A missed opportunity to get a step ahead

Last summer, the FSA proudly told the market it was "reviewing contract terms which have been referred to us by consumers, enforcement bodies and consumer organisations".

In light of its reviews, and in relation to its Unfair Terms in Consumer Contracts Regulations (1999), the regulator then published undertakings from Norwich Union, AmTrust International Underwriters and St Andrew's Insurance that they would amend the way they had hitherto treated customers in relation to refunds on single premium policies.

In short, all three insurers agreed not to enforce the nil refund clauses they had in place and make financial provision for clients canceling their cover early.

Eight months later, a missive was sent out from Canary Wharf, trumpeting the news that an agreement on nil refund clauses had been reached with the whole insurance industry.

It said: "Consumers who have bought payment protection insurance (PPI) with a single premium will benefit from a series of measures relating to the fairness and transparency of refunds agreed between the Financial Services Authority and the PPI industry."

But why was this not done in the first place? Why, when the regulator had already investigated the issues surrounding nil refund clauses and found them to be to the detriment of customers, did it not seek an undertaking from every provider in the market, rather than simply the three it had been looking at?

Surely, the regulator realised that these three providers were not the only ones in the market whose single premium policies carried nil refund clauses? Would it not have been more efficient and served consumers better if the FSA had taken the opportunity last summer to put its foot down on the whole sorry business of nil refund clauses and eradicate them in a single motion?

Even after the most recent announcement from the FSA, problems relating to single premium refunds still remain. Despite claiming it was bringing clarity and transparency to the situation, the regulator has not, in reality, established what sort of refunds consumers can expect to get when they cancel their insurance.

Many, including myself, have long campaigned for pro rata refunds to be a standard requirement. They are easy to understand, simple to calculate and leave no one in any doubt as to where they stand. However, despite this clarity being a primary reason for the FSA's intervention, it has failed to enforce a pro rata structure to refunds.

Instead, the FSA stated: "Because of the differing types of firms and commercial practices within the PPI industry, we do not intend to propose a single refund method for all firms to use."

Before issuing a refund, firms will be able to take their own costs, the commissions paid and the claims experience of the policy into account. In practice it seems that firms have been given a free hand in how they reimburse clients who cancel policies. Certainly past experience would suggest that not all will be as fair minded as the regulator might have hoped.

The real disappointment is that none of this confusion would have existed if the FSA had taken firmer and more decisive action in setting the benchmark for everyone to attain.

There also remains too much customer ignorance over the single premium policies themselves, what they cover and how long they last.

Anecdotally there is a lot of evidence to suggest consumers believe the insurance they buy runs for the term of the credit agreement they take out.

This may be the case for short term personal loans, but is not the case with mortgages. Most single premium policies only last for a maximum of five years. Thereafter, consumers have to take out a new policy if they wish their cover to continue.

This carries a number of problems. In the first instance consumers will be surprised and confused to find themelves having to pay at least five premiums to cover a 25-year mortgage.

In the second instance there are negative implications for consumers covering their mortgage in this way. Not only is it more expensive to do so, but such customers are at a disadvantage when it comes to medical claims.

Each new single premium policy is completely separate from the old one. Therefore if an individual develops a medical condition it will automatically be excluded under the new policy's pre exisitng medical conditions clause.

This is not the case with a monthly policy which extends the cover initially taken out each month, rather than requiring an entirely new contract. The bottom line is that for consumers runing two or three single premium policies back-to-back, there is a chance of them having problems when it comes to making a medical claim on their policy.

Negative publicity
This potential confusion and disappointment is the last thing that consumers need and certainly the industry itself needs no further negative publicity. Many people have heralded the announcement from the FSA on single premium policies and nil refund clauses as a success.

However it seems the regulator should have acted much more decisively on this matter when it first crossed its desk. In reality it has actually passed up the opportunity to deliver the improvements contained in the undertakings last summer, on an industry-wide scale and at a much earlier stage.

Problems also remain over the quantity of the refunds themselves and again it seems strange that given the FSA's search for clarity, it did not put its foot down and simply insist on a pro rata solution.

The single premium market has long had its detractors, and unfortunatley the regulator has done little in its recent missive to the market to create a feeling that all of the potential problems, which have worried commentators and industry practitioners for so long, have been dealt with.

If the FSA really wants to see transparency and fairness being delivered to consumers in this market, it needs to be bolder in its own decisions. IT

Simon Burgess is managing director of British Insurance