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Defining moment

There is an interesting regulatory juxtaposition between the Competition Commission’s review of payment protection insurance and the FSA’s retail distribution review interim report.

The PPI issue did not seem to trouble the FSA until the Office of Fair Trading grew suspicious of the huge profits generated from the sale of a policy that provides little real protection. What the commission uncovered looks like systemic profiteering and abuse of innocent consumers. I wonder if the realisation that the bancassurers have unhesitatingly gone for the jugular again has influenced the RDR team? Has the FSA twigged that for all our faults, IFAs have never overcharged and missold products in the concerted and opportunistic way that the bancassurers have so often done?

The PPI scandal has seriously affected sales of a policy that should be the basis of all financial planning – income protection. Do an internet search on those words and you get nothing but rich PPI sellers passing off their shabby product as income protection. The FSA has ignored this abuse and the OFT has not specifically addressed it, as its remit is to achieve proper competition within the PPI sector, not to protect consumers who should buy something other than PPI.

The logical way to treat customers fairly is for the term “income protection” to be restricted to permanent health insurance products and for PPI sellers to be told that they must sell their product under its actual name. PHI products seek to replace your income if you lose it through illness or unemployment. The best that PPI can claim to do is help pay your debt repayments for a bit.

Interestingly, the FSA’s new PPI comparison table fails to treat customers fairly by omitting to tell them that they should also consider income protection, with or without cover for unemployment. The difficulty is that the FSA has a problem with trying to claim specific financial services meanings for common terms. The word “advice” is the best example, in that the FSA ascribes it a meaning that is not well understood by consumers. Happily, rather than give up, the FSA seems to believe that it can get consumers to understand its definitions if it sticks to clear defining lines and forces all practitioners to respect them. Go for it, I say. If the FSA can do that, it can define income protection properly and tell us that it is almost always more useful than PPI.

The insurance world is necessarily full of words that have very specific meanings. It is those words that protect the consumer. The clearest example is the word “guaranteed”. The bad guys have long abused it to make mugs of consumers but here the Advertising Standards Authority and the FSA are fast on the case. If the FSA was so minded, it could act with similar resolution in the case of advice and income protection.

Financial services consumers would find themselves in a world where key decision-influencing words always mean the same thing. That would really hurt the bad guys who profit from consumer ignorance, as the PPI sellers have done. The Competition Commission is not charged with this sort of consumer protection, so in sorting out the PPI market, it takes no interest in promoting income protection. That is up to the FSA and the industry. Your columnist will do his bit shortly with the launch of a product that includes income protection and unemployment cover and could sell in place of PPI.

LV= has had a very different but valid stab at this clear need but the financial services industry, including its regulator, must promote these efforts and challenge those who sell inferior products or they will not replace PPI sales. No one doubts that consumers who spend money on income protection, rather than PPI, will be infinitely better off.

Tom Baigrie is managing director at Baigrie Davies Lifesearch



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