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Tom Baigrie: The dangers of consolidation

Robert Reid recently wrote in these pages of the increasing likelihood of consumer detriment as a side-effect of the consolidation among life insurers. I am not sure the FSA is alert to it yet but I believe the Financial Ombudsman Service’s caseload caused by this issue is growing.

The way these things tend to happen historically is that a few of us close to the market sound the alarm and are ignored. Years later, the FOS notes it has seen increased growth of complaints in an area and, years after that, an FSA investigation occurs and the whole financial services sector is thrown into disrepute.

I was one of those who warned about payment protection insurance many years before the Competition Commission and then the FSA decided it was an issue. We were ignored when the problem could have been nipped in the bud. Despite the tremendous organisational pressure facing the FSA, we must not be ignored now.

The trouble is simple. The quality of the handling of customer claims and technical and servicing enquiries among life and health and unemployment insurers in run-off mode is becoming worse. Examples of where it is below any reasonable expectation grow daily. The solution is equally simple. Those running such businesses need to be held to account before their failures again swamp the FOS and smash our sector’s reputation.

While an insurer is open to new business, it must remain conscious of its reputation among professionals and consumers. In a close protection claim decision, for example, the impetus to save the claim monies for the bottom line is counter-balanced by the urge to maintain a good claim record and avoid negative publicity.

This balance of pressures leaves the customer likely to be treated fairly. But where the insurer has no reason for existence other than the bottom-line profit it generates from its existing book of business, that balance is lost. Those who run that insurer have no retail brand to protect and earn their bonuses by improving the bottom line. After all, the profit in consolidation comes from stripping out cost and there cannot be one consolidated claims or service team that has not seen its numbers near halved or more.

Consolidation and run-off are entirely legitimate business areas but some involved are not accepting the costs needed to service the back-book properly. They appear to be under-resourcing service and claim teams to grow profit over the long period until the books are closed. The same thing is happening to once outsourced unemployment cover where the contract between the marketing insurer and the underwriting one has lapsed.

Poor admin erodes consumer confidence, poor tax and technical service causes serious, if rare, individual consumer detriment but protection claims handled unfairly are the most damaging of all. All the good work done since my firm led the call for insurers to publish claims-paid tables in critical illness and income protection will be undone by those who no longer care about our opinion.

The last truth means the market cannot provide a solution to this potential abuse so it must be up to the FSA to require those who are no longer seeking to win new business to prove they are maintaining service standards. The clearest sign of a problem is the FOS’s caseload – and that should guide the FSA’s enforcement teams as to where they should focus.

Tom Baigrie is managing director at Lifesearch

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  1. Oh, were it so simple – just alert the FSA and all will be right on the night – experience suggests exactly the opposite.

    In an earlier article in MM I raised the question of “bank charges”, and the blog I am writing on that subject.

    For most people the issue of whether “bank charges” were fair or unfair was consigned to the history books following a ruling by the Supreme Court.

    Let me use this very simple and brief extract from the blog to illustrate why, for me, it is not dead, and why more importantly at its heart lie failures not just by the FSA, not just by the FOS, but also by the Treasury Select Committee – each one forming part of the structure upon which we all rely to function as intended.

    On the day of the Supreme Court ruling, Lord Turner and Hector Sants appeared before the Treasury Select Committee, and inter alia, Lord Turner said this:

    “… I think that it is clearly the case that the argument about whether these charges in the past can be deemed to be unfair, which is probably the basis of most of the complaints that have been brought forward, has been definitively resolved by the Supreme Court …”

    Could not be clearer, could it, according to Lord Turner, accompanied by Hector Sants, the question of whether “bank charges” were fair or unfair is settled, – end of.

    However, perhaps, we should look at what the Supreme Court did say, namely this:

    “This appeal involved a relatively narrow issue. The Supreme Court had to decide not whether the banks’ charges for unauthorised overdrafts were fair
    but whether the OFT could launch an investigation into whether they were fair.

    Lord Walker made clear that the scope of the appeal was limited the court did not have the task of deciding whether or not the system of charging current account customers was fair, but whether the OFT could challenge the charges as being excessive in relation to the services supplied in exchange”

    Spot the difference? Lord Turner implies the question of “fair or unfair” is settled, the Supreme Court meanwhile said anything but!

    The blog I am writing is near completion.

    There are two possibilities –

    1) perhaps I will be proved wrong on the evidence that I am presenting (like that above).

    2) But what if I am correct?

    What if the evidence, including the more recent Judicial Review brought by the British Bankers Association over PPI, which clarified the manner in which “Treating Customers Fairly” is to be implemented by the FOS is fundamentally sound?

    Millions of individuals were affected by this issue, bank balance sheets would be impacted by £billions, and it would have a severe impact on the FOS’ activities and workload, and budget projections.

    PS: Directly @ Tom Baigrie. Yes, I have ensured that at all stages Lord Turner, Hector Sants, Natalie Ceeney, the OFT, the Treasury Select Committee, and a number of individual MPs are fully aware of the blog and the evidence being presented.

    Will such advance and continuing notice of the evidence being presented ensure that all will be right on the night?

    Personally – I suspect not.

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