account immediately.
Competition
An announcement has also recently been made by the OFT that it is to refer the PPI market to the Competition Commission for further investigation. This, in conjunction with the work being carried out by the FSA will have a huge impact on the sector.
The recommendations made by the Competition Commission inquiry are likely to help erode the grip that many big-name providers have on the PPI market at the point of sale and help open it up to an increasing number of independent providers. This, in turn, should help generate greater competition and provide more choice for intermediaries.
In the meantime, significant advancements are being brought to the intermediary market by online portals and aggregators to open up the market in a manner that is easy and works in tandem with intermediaries' existing systems and practices. Certainly, developments at, for example, the Exchange, Webline and Assureweb are all moving in this direction in regards to mortgage payment protection insurance (MPPI) and really beginning to have an effect on both the design and delivery of insurance.
This, in turn, should mean more are happy to sell protection and have access to products that are more flexible and better value than many of the products offered by mainstream providers at the moment.
It is here that many of the problems in the protection insurance market currently exist. Products right across the board tend not to work in favour of the client, but in favour of providers and distributors. This is mainly because the commissions involved are too high, while the terms and conditions of the policies include excesses, exemptions and exclusions that work, in many instances against the consumer. Of course insurers have to protect themselves and write cover that can be realistically honoured and sustained into the future, but at the moment they have gone too far.
For products such as loan and credit card PPI, prices simply need to be brought down, commissions cut drastically and sales processes put in place that make sure the cover sold suits borrowers' needs. This is also the case in MPPI where, too often, cover is being sold to clients who are ineligible by dint of their profession.
In other markets, such as critical illness, more work needs to be done on definitions and ensuring clients understand exactly what the insurance they are buying covers. A lot of work has already been done on medical definitions, but there is still more to do. On a more general note, consistency needs to be introduced across the entire PPI sector to eradicate the many different terminologies often used to describe the same aspect of a policy. This is confusing and makes it more difficult for consumers to compare and contrast what they are being offered and the value it represents.
A lot of media coverage has surrounded the products and sales processes in the PPI market and the manner in which they have failed consumers in the past. In today's environment there is absolutely no chance uncovered wrongs will not be met with appeals for compensation and this is already beginning to happen in growing numbers. A number of claims firms are beginning to farm the market for possible cases and it is certain that a growing wave of complaints will come to the fore in the months ahead.
It is essential, therefore, that providers and distributors in the market who are serious about their long-term future not only look to put their own operations beyond question, but also begin to investigate any possible cases of mis-selling that may have been committed in the past.
One recent report from outsourcing and consultancy firm, Huntswood, commented: "A cornerstone of financial services regulation is that a firm will recognise when it has failed in its duty of care to a customer and then quickly take action to put things right. The first step in this process is to conduct a review of past business using risk-based sampling to identify where sales breaches may have occurred."
While a limited number of firms may have begun this process, the vast majority have not and so they carry an unlimited liability in terms of their exposure to future complaints and compensation claims.
Complaints
For any commercial operation this is a difficult position to be in. The claims may not materialise in numbers, but if they do, as many expect them to, having done nothing to identify, rectify and prevent them into the future will not go down well in the face of a regulatory investigation. On a more basic level, large numbers of complaints could simply destroy the economic viability of a firm's existence in the PPI market.
The market is in a state of flux and product design, pricing, distribution and sales processes are all evolving. It is important that firms not only look to the future in the changes they make, but also have an understanding of their past and how they can protect themselves from possible mistakes they may have made.
However, while there may be a lot of work to do before the PPI market can proudly trumpet the service and products it offers to clients, there is no doubt that demand will remain and indeed grow for the foreseeable future.
Despite the last decade of economic stability and low interest rates and inflation, this is not something that can be guaranteed into the future. Indeed, both interest rates and inflation are on the up and will continue to put financial pressure on those who can least afford it in the months and perhaps years to come.
People may be more advanced than ever before in terms of medical care, but changing lifestyles and habits have put pressure on the nation's health with life expectancy for those in their early middle age actually dropping.
Protection insurance is going through a difficult period, but there are remedies available and the sooner we put them in place, the sooner we can begin to evolve for the better and mine the opportunities that still lie in the market.
Simon Burgess is managing director at Britishinsurance.com
