Lord Hunt says the regulator's action over PPI forcefully reminds the industry it is not someone else's problem
Many regular readers will have seen the article by Simon Burgess about payment protection insurance (PPI) in last week's issue of Insurance Times and thought, "well, that's all very well, but what has it got to do with me?"
Countless thousands of insurance claims are amicably and satisfactorily settled each year by firms that are consumer-friendly and efficiently run, but any journalist will tell you this does not make for interesting copy; what are needed are scandals, and ideally lurid ones.
Firms marketing PPI have had some bad press recently, but to many readers PPI may seem to have little or no relevance. Don't be fooled: these latest troubles do not merely concern deals concluded in "a far away sector, between people of whom we know nothing".
The large fine recently imposed on a subsidiary of MBNA - in parallel with wider FSA and OFT investigations that are still ongoing - has not only ensured maximum press coverage. It has also sent a warning signal to the industry. All of the industry.
No one can say they weren't warned. For past efforts at regulating this industry have foundered not upon a lack of evidence, but upon the Scylla and Charybdis of poorly sustained consumer awareness on one side; and an elementary lack of regulatory reach and political will on the other. This no longer holds true.
Two new elements are now in play. First, the fine itself was really rather large. Indeed, when set against the profits earned by the company in question, it was huge.
Comparable fines levied on "high street brands" would be in the millions of pounds. Such fines make a nonsense of any "wait and see if the regulator is serious" strategy.
This might have one interesting and presumably unintended effect, in that the FSA could look to fund itself for the next year on PPI fines alone.
Second, there is the redress. This is more painful and potentially even more costly. Contacting and dealing with some 14,000 customers in the current case will be painful enough. Scale up to the numbers the banks and building societies have, and we are looking at a serious logistical challenge. It's little wonder my colleagues in the regulatory consultancy at Beachcroft are fielding so many calls on this topic.
I am pleased the FSA and OFT have been scrupulous in not attacking the product itself. Like most insurance products, PPI is potentially good for customers, provided it is properly structured, priced and sold.
The FSA by and large takes the view that major commercial clients of insurance companies are "grown up" enough to take care of themselves. Where the FSA is increasingly prone to going in studs-up is wherever imperfect information and asymmetric relationships prevail, so PPI was always going to be an obvious target.
A significant branch of our industry now has to face the cold fact: this is not just "someone else's problem".
The non-life industry must ensure it avoids its own, ruinous version of the near-disaster that occurred in the life industry as a result of alleged endowment and pensions mis-selling. The alternative is unthinkable. IT
Lord Hunt is chairman of the financial services division at Beachcroft, and deputy president-elect of the CII