despair to some – but has engendered determination in many others,
finds Brian
Rogerson.
report into the payment protection insurance (PPI) market,
published at the end of January 2009, came as a bombshell to the
motor finance industry.
This was especially so since the previous ruling on
the topic, by the Financial Services Authority (FSA) in September
2007, seemed to imply a shift in government’s conduct of business
regulation from a rules-based approach to a new principles-based
approach. Under this, motor dealers would be measured more from the
customer’s understanding of the product being sold than by
compliance with process.
Nevertheless, Peter Davis, the CC inquiry chairman,
announced a package of measures due to come into force during 2010,
including a ban on selling PPI at the same time as finance at the
point-of-sale (PoS) and for seven days afterwards. Also included
were a prohibition on single-premium policies, the introduction of
personal PPI quotes, annual statements and measures to ensure that
improved information is available to customers “to make it easier
for them to compare and search for products and switch
policies”.
Go deeper with GlobalData
Steve Lawler, managing director of Hitachi Capital
Insurance Europe (HCIE) views the CC ruling as a “kick in the
teeth”.
“It perhaps was not unexpected,” Lawler said, “but
nevertheless was the wrong decision to make.”
He explained: “Since the FSA’s previous ruling on
how PPI should be sold most dealers have invested much time and
cash in training and setting up the appropriate procedures. The CC,
however, has taken absolutely no notice of this and gone ahead with
de-limiting PPI from the point of sale. Trying to sell PPI some
seven days after the vehicle has been sold will not work –
re-solicitation rarely returns the investment spent upon it.”
Although retail PPI is a small part of the overall
UK PPI market (in 2007 the gross written premium paid by consumers
for retail PPI was £73 million while for all other forms of PPI it
was £3.8 billion) it has attracted some unfortunate attention in
recent years.
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By GlobalDataDuring 2008 the FSA fined five motor retailers a
total of £175,000 for failings “which exposed 2,175 customers to
the unacceptable risk of being sold a PPI policy which was not
suitable to their needs”.
At the time the FSA explained that, despite the
majority of dealers having been subject to FSA regulation for over
three years, failings were still occurring and consequently the
association was inaugurating a series of free motor retailer road
shows including sessions on selling PPI and treating customers
fairly.
Death knell sounded
The CC ruling brought predictable glee
from some quarters.
Louise Hanson, head of campaigns at the
Consumers Association’s magazine Which? said: “This
decision helps sound the death knell for PPI. For too long too many
customers have suffered from shoddy, expensive and inadequate
protection.”
Finance & Leasing Association (FLA) members
were, understandably, less sanguine than Which?.
FLA director-general Stephen Sklaroff said: “The CC
has thrown the baby out with the bath water. By preventing
customers from protecting their repayments at the time they take
out a loan, the commission has made it much less likely that they
will do so at all. Many more people will go without the safety net
provided by PPI just when unemployment is reaching record
highs.”
Louise Wallis, head of business development at the
Retail Motor Industry Federation believes the CC’s approach has
been heavy-handed, and that, given the current climate, car buyers
want reassurance that if they buy a car using finance they will be
able to meet the repayments if they are made redundant.
“The result,” Wallis added, “could lead to
customers finding themselves without this vital form of insurance,
and prevent dealers from doing their best when it comes to finance
provision. It may also hinder a recovery in the car market.”
Sklaroff is right to be concerned about
unemployment rising. Office for National Statistics revealed that
UK unemployment rose to 1.92m between September and November 2008 –
up some 131,000 from the previous three months and the highest
level since September 1997.
Chris Oakes, chief executive of the Consumer Credit
Trade Association, told Motor Finance: “Although there
were instances where PPI was mis-sold in the past, nevertheless it
still provided very valuable cover. It protects some of the most
vulnerable members of society – who will no longer be offered the
opportunity to take it up.”
An alternative?
Behind the scenes, some motor lenders are
considering an alternative to PPI which may serve to circumvent the
CC’s ruling. Under a ‘debt cancellation’ or ‘debt freeze’ scheme,
the insurance cover – including redundancy – would be built into
the finance agreement as an integral clause. The premium would
effectively be built into the agreement rate and once repayments
were adversely affected by conditions falling within the insurance
clause, the cover would become effective.
Malcolm Padgett, who heads up the specialist PPI
team at the law firm Coffin Mew, however warns that “considerable
regulatory and legal risk is likely to be involved with replacing
PPI with debt cancellation”.
Life in the old dog yet
For Paul Glen, chief executive of Cardif
Pinnacle the Competition Commission’s ruling comes as something of
a relief.
“It has ended a period of uncertainty,”
he said. “We have kept close to government and its deliberations
during the process of the final report and done our share of
lobbying. As a consequence we are not surprised at the changes –
including the seven-day limitation – that are being asked of the
PPI market.”
He added: “The crucial requirement by government is
to make sure that customers have a greater element of choice in
their decision making, and are aware they can decide to take out
PPI from a range of providers.”
Glen believes there are three ways in which PPI can
move forward. Firstly, although some motor dealers will undoubtedly
despair of selling PPI, others will embrace the changes and quote
at the point-of-sale. These PPI quotations may include a range of
options, and will mean the car buyer is less likely to shop
elsewhere for the product. The dealer will then approach the
customer after the seven-day period and attempt to close the
deal.
“Secondly,” Glen explained, “some dealers will not
want to sell in this way and, after introducing a quotation will
pass the lead on to operations which will sell directly to the
customer,” such as Financial Telemarketing Services (FTS), a
subsidiary of Cardif.
The third option, according to Glen, is for the
dealer to point the customer in the direction of an insurance
provider’s web quotation system (which can be dealer-adapted if
required), where a selection of PPI and other general insurance
products will be offered.
As a consequence, Cardif Pinnacle is developing its
own system to provide the above package of options for dealers
which should be ready by the end of May 2009.
HCIE’s Lawler stressed his company is still seeking
future plans for PPI although other insurance products such as GAP
and return-to-invoice insurance are thriving.
Padgett of Coffin Mew said “risk aversion” will be
the name of the game in the future.
He explained: “A range of risk-averse products will
become an integrated part of the finance sales product. PPI will
need to be re-designed and re-priced. When this is achieved
customers will want to buy it again.”
