The FSA wasn't happy about the way PPI providers treated their customers, and you could see its point. It's time the market called a halt to bad practices, says Simon Burgess
Waiting is always the worst part and the payment protection insurance (PPI) market hangs in limbo as the Financial Services Authority (FSA) considers a possible intervention in the way it does business. Whether the industry has done enough to convince the regulator that it is able to manage its own affairs remains to be seen, but either way a quick resolution to matters must be every party's first priority.
Fol-lowing a review of the market last year, the FSA gave the PPI market until 17 March to submit proposals that would address what the City watchdog felt were 'market failure issues' relating to ICOB compliance, transparency and product choice.
As if that were not enough, Citizens Advice had already lodged a 'super-complaint' with the Office of Fair Trading in light of competition issues within the market and an investigation is set to take place.
There were also reports into the market by data specialists Defaqto and Moneyfacts, which highlighted problems with the suitability of the products being sold to individuals, while the British Insurance Brokers' Association called for the abolition of single premiums. All in all it has been a pretty horrible six months for PPI and the sooner a line can be drawn under the problems it has faced the sooner it will be able to move on.
Urgency needed
Now that the various PPI trade bodies have submitted their proposals to the FSA in a bid to demonstrate where and how self-imposed changes can be made, we have to wait until they have been considered and a further meeting between the parties concerned is due to take place in the coming weeks.
To date, there does not seem to be a specific timetable and there actually seems to be little urgency to push this matter to a resolution, which is both surprising and disappointing. If the suggestions put to the FSA meet with its approval then we should be told as soon as pos-sible, al-l-ow-ing firms to get on with im--ple-menting them and improve the processes and pro-ducts cur-rently in place. This would show the industry in a much-needed positive light and demonstrate to clients that, by imposing a new set of guidelines on itself, it has been responsible enough to do what is best for them and not just for itself - as has been the case for too long.
However, what is more likely is that, when the FSA and the PPI representatives meet up, there will be a degree of wrangling over possible solutions and a further meeting will be planned to finalise things after further consultation. This would see the unresolved situation stretching into the summer months - and, given the time taken to implement new proceedings, would mean the status quo continuing until well into the final quarter of the year, if not longer. If this proves to be the case, then the PPI market will be the loser. It needs to show clients and market commentators that it is capable of change - and that, more importantly, it is prepared to do so. But where do the real problems lie and what sort of things could be done to improve suitability, value for money and transparency?
Steps to take
First and foremost, there needs to be action taken on the sale of single premium policies - either to ban them totally or ensure that, where they are sold, they cater for a particular circumstance.
By paying up front and spreading the cost of the insurance over the total loan, single premium policies accrue a large amount on interest over their lifetime, making them incredibly expensive. Policies often only provide cover for between three and five years, so while policyholders may pay for the insurance over a much longer period, their actual cover will have long since run out.
When paying all the premium up front, there should also be a discount on the amount payable, and products should be more flexible enabling clients to both debundle the types of cover available and also switch the cover should they redeem the loan and transfer it to a different provider.
In certain situations where the loan is short-term, there is an argument for single premium policies, but the sales process needs to be much more transparent to avoid thousands of clients taking out policies in situations that are unsuitable. The problem is that, with commission levels running as high as 80% on some products, it is not in the providers' interest to change things.
If, however, a stronger focus was put on the end client with better-priced products, it would be possible to increase volumes and so easily make up for any shortfall in income that this would create. The priority must be to sell excellent-value products and widen the client base, making protection insurance the norm rather than the exception. There is unquestionably a need for protection, but clients need to know that it will pay out when they need it to, that it offers them good value for money, and that it is flexible enough to cater with any change in circumstance they should experience.
One suggestion has been to widen the use of baseline standards in the PPI market. They have proved effective in the mortgage payment protection market and many feel they could do a similar job across a raft of other products. Introducing such standards would certainly help improve the basic level of products on offer and stamp out some of the worst practices in the market. However, at the moment there is a deal of resistance to such a move from some parties who feel there is already a baseline in place through the FSA's regulations and that something running parallel to this would be ineffective, unnecessary and costly.
While the baseline standard has helped the mortgage payment protection insurance market avoid some of the criticisms that have been lodged against the PPI providers, they could still be improved. Indeed, a review is currently under way by the Council of Mortgage Lenders and the Association of British Insurers and it will be interesting to see if portability and the option to debundle cover is introduced.
Customer-friendly
Whether or not baseline standards are introduced, there are a number of other areas where the PPI market could improve its processes to better service the client. It would be possible to introduce a guide highlighting good sales process and help ensure that the suitability fact-finds are thorough and really match the client's needs with the product being offered. There is also no reason why cross-industry pricing standards could not be brought into play, so that clients would be able to see clearly what they were paying for, where commissions were being paid and how interest on the premium would accrue.
Better communication with clients will also mean they know of their right to cancel the policy within a cooling-off period. On an ongoing basis, annual contact with clients will let them know what cover they have and the payments they are making.
There is still too much of the cloak and dagger about the protection market, which, as an industry, we need to get rid of to really engage with the market and deliver policies that meet their needs. The challenge is to meet the complicated protection needs that exist, but with policies that are easy to understand, transparent in how they work and good value for money.
One way to do this would be to set up comparison tables of the products in the market and post them on the FSA's website. This would help clients gauge what they are being offered and, hopefully, to avoid policies that offer poor value.
Because protection is so often sold as a secondary product and many clients are not particularly well versed in what is available, it is important that access to market information is easily available. This could help raise the general understanding of what is being sold and the risks that exist, and begin to show clients that there is a wider market than they might at first think. Independent providers and brokers are trying in many cases to offer a slightly different proposition to clients based on better-value products sold in higher volumes.
Educating the end client that this market is open and easily accessible to them is important and, difficult though it may seem, clients must be made to realise that the protection sold by their mortgage or personal loan provider is not the only protection available to them. The more we can make clients search out the best deal the more competitive the market will become - and in itself competition is a wonderful regulator.
When the FSA and the PPI industry sit round the table, let's hope they can come to quick decisions about what needs to be done to improve the faults in the market. It is important that they find the best way forward - but it also has to happen quickly, so that we can move on from the troubles and criticisms that have plagued the market recently.
Simon Burgess is the managing director of Britishinsurance.com
