Insolvency of household lender Welcome sparks fears among brokers
Brokers face the threat of further levy hikes from the Financial Services Compensation Scheme (FSCS) following the financial troubles of payment protection insurance (PPI) provider Welcome Financial Services.
The FSCS announced last week that low-income household lender Welcome was no longer able to pay compensation claims for any PPI policies mis-sold on the back of unsecured loans it had issued.
Welcome fell into trouble after racking up losses of £639m in 2009 and £758m in 2008, according to the last filed annual accounts at Companies House.
Welcome has set aside £90m to pay for mis-sold policies, but there are doubts that the compensation figure is big enough, which could mean the FSCS having to levy insurance brokers.
Biba head of compliance and training Steve White said: “These are scary numbers, which once again highlight the unfairness of the funding mechanism. Insurance brokers are being exposed to problems not of their own making and not in their market.”
The FSCS will write to all of the customers who have taken out around 500,000 PPI policies sold by Welcome, to tell them they are liable for compensation if they can prove they were mis-sold the product.
A total of 3,727 customers have already submitted general insurance-related complaints to the Financial Ombudsman’s Service over the past two years. Latest figures show it upheld 77% of such complaints against Welcome in the customer’s favour.
Insurance Times analysis of the ombudsman’s complaints data for the past six months of 2010 shows that Welcome was the seventh most complained-about company for GI products.
The FSCS stepped in after the High Court approved a restructuring of the company, which involved the delisting of Welcome’s parent company, Cattle, from the London Stock Exchange on Monday.
Welcome’s problems stemmed from widespread defaults by its predominantly sub-prime customers.
Under the restructuring agreement, the company agreed to pay the FSCS £90m to cover compensation claims for mis-sold policies – the first such arrangement that the scheme has set up.
An FSCS spokesman said: “The benefit to levy payers is that it will remove or reduce the impact on them of what they have to contribute.”
The Insurance Times Fair Fees campaign is fighting for a change to the FSCS rules. Click here to sign the online petition.