Protect and survive

Low interest rates, benign economic conditions and an insatiable thirst for credit over recent years have seen the payment protection insurance (PPI) market triple in size since 1998. However, despite large-scale profits being made by brokers, creditors and underwriters alike, some feel acting in this market is simply not worth the risk. It has now been under the regulatory microscope for well over a year with a number of critical reports published and more set to follow.

The publicity generated by these findings has enlightened consumers to the market's flaws and also the possible grounds they may have for compensation. In turn, this is making many practitioners nervous of what lies ahead.

In 1998 the PPI market was worth £2bn and now in 2006 that figure has jumped to £6bn, according to an independent report issued by the Post Office. In breaking up that figure, the report says £4bn comes from loan protection insurance, including motor finance arrangements. Mortgage payment protection insurance accounts for a further £1bn, while the final £1bn comes from credit card insurance.

This explosion has largely taken place outside the confines of regulation, which only came to the market in January 2005. Given the stranglehold that credit providers have at the point of sale and the lack of genuine competition that exists in the market it is not surprising that such fast growth has led to the development of a number of characteristics which are less than consumer friendly.

Clearly not all firms operating in the PPI market are doing a bad job and, indeed, many of those truly working to the benefit of their clients must be sick and tired of having the market dragged down in the press and maligned as worthless. It is far from worthless, but unfortunately is not being used to best effect and therein lies the problem.

The FSA has already fined two firms in regard to their activities in the PPI market. Between them, Loans.co.uk and Regency Mortgage Corporation have been left with fines totalling over £500,000. There is no doubt that other firms operating in similar areas with similar methods will be nervously looking over their shoulder and considering whether to go on.

If they have other lines of business in which they operate, some may feel it is safer to simply take the profits they have made and up sticks out of the PPI arena altogether.

For those firms who know they could not stack up their procedures and processes to the regulator, there is not only the worry they will be fined, but also the fear that more informed consumers will find them out and begin clamouring for compensation.

If this happens and complaints are made and upheld in any sort of numbers then the knock-on effects for professional indemnity insurance will be horrendous while the number of firms happy to sell PPI will surely dwindle.

However the problem for brokers and credit providers is that if they are selling loans, mortgages or credit cards, they are also obligated by their duty of care to the client to ensure they can meet the financial commitment they are making both in the present and in the future.

This means that brokers and providers are obligated to investigate what hurdles could lie ahead and how they may be negotiated. This in turn leads directly to the door of the protection market and so for those looking to turn their back on it, they are also turning their back on one of their fundamental duties to clients.

According to the FSA: "An efficient and effective financial services market requires firms to treat their customers fairly, including by disclosure of clear, useful information about products and services, which enables consumers to see what they are being offered and to be well managed and soundly capitalised."

Firms that do not investigate how to keep their clients "well managed and soundly capitalised," are not, in the eyes of the regulator, treating their customers fairly.

This should prove to be beneficial to the market and its clients. It means that providers cannot absolve themselves of their responsibility to offer PPI to clients even if it means doing so by introducing them to another party.

It also means that those who know they are acting below the required standards must leave the credit market altogether, or begin to offer a complete package that meets the needs of their clients and satisfies the requirements of the regulator.

Simply because the PPI market is going through a difficult transitional phase, brokers and providers must not turn their back on it. There are still a number of excellent products available in the market and more are being developed as we speak.

Firms that take the trouble to source out the best of what is on offer will have nothing to fear from either the regulator or consumer complaints. Those who refuse to make the effort but choose to stay in the market will have both to fear. IT

Simon Burgess is managing director of Britishinsurance.com