'Content Throughout much of 2006, two of the UK's most influential regulatory bodies have been investigating the payment protection insurance (PPI) market, in an attempt to determine whether it is providing a good, fair service to consumers. In a move that will come as a blow to providers, both the FSA and the OFT have publicly announced that their investigations have uncovered failings in the market.
These findings mean that investigations will continue into 2007, with potential reprisals for individual companies that have failed to comply with guidelines set out in the Insurance Conduct of Business (ICOB) sourcebook. Naturally, this news will come as a disappointment to PPI providers, many of which have been hoping that the FSA at least would close its investigation, ending a period of uncertainty for the sector. However, the FSA has complained that visits to 40 firms in the last year have revealed continuing problems, centered on three principal areas of concern.
Firstly, the FSA is worried that providers are not making it clear that PPI is optional, or giving sufficient information on how much cover costs. Furthermore, some firms were failing to collect adequate information on the customer, for example on any existing insurance cover they might have. Finally, the FSA noted during the course of its investigation that sales conversations were sometimes being biased towards single premium policies, rather than regular premium policies, when the customer's circumstances did not always warrant this.
The FSA now wants providers to address these concerns, and, in particular, it expects providers to make it clear that taking out PPI will not affect any applications for underlying credit that a customer may make. Firms need to act with particular diligence when selling single-premium policies.
However, it must also be noted that the FSA's findings highlighted important discrepancies within the market itself. While experienced financial services providers tended to meet expectations, poor compliance was generally seen among firms that sold PPI as a tertiary product. These included car dealerships, which occasionally sell PPI to cover payments on finance used to purchase cars. Firms that sell regular premium PPI in the prime mortgage sector were excluded from the sample of firms assessed by the FSA in phase II because they were generally found to adhere to standards in when the FSA launched the first phase of its investigation in 2005.
The conclusions of the OFT review were even more critical, however, with the regulator stating that "many customers are failed by PPI." The cause of this, in the OFT's view, is principally a lack of competitive pressure, which results from the fact that distributors have a point of sale advantage. It notes that standalone providers have been unable to challenge for market share, largely due to substantial start-up and marketing costs. The result is that consumers are not really able to shop around for deals on PPI, and so pricing is not keen.
In addition, claims ratios were found to be low and commissions high in comparison to other general insurance products, and this has led the OFT to conclude that distributor profitability is unusually high.
In response to these findings, the FSA plans to consult on rule changes and conduct a review of the ICOB sourcebook. Plans are being made to publish a report on the results of this review in the first quarter of 2007, and any recommendations or remedial actions will then be introduced in time for the final quarter of the year. The OFT has already referred the market to Competition Commission, which will begin to examine how barriers to competition can be removed.
Another consequence of the revelations is likely to be increasing cooperation between lenders and insurers. Lenders have been working more closely with their insurance partners in developing products and reviewing sales processes, and, with renewed scrutiny on the market, this will have to continue. In particular, providers will need to focus on providing value and choice to the customer.
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