The FSA is to fine 10 major lenders up to £1m each over mis-selling payment protection insurance policies. This should be the cue for brokers to move in on this market, argues Simon Burgess
In June 2006, KPMG was commissioned to undertake a survey of payment protection insurance (PPI) sales practices from January to March 2006. In its resultant document, KPMG 'set the scene' for this sector by announcing that 2005 was a long year for the PPI industry.
Key players contributing to the PPI debate during 2005 were the Citizens Advice Bureau, Office of Fair Trading (OFT), the FSA, trade bodies and independent research houses.
Moving on a year, we still had the same consumer and regulator criticisms, but these were joined by an increasing number of national newspapers berating high street providers. The scene was set for an even longer 2006.
The FSA continued to warn firms that it would pursue disciplinary action against those that fell below required standards, but it wasn't until the last quarter of 2006 that the regulator showed it had real teeth and started dishing out the fines.
The OFT announced that the PPI market was failing customers and signalled its intention to refer providers to the Competition Commission. I said then that these fines were the 'thin end of the wedge'.
We are only a few weeks into 2007 and consumer and media pressure is already mounting. PPI players and spectators will be aware that the FSA is considering whether new rules are required for first quarter sales in this sector and we await to hear the outcome of the OFT's action.
But was the FSA ready for ITV's insight into this sector? The Tonight with Trevor McDonald programme highlighted how borrowers were paying over the odds for cover which, it said, was often inappropriate for their needs? Money saving expert Martin Lewis wiped the floor with the big lenders over exorbitant pricing and dubious sales tactics.
When it was broadcast on 12 January, the programme articulated what I've been saying to consumers for years: check whether you really need the cover and don't be fooled into thinking you have to take out a policy with your lender. And contact stand-alone providers and compare prices.
Ten days after the broadcast, the FSA confirmed its intention to fine 10 major lenders £1m each for mis-selling PPI. The timing couldn't have been better. I truly do not want to gloat, but the reputation of those with this high street monopoly has well and truly been damaged. And because of this, I believe, at long last, the distribution landscape will change.
Consumers traditionally signed up for cover with the big banks and building societies because they weren't aware of other options. Recent media coverage and the FSA's fines can only serve to cast more doubt over the big lenders who currently account for 90% of the PPI market. And where there's doubt, there's opportunity.
This current 'climate of discontent' is the brokers' cue to move in and seize a greater market share. I know I've urged brokers to do this before, but the time to act is now. We need to redress the imbalance.
Consumers need another distribution channel, the media is urging them to look around, the FSA is telling them their providers aren't so squeaky clean and the insurance industry responds by taking a minuscule percentage of the PPI market.
Out of Biba's 2,100-strong membership, only 49 have currently notified Biba that they are PPI specialists. I'd like to believe there are more than just a paltry 2% offering this cover, but sadly, I know my optimism is misplaced.
It's not as if there isn't a need for this type of cover. Consumer debt reached an all time high in December 2005, £1.3 trillion, and the Council of Mortgage Lenders (CML) reported that 35,320 homeowners were between six and 12 months behind with their mortgage repayments in 2006, as opposed to 31,470 in 2005.
Despite repossession being the last course of redress for lenders, the Department for Constitutional Affairs reported that 34,626 county court actions were entered in the tird quarter of 2006, 15% more than in the same same period in 2005 period. The CML revealed that 8,140 properties were taken into possession during the first half of 2006, 75% more than in the same period in 2005.
Aren't brokers meant to ensure their clients are fully protected at all levels? These rising figures suggest consumers are in dire need of payment protection at an affordable price. My company recently launched some products that offer brokers 30% commission and the premiums are still way below anything marketed by the high street lenders.
The national media has 'warmed up' consumers to sourcing PPI from other providers – so, brokers, why isn't it in your portfolio?
PPI is as easy to sell as home or motor cover and Biba's learning and assessment system – BrokerAssess – contains a specific module on PPI. Given the commission and the ease in which this product can be sold it's a win-win scenario.
Around seven to eight million policies are sold every year and intermediaries account for under 10% of sales. I sell around 150,000 a year and this equates to around 2%of the market.
Out of the 3,127 intermediaries who include my products in their portfolios, only 23% are general insurance brokers, IFAs account for 29%, mortgage brokers 37% and the remainder are web aggregators and search engine optimisers. It's interesting to note that around 90% of our affiliate commission is paid to the web-based distribution channels. I want to pay brokers more.
And it's not just the distribution and commission issues. Our reputation is becoming inadvertently damaged by the money-grabbing morals of the banks and building societies. However, there was nothing inadvertent about Angela Knight from the British Bankers Association when she responded to criticism from Martin Lewis.
Knight was very direct when she said cheaper insurance providers must have inferior products to her members. Since when did a banking trade body become an expert in the intricacies of insurance? How dare she question the cover we provide? The insurance industry must fight back.
Huntswood Consulting recently published a paper into PPI and predicted that "winners in the new protection market will be those who minimise the impact on sales by rapidly redesigning products, processes and re-establishing confidence for their customers and the market".
When properly sold PPI can bring a much valued benefit to customers – isn't that what brokers do, add value for the benefit of customers?
We need to change this distribution landscape and make it another long year for our competitors. IT
Simon Burgess is managing director of British Insurance