Fair Fees: Under scrutiny

Four years ago, Picture Financial Services was fêted as a saviour of the Welsh valleys’ depressed economy.

The firm of credit brokers had just moved into swish new offices in Newport, backed by money from Merrill Lynch and Deutsche Bank. Under its chief executive Neville Allport, the Western Mail’s 2007 Business Achiever of the Year, Picture had plans to create 250 new jobs within three years.

But just over a year later, the situation looked very different.

The company operated by consolidating customers’ debts – secured against the value of their homes – into single loans, making its money through a mix of commission and by selling payment protection insurance (PPI).

But its financial position soured as quickly as the credit boom that had sustained its growth. In 2008, Picture went into administration as its investment bank backers refused to extend their support. It became another business casualty of the worst recession since the Great Depression of the 1930s.

But there was an extra sting in the tail.

Picture imperfect?

Most insurance brokers first became aware of Picture last month when the FSCS (Financial Services Compensation Scheme) published its annual report for 2009/10.

It revealed that the defunct South Wales company was linked to 908 claims (by far the biggest source) of the widespread PPI mis-selling that has fuelled the soaring increases in FSCS payouts, sparking Insurance Times’s ‘Fair Fees: Brokers won’t pay for banks’ campaign. Of the 2,411 claims submitted to the FSCS last year, the report shows that 89% were upheld.

The claims were lodged following the FSCS’s ruling last July that Picture was in default, and therefore could no longer provide compensation to customers.

The FSCS has received another 567 claims against Picture since April. Of these, 55% have been settled, with 87% of those decisions resulting in an offer of compensation.

Allport, who says the company took its responsibilities as an authorised intermediary “very seriously”, denies that Picture mis-sold PPI.

He says that, in spite of the subsequent payouts by the FSCS, an FSA review found no evidence of mis-selling by the firm, that no enforcement action was taken against Picture and no fines were levied.

Picture went bust before it could answer any of the claims against it, and Allport says that the company that has taken over the management of the loan book has forwarded all compensation claims to the FSCS without investigating them.

But the FSCS says that it investigates each individual claim before settling.

Prior history

While Picture was the biggest source of PPI-related claims, it wasn’t the only firm to mis-sell the product.

As far back as 2006, the FSA fined credit broker loans.co.uk £660,000 over its mis-selling of PPI policies. Meanwhile, claims management firm Forbes Douglas say that the defunct broker Loanmakers is their chief source of complaints.

Many financial services companies mis-sold PPI (see box, right); last month Lloyds TSB became the first high street bank to withdraw from the market.

But it is the failures within the credit broker sector that lie behind the recent explosion in the FSCS insurance intermediary levy, says Biba head of compliance and training Steve White.

“It’s not the banks that are the problem, it’s the credit brokers.”

And it is not just the volume of claims that is sparking anger, it is their value. While the FSCS annual report shows that the average PPI claim worked out at £8,540, other insurance claims averaged £1,152.

FSA correspondence, seen by Insurance Times, confirms that PPI-related claims account for £60m of the £61.4m that insurance intermediaries will be expected to fork out in compensation this year – a staggering 97.7%.

Caseload grows

Meanwhile, the number of cases continues to rise. The Financial Ombudsman Service’s newsletter, published a fortnight ago, shows that the watchdog received 13,520 new PPI cases in the three months to the end of June this year.

Extrapolating this figure across the rest of the current year means there could be more than 54,000 new PPI-related complaints for the current financial year, up 5,000 on the number the service handled during 2009/10.

Many of these claims will not be referred to the FSCS because the firm being complained about is still in business. Nevertheless, any increase in complaints heralds yet another hefty increase in the FSCS’s levy on general insurance intermediaries next year.

And a change to the way the FSA handles PPI mis-selling complaints means that there could be more trouble in store. The authority has this week published updated rules that will require firms that have been the subject of upheld PPI mis-selling complaint to contact all their customers.

In a recent consultation paper outlining its draft proposals, the watchdog defends this move on the grounds that under its ‘treating customers fairly’ principles, it is “appropriate to consider the position of non-complainant consumers who may have suffered detriment from such failings”.

The FSA estimates that the cost of the changes could cost the financial services sector anything from £1.7bn to £4.2bn. The FSA reckons that brokers may have to pay up to £430m of this, in line with its estimate that around a fifth of PPI complaints concern alleged mis-selling by intermediaries.

The FSA believes that the firms guilty of mis-selling products will cover most of this. But it estimates that the additional costs will push up to 40 brokers over the edge, saddling the FSCS with another £35m of compensation costs.

White acknowledges that general insurance brokers have not been entirely innocent parties: Swinton was fined £770,000 for PPI mis-selling, for example.

However, he makes a crucial distinction between the activities of the two types of brokers. “We have never said that we have not sold it [PPI], but no GI business has shut as a result – as opposed to the credit brokers.”

How did the situation ever get this out of hand? Consumer Credit Trade Association chief executive Chris Oakes, whose members include credit brokers, refuses to comment on the FSCS having to pick up the tab for the failure of firms within his sector.

Peter Doherty, of Bolton-based brokers Frank Brierley Insurance, speaks for many when he points the finger at the FSA. “If firms were mis-selling on that scale, it begs the question about the supervision and control that the FSA was carrying out.”

Biba’s White agrees:“ The FSA failed to police this at the point of sale. It’s akin to fiddling while Rome burns.”

Senior policy director at Which?, the consumer group, Vera Cottrell believes that the smaller the firm, the more likely it is to drop beneath the FSA’s radar.

An FSA spokesman defends the watchdog against these charges, pointing to improvement in the handling of PPI complaints. He says: “We said all along that the PPI market was broken. Hopefully what is going to come out will fix it.”

Market dries up

Cottrell says that many credit brokers, such as Picture, have shut over the past two years as the market for unsecured loans dried up.

However, one senior insider suggests that running the credit brokers completely out of town may not be in brokers’ interest.

He says: “While they are selling somebody else’s product, they are an insurance intermediary. If they take their bags and go home, they will stop contributing to the pot.”

Four years on, Picture’s book of outstanding loans has been transferred to the management of Target Loan Servicing.

A spokesman for Picture Home Loans, the company set up by Target to manage the loans, says: “Picture Finance went into administration two years ago. We are simply running down the loan book on behalf of the investment banks that own the company.”

Meanwhile, Allport, the firm’s erstwhile chief executive, has recently set up in business again with a new company in Cardiff called Pure Options specialising in selling income protection insurance.

The company, which has secured support from the Welsh Assembly and FSA authorisation, hopes to create 185 jobs over the next three years.

Cleaning up the mess

Doherty is angry that insurance brokers have been saddled with the costs of PPI mis-selling, rather than the companies selling the product, which he says are responsible for the problem.

“It is unfair that the claims for mis-selling that the firms have built up is being pushed on to innocent third parties,” he says.

Broker Network chairman Grant Ellis is in no doubt that while many of the credit brokers have bolted, cleaning out the stables is going to take a long time.

“Like Picture Finance, many of the sellers are no longer in business, so it’s the FSCS that is left to pick up the tab. There is a lot worse to come.” IT

‘It's not the product, it's the way it's sold'

The payment protection insurance (PPI) scandal has been one of the biggest to hit the financial services industry.

Customers have complained that firms did not give them clear information during the sales process, which resulted in their having to pay for policies long after their cover had elapsed.

Many also complained about the widespread use of single-premium policies, which resulted in hefty up-front payments. Others found that they had been badly informed about what they could and could not claim for on policies, which they often felt pressured to sign up for when they were buying other products.

The FSA has banned point-of-sale PPI; single-premium policies look set to go the same way in October after the FSA won a court ruling against Barclays, which was seeking to block this move.

But according to Biba’s head of compliance and training, Steve White, the problem lies not with PPI itself but how it is sold.

British Insurance, part of the Towergate group, claims that it is applying professional standards to the sale of PPI. Managing director Nel Mooy says that it does not go in for aggressive cold-calling, preferring to let customers find their products on the web. It also has published information about PPI in a bid to demystify the product.

“PPI isn’t suitable for everybody, but it’s a product like any other insurance product, with features and exclusions,” she says. “We hope that it survives this negative publicity.”