With the approach of the FSA's 17 March deadline for trade industry bodies representing the PPI industry to clean up their act, Simon Burgess asks who is to blame for PPI mis-selling
As the debate surrounding sales of payment protection insurance (PPI) gathers momentum, many brokers across the UK will no doubt be heaving a sigh of relief that they follow the 'nimby' (not in my back yard) philosophy.
Waves of public criticism have been heaped upon this much-berated sector.
In the space of six months there's been the Citizens Advice Bureau's (CAB) complaint, the subsequent Office of Fair Trading investigation, the FSA's public warning and recent damning findings from research company, Defaqto.
The CAB called for an investigation after receiving complaints from many consumers who were unable to claim on the policies they'd been sold or who had been paying too much for their cover.
As a result, the OFT conducted its own detailed market study. It found issues with over-pricing, product design, irresponsible lending, pressured sales and claims administration.
It reiterated my concerns that consumers faced difficulties gaining the information they needed about alternative suppliers, and with the technical nature and/or lack of transparency of the information available to them.
The OFT identified the high costs and other entry barriers for stand-alone PPI providers.
It is now waiting for the Competition Commission's report on store cards and associated PPI before referring on.
Similarly, the FSA called upon firms to take urgent action to ensure their sales were in line with regulatory requirements after its mystery shoppers uncovered a raft of poor selling tactics and lack of proper compliance controls.
It has given the relevant trade association bodies until 17 March to 'get their houses in order' and to introduce voluntary self-correcting measures.
If the FSA's concerns about PPI surrounding transparency, pricing, choice, compliance and inappropriate sales, are not addressed by this deadline, it will impose its own corrective actions.
This could result in the separation of insurance from core products and greater clarification of the sales process.
Last month, financial research firm Defaqto warned consumers they could be wasting as much as £350m per year on PPI which fails to pay out. These findings were no surprise to me. I'm constantly asking for lenders' unscrupulous tactics and exorbitant premiums to be investigated .And I am delighted this is finally happening.
What may surprise brokers is the size of the market they're ignoring. Defaqto reports that the PPI market accounts for 15% of all general insurance premiums written in the UK - almost the same size as the private motor sector.
Brokers may well feel their laissez-faire attitude is justified.But given the staggering size of the market, is it morally right to leave so many consumers at the mercy of our competitors?
How has it reached this size without brokers taking a substantial share?
Sales of PPI have been on the increase for 20 years. In December last year, the personal debt level was reported to have reached a whopping £1.3 trillion. As this increases, so does demand for this type of cover.
There are currently about 20 million policies in force in the UK. That is a market worth about £8bn in premiums and commission.
Lenders cream off about £6bn of that pot, taking 82% of PPI sales. Loan brokers account for 15%, while insurance brokers languish at the bottom, selling 3%.
Lenders are quick to make the most of their position as mortgage and loan providers by selling PPI as an add-on.
Often the insurance was, and still is, bundled-in as part of the mortgage or loan and consumers are misled into taking out policies without checking costs and exclusions.
It was only a matter of time before these anti-competitive practices came under closer scrutiny and now trade associations have less than two weeks to provide evidence to the FSA how they're tackling them.
Predictably, these bodies are making much noise about how they're 'taking the lead in developing an industry solution'. This is something they should have done years ago.
The Association of Mortgage Intermediaries and the Council of Mortgage Lenders (CML) have put together PPI working groups and cross-industry forums.
The CML is also reviewing the baseline specification for PPI policies, specifically for mortgages.
While these cross-industry forums and discussion groups are to be applauded, why are the very people who could effectively turn-around the negative image created by the lenders excluded from discussions?
The CML hasn't invited Biba to its forum. Given the lack of alternative providers in this market, I would have thought Biba representation was vital.
Brokers are one of the few groups who meet the FSA's criterion of Treating Customers Fairly and could prove adept at re-building the insurance industry's tarnished reputation.
Biba has stuck its head above the parapet and is not only calling for single premiums to be abolished, but is helping to shift the blame from our industry to the lenders who created this situation.
Biba chief executive, Eric Galbraith, comments: "This is not an insurance problem and there's nothing wrong with PPI itself.
"The worst abuse of this product has been at the hands of the lenders who sell PPI and, in many cases, also design the product."
The ABI is picking up the product design and structure mantle by developing a standardised model for its members, covering definition and interpretation.
Although I believe actions speak louder than words, I am comforted by the ABI's response that a document with key dates and timelines will be with the FSA before its deadline.
This will tackle the product structure issues, leaving brokers - I hope - to take a more aggressive stance when it comes to product sales.
Biba recently encouraged its members to sell PPI and it offers, in conjunction with the CII, an online training programme.
It is not a difficult product to market. Anyone who can sell motor or household insurance with its excesses and liability issues can sell this.
Specialist intermediaries provide low-cost online accident, sickness and unemployment insurance schemes for introducer/affiliate brokers via the internet.
These products avoid the pitfalls of the volume-biased mortgage lender policies and can easily be added to a broker's product portfolio.
Brian Brown, author of the Defaqto report says: "Providers should conduct a proper customer demands and needs analysis before making a recommendation to take out insurance.
"They should also spend more time explaining to the customer what information is required and use common terminology and graphics to explain how their policies work."
Isn't this what brokers do anyway?We don't need trade associations to tell us how to sell PPI.
Brokers provide the right products for the right people, so why are we letting others damage the reputation of our industry?
Sadly, this industry's Nimby attitude may have something to do with it. IT
' Simon Burgess is managing director of Britishinsurance.com