Payment protection faces regulatory sanction but Lord Hunt says it is valuable.

At a time of economic uncertainty, payment protection insurance (PPI) should be coming into its own, offering desperately needed security to a hard-pressed nation. Instead it is labouring under the ever-darkening shadow of possible regulatory sanction.

When I published my independent review into the Financial Ombudsman Service in April, I warned there might be further timebombs of complaints waiting to explode. Now I am alarmed by rumours that PPI may fall victim to a past business review, with talk of a possible first use of the “nuclear option” – section 404 of the Financial Services and Markets Act, which gives the FSA power to establish such a review.

Many of the complaints relate to the appropriateness (or lack of it) of a PPI product to the particular circumstances of the individual – in other words, to distribution.

The Treating Customers Fairly implications are huge, so it’s little wonder alarm bells in the ombudsman’s office prompted equally agitated peals within the hallowed halls of the FSA.

Arguably, the PPI industry – essentially insurers and distributors – has only itself to blame. When the PPI issue first raised its head in 2005, the FSA robustly and clearly called on firms to “take urgent action to ensure that their selling practices for PPI are in line with regulatory requirements”.

Too many firms ignored that call. Everyone concerned should have taken a long, dispassionate look at their products and associated processes. But instead of going through that no doubt time-consuming and uncomfortable procedure, some preferred to craft alternative or substitute products, often based on variants of income protection arrangements.

To the cynically inclined, this looked more like a way of protecting the income stream of distributors than a sincere attempt to address fundamental weaknesses. And how many distributors can honestly demonstrate they invariably ensure customers understand that income protection products may, in due course, affect their entitlement to state benefits?

“Either the industry must deal with this surge of complaints itself, or it must lobby hard to ensure that any externally imposed, industry-wide solution is balanced, even-handed and fair, not ruinous.

Lord Hunt, Beachcroft

It’s not all doom and gloom, though, principally because PPI is a legitimate product, indeed an essential product, for the more vulnerable elements of society.

Even as he unveiled evidence of dubious selling practices back in 2005, former FSA retail chief Clive Briault emphasised that “when properly structured, explained and sold, payment protection insurance can provide worthwhile cover for consumers”.

Quite rightly, that has remained broadly the FSA position ever since. The Office of Fair Trading too acknowledges that PPI can respond to a genuine customer need.

So what must the industry do? Well, it’s certainly no good farming out masses of complaints to the ombudsman. Either the industry must deal with this surge of complaints itself, or it must lobby hard to ensure that any externally imposed, industry-wide solution is balanced, even-handed and fair, not ruinous as some doom-mongers already fear it may be. It must engage rapidly and robustly with regulators, consumer groups and policy-makers. Above all, it must do its best to make sure that good, honest and reliable PPI products continue to be available to the people of this country, at a time when economic gloom stalks the land.

Both the reputation of the industry and the public interest are at stake here. Let us take our own destiny into our own hands, now, not leave it to others to put our house in order again.

Lord Hunt is a partner and chairman of the financial services division at law firm Beachcroft.