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On September 26 2007 the Financial Services Authority (FSA)
published the finding of its latest review of payment protection
insurance (PPI) in the manner of a headmaster addressing errant
schoolchildren.

Clive Briault, FSA managing director of Retail Markets said: “We
have, on a number of occasions, set out clearly our requirements
for the selling of PPI. While some progress has been made by the
industry, we are extremely disappointed that some firms have still
made little progress in improving their sales practice.”

He added: “The right PPI can provide valuable protection for
consumers, but they are entitled to expect that they will be
treated fairly when they buy it. They must be told how this product
works, what it covers, and how much it costs. At the moment too
many firms are not meeting these requirements.”

 

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MYSTERY SHOPPER GIVES CREDIT TO MOTOR
DEALERS

The latest review looked at 150 firms including the mystery
shopping of personal loan providers. The mystery shopping
identified “serious failures” in the sales processes of a number of
firms selling single-premium PPI alongside unsecured personal
loans.

As a result four firms will be subject “to further
investigation” and a further 20 cases “may also be investigated”.
In addition:

• some 11 firms have stopped selling PPI either permanently or
  temporarily
• three firms have cancelled their FSA authorisation to sell
  PPI
• four large firms are reviewing past PPI sales to ensure they
  were appropriate.

Briault confirmed however: “Motor retailers have shown some of
the biggest improvements since our earlier work. For instance, they
have been pro-active in changing their sales processes to better
align them with ‘fair treatment of customers’ objectives.”

FSA PPI FINES TIMELINE

The FSA has previously fined five firms over “poor” PPI selling
practices:

•   September 2006: Regency Mortgage Corp, £56,000
•    October 2006: Loans.co.uk, £455,000
•   December 2006: Redcats (Brands) Ltd, £270,000
•   January 2007: GE Capital Bank, £610,000
•   February 2007: Capital One Bank (Europe), £175,000

It has also imposed a public censure on Eastern Western Motor
Group (December 2006) and Cathedral Motor Company (February
2007).

FSA’S DISLIKE OF SINGLE PREMIUM PPI

Following an FSA visit to an unnamed motor dealer the company
“pro-actively” took steps to improve its sales process and to
source a PPI product that would better suit the needs of its
customers.

In the past it had only offered single-premium PPI policies that
were provided by the lenders and were specifically linked to the
underlying credit product. The dealer subsequently approached an
insurance provider to source a regular-premium product that it
could offer in place of the lender’s own product. The FSA explained
that the dealer believes “that the new product offers better value,
is easier to explain to its customers and will remove the
detrimental early settlement penalties of single-premium PPI.”

Steve Lawler is managing director of Hitachi Capital Insurance
Europe. He told Motor Finance that over recent months the
insurer had witnessed a “large shift” towards monthly premium
policies – especially in the motor finance sector.

Facing Armageddon?

PPI providers are often criticised for not preparing the sector
sufficiently for the current regulatory onslaught, which one
observer describes as “facing Armageddon”.

One industry observer explains: “A PPI insurer that goes out to
tender its product has to prepare a complex and lengthy document
which comprises a complete package including facets of training and
compliance.  However, the only point in which their customer
is really interested is the page that shows how much commission it
can earn.”

Rod Revell, chairman of the General Insurance Group at the
Finance & Leasing Association (FLA) says: “Most PPI providers
made massive attempts to prepare the industry for regulation. It
was, undoubtedly, more difficult for smaller motor dealers to deal
with it whereas the larger motor groups which have been able to
invest in compliance have successfully adapted to the changes.”

Malcolm Padgett, who heads up the specialist PPI team at the law
firm Coffin Mew LLP, stresses that the motor industry had been very
unwilling to face the prospect of being regulated by the FSA when
regulation was first announced. “However,” he says, “the fact that
the FSA was perceived to be a very rules-based and procedural
regulator slowly encouraged much of the motor industry to believe
that it could safely submit to the regulation, by designing sales
processes to meet the FSA’s clear conduct of business requirements
– which is what happened.”

The outcome, Padgett says, was that the sales process for the
PPI product was adapted by the motor trade to anticipate the FSA
regulation rather than the product itself being in any way adapted:
“This has meant that the motor distributors have been selling
insurance, which over many years has become ever more complex,
totally dependent upon compliance-driven processes.”

FLA responds “robustly”

The FLA has long sought to lobby on behalf of its members at a
time when the regulators’ star has been very much in the
ascendancy.

Richard Bostock, senior policy adviser at the FLA tells
Motor Finance that although it had been heavy going, much
lobbying progress has been made despite it having sometimes been
obscured by adverse media coverage.

Two recent wins for the FLA include a protocol that ensures that
consumers who cancel PPI early get a refund in their premiums, and
publication of A Consumer guide to Payment Protection
Insurance which will be made widely available to consumers
before they take out a credit agreement.

Indeed, the FLA responded robustly to the FSA’s Third Thematic
Review prior to its publication. Bostock says: “Our key points were
the lack of balance, with prominence given to the negatives, and
the absence of a clear statement that PPI remained a sensible and
appropriate purchase for many borrowers.

“We also objected to an unsubstantiated comment – that bundling
PPI with loans/credit was, by definition, a ‘flaw in the structure
and operation of the market’. There was also insufficient
prominence for the real progress the FSA had found in PPI selling
in the motor market.

“We argued,” Bostock adds, “that the FSA should surely be
encouraging further progress rather than intensifying the existing
trend towards companies withdrawing from the market.” The FSA
accepted the FLA’s points and the final version of its press notice
was, as a result, much more balanced.

Post-sale PPI not an option

Whilst there is no doubt that UK motor dealers have not always
sold PPI as correctly as they might, there has been a significant
improvement over the last five years.

Revell defends the product vigorously. “At a time when the
government has grave concerns about the high level of consumer debt
in the UK, and with a rising incidence of house repossessions, PPI
is the one product that actually helps people when they lose their
jobs or fall ill. Yet there are those who would encourage people to
cancel their policies, and you cannot blame motor dealers who now
lose confidence in the product because of often-unfounded criticism
for stopping their sale of PPI.”

Nor does Revell believe that selling PPI on a post-point-of-sale
basis will be successful. “Selling PPI on a post-sale basis,” he
says, “often means selling it with a separate premium – instead of
a single premium tied to the agreement. As such it experiences a
large attrition rate. The only place for PPI is at the
point-of-sale when customers are able to take an unbiased view of
the risk.”

A future PPI

Padgett argues that the FSA has shifted its conduct of business
regulation from a rules-based approach to a new principles-based
approach under which motor dealers will be measured more from the
customer’s understanding of the product being sold than by
compliance with process.

He says: “The motor trade is losing the security blanket of FSA
rules against which to measure its lawful sale of really quite
complex PPI. That means that the insurance itself is going to have
to become much more simple and straightforward to sell if motor
dealers are going to be able to continue to meet FSA
requirements.”

Revell agrees that PPI will continue to exist in the future.
“Many firms that are currently dependent upon PPI can ill afford to
give it up. If income from PPI does seriously diminish or disappear
then distributors will have to cover their costs by other means –
either with car prices rising, charges being made to banking
facilities or motor lenders raising their interest charges.”

One determinant for the future of PPI is the health of UK
economy. “Insurers tend to tighten their cover as they face more
claims,” Lawler observes. “If the economy dips and unemployment
increases then PPI will be in greater demand at the PoS. If the
economy carries on upwards then PPI will probably experience a
widening of cover and become altogether more inclusive.”

John Harrop, business development director at Cardif Pinnacle
agrees: “I think in around two year’s time PPI will become far more
customer-friendly,” he predicts. “It will become more claims-based
and more of a lifestyle product. It could also, for all sorts of
reasons, be in much greater demand by then.”

After the
review

David Heffron
examines what recent developments in PPI mean for the motor finance
market
  The FSA published its results of its
Phase 3 Review in September 2007.  The review involved visits
to firms and enforcement action where appropriate. Phase 3 was
designed to test industry progress on ensuring that: 

• customers are told PPI is optional (if applicable) 
• they receive clear information about the product and its
  cost 
• they are given the help they require to understand the benefits
  they are eligible for under the policy and exclusions
• where advice is given, customers are recommended a policy which
  meets their needs 
• they are offered a fair refund if they cancel their policy
  (particularly relevant to single premium business). The FSA visited
  150 firms throughout its review. It found there have been
  improvements against outcomes one and five (above), but that there
  was little progress against the remaining outcomes. It announced it
  will continue to work with firms to improve sales processes and
  that PPI will continue to be a high priority

    Insurance Conduct of Business Review

The FSA has recently
completed its review of its Insurance Conduct of Business
sourcebook (ICOB). The consultation paper was published in June and
closed at the end of September.  It is unknown at this stage
when the new rules will be introduced. It was initially hoped that
they would be introduced by the end of the year, but this now looks
unlikely. The proposed changes are additional requirements for the
PPI, where considered necessary, and a move to a principles-based
regulation.  
Competition Commission

The PPI market is currently
being investigated by the Competition Commission (CC). The CC is
due to publish its initial findings in February/March 2008 and the
final report in August 2008. If the CC finds there is an adverse
effect on competition, it will also assess whether this has a
detrimental impact on customers, for example through higher prices,
lower quality or less consumer choice. The CC will then decide
whether it should introduce remedies to tackle the adverse effect
on competition customers.  

The
future

PPI has provided a good
source of income for those selling it. It appears from the FSA’s
ICOB proposals that specific rules will be introduced in relation
to the PPI sales which are likely to lengthen the time it takes to
make a sale and increase the compliance requirements, particularly
in relation to training and competence and compliance monitoring.
The CC investigation may also result in a reduction in the
profitability of the product whilst negative publicity is also, no
doubt, impacting on sales.

The author is a partner
in the financial regulation group of Addleshaw Goddard LLP,
david.heffron@addleshawgoddard.com.