PPI: first blood

It was always going to be a matter of when and not if the FSA would take action against a firm in the payment protection insurance (PPI) market.

On 5 September the regulator fined Regency Mortgage Corporation £56,000 for failures relating to its sale of mortgage related PPI in the sub-prime market. The decision marked the first time the FSA had taken action against a firm in relation to PPI sales, but it is unlikely to be the last, given the current state of the market and many of the problems that have been so publicly highlighted in the last year.

The FSA deemed that Regency had not treated its customers fairly, did not collate sufficient information to ensure client needs were adequately met and sold policies where cover was already in place. The regulator also found that a number of policies had been sold that had certain terms precluding clients from making a claim.

To make matters worse, the policies were sold to clients in the right-to-buy mortgage market who are in the main sub-prime borrowers and traditionally have limited means and access to credit. In turn, this meant they were mostly likely to be severely financially impacted should they need to call upon the protection, which then proved to be worthless.

FSA enforcement
Commenting on the fine, Clive Briault, FSA managing director for retail markets, said: "We have highlighted payment protection insurance as an area of high potential risk to consumers and we said following our thematic review last year that we were considering enforcement action where serious breaches had been identified."

Briault said he hoped the move would act as a clear incentive for others to act with propriety and added: "Our action sends out a message to firms operating in the payment protection market that they must operate in a way that treats their customers fairly and meets regulatory requirements."

The FSA has had the PPI market in its sights for quite some time and, at the beginning of the year, had issued a warning that it must get its house in order or face unilateral intervention. Representatives from the PPI market put forward proposals at the time regarding possible improvements that could be made, although they lacked any real bite and disappointingly nothing concrete has since been put in place. Discussions on the matter remain ongoing.

The Office of Fair Trading (OFT) has also got itself in on the act and, following a 'super complaint' from Citizens' Advice last year, conducted an investigation into the PPI market and released its interim report on the work last month.

It did not make comfortable reading for those in the PPI market. It was highly damning in its criticism of daily practices and procedures across the sector. The report highlighted inflated commissions in the PPI market, which averaged over 60% across the sector. Struggling to understand such figures ,the OFT questioned how this level of commission could be driven by the cost of selling the insurance alongside associated credit products.

Criticism was also levelled against the claims ratios in the PPI market, which bore little comparison to those seen in many other areas of insurance. The OFT defined claims ratios as a percentage of the amount paid out in relation to the premiums earned. At the bottom end of the scale claims ratios in the secured loan PPI market were found to be a miserly 10%, with MPPI coming out on top at 35%.

However, put into the context of home insurance with a claims ratio of 55% and motor insurance with a claims ratio of 74%, it is clear to see why the OFT stated: "This could suggest that gross profits are high in the UK PPI sector, and implies customers are receiving poor value."

Further criticism
The list of OFT criticisms didn't stop there. PPI policies also came under fire for being overly complex and confusing. The OFT said the huge range of cover, which had large variations in exclusions, product structure and benefit payments, made it very hard for consumers to actually know what they were getting. It also said that the use of different terms such as 'excess' or 'waiting periods' to describe the same thing added to the confusion.

Information on the insurances being sold alongside credit products was also sketchy and the practice of advertising a loan's APR without including the cost of associated protection insurance, before then adding the insurance to client quotes, came in for particular criticism.

The OFT said including PPI could have a major impact on the cost of the loan and in many cases more than doubled it.

As the OFT said: "When a customer can neither determine the total cost of the loan with PPI added nor the quality, the potential for customers who may already be financially vulnerable to get value for money is significantly reduced."

It will not be until the end of the year or early into next when the OFT makes its final recommendations on the back of its investigations into the PPI market. It is to be hoped that the OFT uses its full range of powers in referring the market to the Competitions Commission and makes stern recommendations to the regulator as to where it feels improvements could be made. To do anything less would certainly seem very strange given the depth of criticism in this interim report.

In the meantime firms, which continue to prey on clients by selling inappropriate and poorly performing products, should be wary of sanctions from the regulator. Now the FSA has cut its teeth on the PPI sector, none will be in doubt that the practices, procedures and products in the market are well and truly in its sights.

Hopefully, this will lead to some genuinely positive action being taken in protection insurance and perhaps we may even see some headlines praising the changes that are being implemented. Certainly, it would make a change from the torrent of negative ones we have had to bear in recent months. IT

' Simon Burgess is managing director of Britishinsurance.com