A rocky road for creditor insurance
MORTGAGE FINANCE GAZETTE - 1ST JUNE 2007
Can the creditor insurance market gain respectability after all its highly publicised shortcomings? Simon Burgess thinks it is possible
Creditor insurance has been dragged along a rocky path in recent years and bears the scars for its troubles. The question is whether these scars will properly heal and an improved creditor insurance sector will grow back in their place, or whether we are left with an industry that is permanently disfigured.
There is no doubt the last decade has been the most significant in the history of UK creditor insurance, with the next two or three years set to be equally as formative. We have seen regulation form the Financial Services Authority (FSA) introduced and a round of reviews and investigations carried out into the sector, and we keenly await news form both the Competition Commission and FSA, whose research into the market is ongoing.
The findings of this research will be seminal in how the market develops, while the ongoing evolution of the regulatory environment in which we operate will see a large number of changes brought to bear on providers and intermediaries alike over the coming years.
Regulation
First and foremost let’s look at the regulatory climate and how it is warming to the challenges it faces. Only last month the FSA set out its view of future regulation and its planned move to a more principles-based regime.
In practice, this will have two major impacts for the creditor insurance market. In the first place, it will create a different level of regulation for protection products and see them more stringently overseen than other general insurance policies such as household and motor.
In the second instance, firms will need to have a better understanding of their own operations, how the FSA would like to see them cater for the consumer, and what they need to do to achieve these outcomes successfully. Simply reading the FSA Handbook and implementing its rules will no longer be acceptable.
Discussing the issue earlier in the year, John Tiner chief executive at the FSA, commented: “The work so far confirms our belief that the risk of consumer detriment varies according to the type of insurance product purchased.” He continued: “There is now a strong case for moving to a differentiated regulatory regime, expressed in a more principles-based way, where the focus is on outcomes for consumers rather than processes within firms. Our insurance rules will be more risk-based and proportionate while continuing to meet our consumer protection objective.”
While it will be impossible for the FSA to move completely away from some level of prescription, the move to a more principles-based approach will have significant ramifications. It will force businesses to take a more objective look at their operation and evaluate just how they stack up in the face of what the FSA expects.
The FSA is under no illusion that it will simply operate form a number of high-level principles and in markets like protection insurance accepts the need to spell out certain requirements.
Stuart King, head of retail intelligence and regulatory themes at the FSA, said at ht annual credit insurance conference in March: “IN reviewing our rules, we will focus on the obligations that flow from the Principles for Businesses that encourage senior management to take responsibility for enabling their customers to make an informed decision.”
However, in regard to the level of prescription that would remain, he added: “In the light of some of the specific shortcomings in this market we have also been looking at setting some specific requirements in respect of the selling practices for higher-risk products.”
These include ensuring that in a combined oral and written sales process, all of they key information required for the customer to make an informed decision is given in the oral disclosure. It will simply not be complaint to skimp on giving this information orally and rely on sending reams of documentation, which the consumer is unlikely ever to read, as some firms have done in the past. The regulator is also considering measure such as making eligibility check mandatory for non-advised payment protection insurance sales.
Enforced action
It seems therefore that as the FS gives a higher priority to its principles and the outcomes they deliver for consumers, it is also going to be keeping a tight rein on sectors where it thinks there is a higher potential for consumers detriment.
Accordingly, credit insurance can expect to stay under the microscope for the foreseeable future and be governed by a belt-and-braces approach. For those failing to live up to the FSA’s future requirements, King highlighted the dangers when he said: “To date we have taken action against nine firms. Seven firms have been the subject of financial penalties totalling £1.6 million. We have issued public censures against two firms. As part of these actions, firms concerned have had to engage in remedial activity which will involve contacting an estimated 1.5 million customers.”
It will take a matter of months for the FSA to complete its review into payment protection insurance, although the third phase of what has been one of the biggest investigations into any market sector is now well under way. The finding of this review will lead to a consultation on proposed rule changes in the third quarter of this year.
New rules
For insurers and brokers in this market there will be a lot to contend with. Not only will they have to get on top of a move to the principles-led regulatory environment, but they are also likely to see new rules introduced to further improve the current sales processes they have in place.
While there has been no announcement on what change may be introduced, it is a safe bet they will be based on a number of the themes that have come out of the FSA’s work to date.
The regulator wants to see firms give consumers all the information they need to make an informed decision and it may well look to tighten up the requirements currently prescribed.
It will also want to see consumers made aware of what the insurance they are buying covers and be certain that firms selling the cover have taken the time and care to ensure it is appropriate.
Single premiums
Single-premium policies remain a concern of the FSA and again it will want to make sure any such sale has the best interests of the client in mind and is not based on commercial considerations.
There has already been a degree of work done by the regulator on single-premium policies and it recently announced that nil-refund policies would be cancelled in the future and not enforced in outstanding policies where they exist.
This was welcome news, but in many ways goes to show how slow movement across the regulatory landscape can be. Last summer the FSA secured agreement from three individual insurers that they would change their stance on single-premium nil-refund clauses and duly published their declared undertakings to abandon them.
However, despite this it took the best part of a year to get the wider industry to sign up to such an agreement and one can only wonder at the number of consumers who were disadvantaged in the interim.
Improvements
There is no doubting the number of challenges that lie ahead in terms of regulation and operating procedures for the creditor insurance market. For those looking to succeed and develop the business they currently write, relying on bet practice will be essential.
Providers and brokers that need to be harried and cajoled into compliance will find that the burden placed on them by the regulator makes it difficult to operate, and enforcement actions will effectively curtail their business.
Despite the frustrations that may exist over the pace of change, we should not forget the improvements that have been made. The market is moving away from simply offering financial incentives o sales staff and better linking sales with quality criteria, which should increasingly make a difference to how the market is perceived in the coming years.
Firms are also getting better at managing their own sales and using management information to better effect when it comes to monitoring the risk posed to consumers by poorly performing staff.
Some would argue that these things should simply have been in place for years, and this is perhaps true. However, as we move further into a much more regulatory-conscious environment and consumers are encouraged to shop around, we will hopefully see the pace of change increase as best practice and good value become real differentiators for consumers.
Despite falling levels of credit card and personal loan debt, creditor insurance is fast gaining in importance for many consumers, nervous of the changing state of the economy and rising interest rates.
There are some where in the region of 20 million payment protection insurance policies outstanding in the UK at the moment and upwards of 6.5 million are sold every year. Now is the perfect time for creditor insurers to begin setting their stall out and by offering best practice they have the opportunity to steal a march on competitors, who may still be over-priced or offer poor terms and conditions on their policies.
Certainly for intermediaries, offering best of market solutions to clients, rather than simply the insurance that is sold alongside the main line of credit, will help them offer a better service and should pay them dividends in the future.
Creditor insurance may have been though some difficult times, but it would appear that a genuine recovery is underway. If this recovery coincides with an increased need for the products on offer as expected, then the market may well flourish in the next few years.
The FSA’s Principles for Business
A firm must:
• Conduct its business with integrity.
• Conduct its business with due skill, care and diligence.
• Take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems.
• Maintain adequate financial resources.
• Observe proper standards of market conduct.
• Pay due regard to the information needs of its clients, and communicate information to them in a way which is clear, fair and not misleading.
• Manage conflicts of interest fairly, both between itself and its customers and between a customer and another client.
• Take reasonable care to ensure the suitability of its advice and discretionary decisions for any customer who is entitled to rely upon its judgement.
• Arrange adequate protection for clients’ assets when it is responsible for them.
• Deal with its regulators in an open co-operative way, and disclose to the FSA appropriately anything relating to the firm of which the FSA would reasonably expect notice.
Executive Summary
• There are around 20 million payment protection insurance policies outstanding in the UK at the moment and upward of 6.5 million are sold every year.
• The FSA plans to move to more principles-based regulation where the focus is on out comes for consumers rather than processes within firms. This will have tow major impacts for the creditor insurance market: protection products will be more stringently overseen than other general insurance policies; and firms will need to have a better understanding of their own operations.
• The FSA is looking at setting some specific requirements in respect of the selling practices for higher-risk products and sectors where it thinks there is a higher potential for consumer detriment.
• To date the FSA has taken action against nine firms – seven have been the subject of financial penalties totalling £1.6 million. The FSA’s review will lead to a consultation on proposed rule changes in the third quarter of this year.
Shortcomings in payment protection insurance systems and controls
The FSA expects senior management of rims to have in place systems and controls to ensure payment protection insurance is sold properly. It has found that in an umber of cases wider short-comings in systems and controls have accompanied failures to sell payment protection insurance properly. These include:
• Training and remuneration policies. Some firms, in light of evidence that sales staff were not complying consistently with their sales procedures, failed amend their training procedures and continued to have remuneration policies biased towards sale at all costs.
• Management information. We have found inadequate management information systems which left senior management unaware of problems at an early stage or a failure of senior management to exercise proper oversight.
• Information-gathering in the sales process. We have found instances where firms were not gathering sufficient information to ensure that their recommendations were suitable.
• Compliance. Common themes included inadequate resources in the compliance department and failing to apportion compliance responsibilities sufficiently among senior management.
• Customer complaints. Finally, a number of firms were failing to contact customers and remedy non-compliant sales when they were shown to be such and had ineffective mans of addressing customer complaints.
