Getting rich on ethics

Ethically-run insurance intermediaries shouldn't be having sleepless nights over their regulator's treating customers fairly (TCF) initiative. Indeed, it may create a dream opportunity for them.

The new requirements could unlock the door to £7bn of commission tied up in mortgage payment protection insurance (MPPI) and payment protection insurance (PPI) policies, which typically pay out for a year if policyholders are too ill to work or if they experience involuntary unemployment.

So while there is nothing to stop brokers from continuing to take their favourite nightcap, they will hopefully be able to justify it on celebratory rather than medicinal grounds.

The management of the major banks and building societies, on the other hand, are probably now more into valium than nightcaps, because it is hard to see how they cannot fall foul of TCF.

TCF is only one component of the FSA's attempt to restore consumer confidence in our industry but, because it departs from previously known regulatory tradition, it is the one on everyone's lips.

It is not intended to create new rules or obligations or new checklists to comply with. But it is to ensure that the principle of fairness is evident in all key areas of a business and embedded within its culture.

Unlike rule-based legislation, which spells out exactly what can and can't be done in specific circumstances, this principle-based legislation requires judgment to be exercised. The FSA, the firms it regulates and the customers they serve are all being asked to make a judgment on what is and is not fair.

Legal opinio
In short, everyone is now required to operate within the spirit of the law rather than within the letter of the law. It's no longer sufficient to merely hide behind legal opinion saying that a product or practice is above board, and those who try to sail too close to the wind are more than likely to capsize.

As spelt out very clearly by the regulator in its latest paper Treating Customers Fairly - Building on Progress, published earlier this month, exactly what is likely to be considered fair will vary from one firm to another and the fact that small firms lack the resources of their bigger counterparts will certainly be taken into account.

But it does seem possible to make at least some generalisations about the fairness of certain practices in the MPPI and PPI arena. It is not uncommon for high street lenders to take over 80% of a client's premium in commission and over-rider payments from these products and it is hard to see how anyone in their right mind could regard this as being fair to the public.

Intermediaries, on the other hand, have access to PPI and MPPI schemes offered by Biba, and can introduce clients to them in the knowledge that they have been vetted by those with the foremost regulatory expertise.

The Biba schemes can undercut some high street lenders by a third on price and provide a superior quality of cover at the same time. They offer cover that dates back to day one whereas that provided by banks and building societies tend not to pay out until after a 60-day excess period.

Fairness is essentially the function of looking at the impact of our actions on others, and it is hard to see how anyone could be perceived as being anything but fair if they provide clients with vastly superior value to that being offered elsewhere

But it is quite possible both to be fair and to make money. If those managing ethical funds or environmentally friendly cars can make small fortunes then there is no reason why insurance brokers promoting value for money propositions shouldn't do as well.

Another example of quite legal, but palpably unfair, behaviour was recently demonstrated by a major PPI insurer rather than a bank - although it is actually the subsidiary of a banking organisation. This June, it simply closed one of its schemes to all members by writing to them with its 30-day notice of cancellation, which is all that its small print requires it to offer.

But it seems unimaginable that an organisation such as Biba would ever sanction such behaviour. Indeed it is just about to introduce PPI cover which actually guarantees that it cannot be withdrawn within the first five years.

Income protectio
Intermediaries introducing PPI and MPPI business to the Biba schemes are in fact able to outsource their regulatory responsibility. But just a word of warning on this one. If you are really going to treat customers fairly you should first ensure that you pay due attention to the merits of income protection as an alternative.

Income protection does not cover involuntary unemployment but, because it can pay out right up until a policyholder's intended retirement date if they are unable to work on health grounds, it can sometimes represent better value than MPPI or PPI, which only pay out for a maximum of one year, or sometimes two years.

MPPI and PPI can, however, be better value for smokers, older people and those in risky occupations. They are also quicker to sell as a result of involving no initial underwriting.

Hopefully TCF will create a prosperous future for many insurance intermediaries. But be aware also that the FSA regards the future as starting now. IT

' Simon Burgess is managing director of intermediary Burgesses