No competition, no hope

It is difficult to believe that despite the warnings, complaints and public calls for changes to the payment protection insurance (PPI) market, providers, trade bodies and distributors have done nothing to prevent the Office of Fair Trading (OFT) from referring the market to the Competition Commission (CC).

It is not as though the OFT's decision has come out of the blue, and there have been a number of warning shots fired over the bow of the market from both consumer and financial watchdogs alike.

Indeed, in the same week that the OFT announced it would be making a referral to the CC, the FSA stated it had found there were still significant instances of customers not being treated fairly in the PPI market. This followed its second thematic review into the market, which had uncovered a number of problems a year earlier.

The refusal to take action in the face of clear, consistent and ongoing criticism points to a number of unpleasant evils, which sit at the very heart of the PPI market. In the first instance, it clearly demonstrates the majority of providers are happy to abuse the position they have and offer insurance, which is over-priced and poorly sold.

It also underlines the fact that although financial providers make a song and dance about putting customers first, this is not always their intention. They will put customers first when they have to, but otherwise their own profits will take precedence.

In a commercial market many will think that this is a naïve point to make, and perhaps it is. However it is also slightly depressing to think that firms who are in some cases making profits that run to billions of pounds, see fit to ramp up their margins wherever possible and squeeze further funds from clients who can least afford to be parted from them.

Continually, we hear phrases like "responsible lending" and "treating customers fairly" and yet in certain markets when we look deeper there is often nothing to substantiate the claims being made.

What the OFT's report into the PPI market shows more than anything is that competition is a natural regulator and without it markets will suffer at the hands of those in the strongest positions. Of course there will be winners and losers in any commercial market, but in the PPI market the winners should not always be the insurance sellers and the losers should not always be the clients, as is the case at the moment.

Without genuine competition insurers are under little pressure to improve their practices and given the profits they are making have no incentive to do so.

However a degree of responsibility also has to lie at the feet of consumers for the raw deal they are receiving. Potential policy holders in the insurance market also have to gain an understanding of the risk they offer, what they need to cover it and where they can get the insurance.

At the moment too many consumers are lazy. They are not prepared to shop around, they are not prepared to undertake the right level of research required to really make informed decisions and they too readily put themselves at the mercy of others. This is not simply a problem with PPI, but many of the wider financial markets and until both industry and government can truly address the problem of financial competency it will continue to hound the nation.

Therefore, while work is ongoing to raise the level of financial understanding, there must also be stringent regulation to create competitive markets for clients. Mixing consumers who are not properly informed with retailers who are desperate to make margin will only ever produce one result.

But what can and should the CC do to improve things in the PPI market? Ongoing work must be carried out at a basic level to improve financial competency across the board. But more specifically the information given to clients about the PPI they are buying, the job that it does, the amount it will cost them and the limitations it carries must be uncompromisingly clear, fair and not misleading.

Too many clients are under the wrong impression that either they have to buy PPI or that it will actually help their credit rating. Others do not understand exactly what the product does, while many simply have a quote for the insurance automatically added on to the credit they are taking, making it more difficult to turn down. This type of approach has to be stamped out immediately.

In terms of restructuring the market, the CC may look to recommend the abolition of profit sharing arrangements between providers and distributors or even suggest splitting the sale of the credit product and the insurance, which seeks to protect it.

It may simply say the FSA needs to implement a tighter framework within which the market must work and in turn perhaps we will see the regulator's Treating Customers Fairly principles used to ensure firms are providing the best cover possible.

What is certain is that significant change is needed. Both the Council of Mortgage Lenders and the ABI have carried out a good deal of work within the MPPI market over recent years and yet it was not enough to see it escape referral to the CC.

Changes must go further than only eradicating the very worst practices, but must genuinely set about making PPI policies really meet the needs of clients. This in turn should help to drive the competition that is so desperately needed to help regulate this market effectively.

The fact that MPPI improvements failed to save the market from its fate should act as a gauge to the kind of changes we need to see introduced and until they are, millions of new policyholders each year will continue to be mistreated by a market that advertises itself as being there to protect them. IT

Simon Burgess is managing director of Biritishinsurance.com