The battle between providers,
regulators and claims management companies over payment protection
insurance may be coming to an end, reports Charles
Wheeldon.
Go deeper with GlobalData
After suffering numerous
speculative lawsuits brought by claims management companies (CMCs)
operating on a ‘no win, no fee’ basis, payment protection insurance
(PPI) providers – led by Black Horse – may at last be breaking the
cycle of routine settlement.
Black Horse Ltd has recently won
five cases of alleged PPI mis-selling brought by claimants backed
by CMCs, the most important being Harrison vs Black Horse
in the High Court, a decision binding on all County Courts.
This should act as a strong
deterrent against ‘frivolous’ CMC-backed litigation in future,
despite the persistence of rumours that the CMCs may band together
in a last-ditch attempt to overrule Harrison vs Black
Horse in the Court of Appeal.
The court cases are the latest
development in the ongoing controversy surrounding PPI, which
should reach another milestone when the British Bankers Association
(BBA) challenges the Financial Services Authority (FSA) in the High
Court on 25 January.
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By GlobalDataAt issue is the lawfulness of the
FSA’s Policy Statement, issued last August, which lays out a
package of measures intended to reform the PPI market and protect
consumers. The BBA will attempt to challenge the policy statement
in a Judicial Review, in a case expected to last four days.
An end to the
pantomime?
It is hoped that the court’s
judgement will pull down the curtain on a pantomime that has
bedevilled the PPI industry for five years and has seen the market
shrink from its 2005 peak of £4.5bn in gross written premiums (GWP)
to barely a third of that volume last year.
It was in 2005 that the FSA first
got involved, when it took over the regulation of the product from
the General Insurance Standards Council.
There followed a series of thematic
reviews and ‘Dear CEO’ letters, with the FSA pleading with the
industry to improve their sales standards.
By the end of 2006, the FSA had
noted that hardly any progress had been made to improve excesses
against consumers, so the regulator launched the first of 24
enforcement cases to date against the market’s miscreants.
Four of these were directed against
motor finance providers.
In 2006, EW
Motor Group’s senior management was held to have taken insufficient
responsibility for compliance. Then, in August 2008, George White
Motors, Ringways Garages and Park’s of Hamilton, were all found to
have failed to establish customer suitability and monitor the
quality of advice given.
However, the motor finance industry
players were hardly the biggest sinners. Providers of personal loan
and mortgage PPI generated the most controversial headlines, with
accusations of uncompetitive practices and excessive
commissions.
The regulators took action, with
the FSA forbidding single premium PPI in 2008 and the Competition
Commission banning finance providers from selling PPI at the point
of sale in early 2009.
The Competition Commission
concluded that the vast majority of the existing 12m PPI policies
had been sold at POS, with many consumers unaware they could shop
around, leading to higher prices. PPI providers were consequently
forbidden from selling their products within a week of loans being
taken out.
All this activity has somewhat
thrown the baby out with the bathwater, as the consumer credit
industry has recoiled from offering PPI products almost
altogether.
Now at least there is good news for
PPI providers, as the prospects of CMCs appear much weakened after
Black Horse’s successes in court.
Greg Standing, a partner at Wragge
& Co LLP, who acted for Black Horse on a number of the cases,
says: “The success Black Horse has had in defeating PPI mis-selling
claims demonstrates that lenders who can show they had compliant
documented sales procedures are well placed to resist such claims.
Harrison in particular was a bitter blow to the CMCs.”
Nancy Rignall, UK deputy managing
director at Spanish insurance multinational Mapfre Abraxas, says:
“The industry has learned that it has to slow down and take its
time, ensuring that the customer has a good understanding of the
significant benefits and also the exclusions of the policy.
“The commissions on the product are
reduced, but by going through the correct sales process, it is
possible to sell higher volumes of product with lower
cancellations, so the overall effect for the dealers should be
better.
“The unfortunate casualty of
regulation has been those companies who have decided they are not
equipped to offer this product correctly, and thus have withdrawn
altogether from offering it.
“If you compare the motor industry
to, for example, the mortgage sector, it has taken them longer to
get behind regulation and work with it effectively, but I strongly
believe that now they have a good understanding and ability to
offer this product in the best interests of their customers.”
Substantial potential
market
Speculating on the long-term future
of PPI, Rignall says: “Datamonitor estimates the total creditor
insurance GWP will only recover to £2.6bn by 2014, due to the POS
ban preventing penetration rates rising to prior levels.
“However, the widespread use of key
credit products, even during the credit crunch, creates a
substantial potential market. Consumers are worried about their
ability to pay off their debts in the current market and so the
market has become more receptive to PPI solutions creating a great
opportunity for PPI distributors and insurers.
“I very much believe we will start seeing more positive opinion
publicly given on PPI from government bodies and the media as the
product is now more sensibly priced, more transparent and providing
better benefits than ever before.”
