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The FSA’s professional foul

If something is good for consumers and you regulate it too closely and thus stop it being widely available, you are causing consumer detriment. The FSA is about to do something that will cause many consumers to suffer destitution. It seems too late to stop it. This is a cautionary tale.

It starts, as ever, with foul market behaviour. The worst cases on the recent PPI scandal were those when the lump sum cost of the PPI was added to the debt it was covering.

The cost of the debt insurance after interest was often more than the cost of the thing being bought.

Eventually, the FSA stopped this scam and told the missellers to compensate the ripped off and to disclose at the point of sale the total cost of the insurance premium including interest. Dead right.

But what happened next turned a good rule into consumer detriment. The FSA decided that this total premium disclosure should apply not just to lump sum premiums paid for by debt, but also to all monthly-paid long-term cover.

They gave no clear reason for this extension but whether it is lump sum PPI or £5 a month life cover, the insurer has to disclose in writing the total premiums over the whole term as a lump sum.

Of course, the quickest way of putting a consumer off buying something is to paint it in its most expensive light. So, if what is being sold is good for consumers, this impediment to sales will cause consumer detriment. So good regulation has crept into bad regulation, unless you think the public have too much life and disability protection already. The FSA assure us they do not think this.

It gets worse though. Quite separately to this, an ABI critical-illness cover review in 2006 led them to draft a written explanation that every buyer gets sent. The FSA found this worked well and so, when their own research showed that consumers buying CIC over the phone did not know enough about what they were buying, they got the ABI to define what points sellers need to make to buyers when selling CIC over the phone.

That is proper stuff and it is due to become compulsory for everyone from January.

But then in a leap of regulatory logic, someone at the FSA decided that if critical illness is being explained in full in this telephone conversation, so must be total premium disclosure and not then just for CIC, but for life and income protection too. The upshot is that from the start of next year, all those who sell protection under Icobs rules will have to explain the price of the cover, not just in the monthly way all consumers use when budgeting, but as the total premium payable over the term.

So if 20-year cover is right for a young family, then the £20 per month decision will become a £2,400 decision, with no reference made to the fact it is not a binding contract on the buyer or that inflation will render any amount worth much less over 20 years. That will put a few young families off protecting themselves.

In the case of foul PPI, it was meant to, but the FSA does not think it will put them off good protection. They will be wrong, at least sometimes, and a young family will in due course be rendered destitute by their error.

Tom Baigrie is managing director at Lifesearch


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There are 7 comments at the moment, we would love to hear your opinion too.

  1. I agree totally. But why is it that the flaws in the rule after rule that is forced upon us by the FSA that takes most financially aware people only an instant to spot, the FSA cannot work out this also. Is it the case that most of these individuals coming up with the rules have never actually given anyone advice. Or is it just that they come up with rules just for the sake of it to try and justify their existence or is it what most people would agree an agenda to force Advisors into a situation where people will no longer seek Advice from an advisor and go to a high street bank where they will obtain poor advice but boost the Banks profits in turn enabling them to pay back the government quicker for the amount they needed bailed out for which in most cases was caused by poor judgment on their part.

  2. I wounder what Hector Sants costs us over the lifetime of his reign.
    Absurd salary plus bonuses for total & complete failure,Unfunded over generous Final salary pension.
    Uncapped luxurious expenses & perks,transport/Limo costs etc,etc

    When its all added up,maybe in due course we will be rendered destitute by his errors.

  3. The FSA chose before the banking fiasco to get into bed with all the bankers mainly because they did not understand what a regulator was meant to do. Now that they have been given notice on their postion of authority they are introducing more ill thought out rules than ever to justify their positions. Good ridence to them because they have been a complete farce whilst they have been in charge of regulation.

  4. Neil F Liversidge 5th October 2010 at 5:21 pm

    Spot on Tom. What other type of business is forced to paint costs in such a way? When I bought my car I don’t remember the dealer having to map out the likely running costs over its projected lifetime. The FSA’s decision is idiotic and just reinforces the suspicion that it meddles for the sake of it.

  5. I would say I despair, but I passed that point long ago; I suppose I still do. How far we have come in the 101 years from Churchill wanting to write ‘insure’ above the doorway of every cottage ……. for sacrifices inconceivably small…… to today where the Govts unnaccountable minions are intent on persuading everyone not to take out life insurance? I suppose life insurance seems less important when you have a DIS benefit more likely to give your spouse an IHT problem than anything else and all the other gold plated benefits to boot….. only as good as your notice period though.

  6. I agree with Tom. It’s ironic we will have to provide a cost analysis over the term of a plan when sometimes it can be difficult to convince some people of the importance and value of anything when all they see is the cost, while in the reverse the FSA’s own cost analyses (particularly on the RDR) were totally innacurate and they have failed to sell the idea of the benefits and in fact admit in some of their documents that the RDR will be be detrimental for consumers in the short term!
    Just a slight correction on teh costs of hector Sants, whilst his remuneration package is too high (and should have some kind of balance to those elected to serve society including the PM), I suspect Hector is NOT in the Final Salary Scheme at the FSA as I was under the impression it was closed to new members….

  7. Phil,
    I stand corrected.
    Apparently the Telegraph states that Sants is “only” paid roughly £50,000 a year extra as a contribution to his own pension arrangement in lieu.I presume thats £50k net

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