Regency Mortgage Corporation has become the first firm to be fined by the FSA over sales of payment protection insurance.It is not the event itself that is so important but the precedent it sets, the expectations it raises and the implications it carries. Regency may be the first PPI firm to be fined but it is unlikely to be the last and now the FSA has bared its teeth, there will be many firms questioning their own PPI sales practices and procedures. PPI sellers can no longer believe that punishment is unlikely for their actions and must now all realise that this is an area under close scrutiny where firms which are found wanting will be held to account. The line in the sand has been drawn and anyone crossing it will have to face the consequences. There is no shortage of firms that have crossed the bounds of acceptable compliant practice and continue to do so. Regency was found wanting in a number of areas in selling mortgage payment protection insurance to clients in the right-to-buy market. According to the FSA, it did not treat its customers fairly, did not ensure recommendations met client needs, sold insurance where cover was already in place and kept poor records. Unfortunately, all these are common practices and have been highlighted as market-wide problems in the past. Financial research company Defaqto issued a report at the beginning of this year in which it claimed that up to £350m was being wasted on PPI policies which would not pay out in the event of a claim because they were unsuitable. Defaqto criticised the information available at the point of sale to consumers as well as the sales process itself. Too little information was gleaned from the client and the report stated: “With only minimal, if any, questions being asked about health or employment status at the time of purchase, insurers rely on customers knowing they need to disclose important information such as pre-existing medical conditions.” In practice, this means unsuitable cover is missold on a routine basis. Protection has long been seen as little more than a secondary sales opportunity and this is, in part, to blame for the slapdash way in which it is often marketed, explained and then sold. Too little information is made available to consumers up front and often they do not understand what they are buying. This was highlighted in the Defaqto report and more recently in the Office of Fair Trading’s interim report into the market, following the super-complaint that was lodged by Citizens’ Advice last year. Not only is little information made available to clients but it is also made difficult for them to compare the price of the insurance and how it affects their monthly premiums. The OFT made particular reference to the practice of advertising a loan’s APR without including the cost of insurance but then adding it on to the premiums in the quotes given. How this can be in the best interests of the client is a mystery. Admittedly, it is a practice more common in the loan PPI market but it was still happening with 40 per cent of the MPPI providers contacted by the OFT in its research. When cover is simply added automatically into the quote, it is inconceivable that there will not be a high incidence of situations where the cover is taken inappropriately and without due care or regard for the client. The real problem is that protection insurers across the board have no incentive to improve their products because they have a stranglehold on the market at the point of sale and are gener- ating huge profits. Intermediaries in the market are also being paid grossly inflated commission and so often lose sight of best practice. It seems clear that further fines will follow the one that has been handed out to Regency and this should be welcomed. However, what many have not counted is the cost that it will have both reputationally and to business overheads. It is not good for business for firms to be publicly sanctioned for their mistreatment of clients and the more that these issues can be highlighted, the more it will act as a deterrent to others. In terms of operational costs, any fine from the FSA will lead to a sharp increase in a firm’s professional indemnity insurance. It would not be unfeasible for a premium to double in such circumstances and this could run to many tens of thousands of pounds, depending on the size of the firm firm. This cost will have to be borne by the business for years. The real problem in all this is that protection insurance is a valid product that plays an important part in the market, whether covering personal loans, mortgages or credit card debt. But it will never be able to provide what clients need in any volume until the insurance is better designed so it pays out when needed and is easily and quickly understood and compared. It also needs to become more flexible so clients can choose the level of cover they require and better suit their circumstances, while unjustified commission and premiums must be slashed to reasonable levels. I hope that PPI providers and sellers across the board will sit up and begin to deliver the product their clients so badly need rather than taking advantage of them.
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