FSA ‘failing on payment protection insurance’
THE SCOTSMAN - 3RD NOVEMBER 2007
Financial watchdogs are letting consumers down by not policing sales and complaints processes effectively or awarding the correct levels of compensation in cases where complaints are upheld.
The problems have come to light in the payment protection insurance market – where policies cover monthly payments on credit agreements in the event of accident, sickness or unemployment.
Payment protection insurance is big business – there are more than 20 million policies currently in force.
Payment protection insurance has been under investigation by both the Financial Services Authority (FSA) and the Office of Fair Trading (OFT). The latter body referred it to the Competition Commission last October after finding that payment protection insurance offered consumers a poor deal both in price and cover.
Particular problems have arisen with “single-premium loan-funded policies”, which carry a one-off, upfront fee. On top of the car or personal loan the consumer is organising, a secondary loan is put in place by the finance company to meet the cost of the insurance, and this loan also carries interest, often charged at about 30 per cent annually.
Consumers often do not realise payment protection insurance has been added or that a secondary loan has been arranged to pay for it.
Everything is rolled into a single monthly repayment figure by the finance company so it is difficult for consumers to see just how much their insurance is costing – if they even know they have it.
Payment protection insurance sales are regulated by FSA and in its September review of the market it found that about two-thirds of the firms it had visited were not complying with its rules.
Under regulation, customers must be told how the insurance they are buying works, what it covers and how much it costs. The FSA’s research revealed this was not happening.
Indeed, despite the rules the regulator has put in place, thousands of consumers are still unaware of what they are buying, and are not being told in clear English what it costs and how it will be paid for, according to complaints-handling firm Conkers.
The firm says consumers are being lured into taking out the insurance, whether suitable or not, by cleverly scripted sales questions that corral them into buying the product without spelling out that the insurance is optional or can be bought independently of the loan from another company.
Stuart McDermott, disputes manager at Conkers, says: “Why, when the FSA has found problems are rife, has it only taken enforcement action against ten firms, with only a handful of others in the pipeline?
“By refusing to take action against the biggest and worst offenders in the market they are letting consumers down on a daily basis.”
Referring to the case of John Leonard, (the case study), McDermott questions why he would have agreed to insurance that ended up costing him the equivalent of half the loan originally taken out, when a regular monthly premium policy could have been arranged for under £10 a month, a total of less than £360 over the course of his three-year loan of £3,950.
The company that organised both the loan and the insurance said it was unable to comment on the case.
Simon Burgess, managing director at Britishinsurance.com, another company that specialises in payment protection insurance, believes a significant number of clients are left in the dark when it comes to single premium policies. He says: “It is difficult to see how those selling single-premium loan-funded payment protection insurance are acting compliantly when there are cheaper, more suitable options available. If firms were really spelling out how the policies worked, what they cost and that other options were available then I do not think they would sell very many at all.”
Despite the small number of enforcement actions that have been taken against firms selling single-premium loan-funded payment protection insurance, the FSA insists it does take the matter seriously.
It says: “The FSA will not tolerate firms failing to treat their customers fairly when selling payment protection insurance. The FSA is seeking to impose higher fines for firms where standards fall below the required level.”
However, given the number of firms operating in the market and the number of policies sold each year, many feel the FSA is not doing enough.
Not only are consumers facing problems at the point of sale, but where their complaints are upheld, McDermott says, there is also little consistency in the compensation handed down by the Financial Ombudsman Service (FOS), which is there to settle disputes between firms and their clients.
Where a complaint is upheld, the FOS says it seeks to put consumers back into the position they were in before the issue arose. The FOS says: “In the 60 per cent of cases where we agree with the consumer that they should not have been sold the policy, we will tell the firm what it needs to do to put things right. Generally, this will be a refund of the lump sum single premium and any loan interest that the consumer has been charged in relation to the policy.”
McDermott reports that the FOS has told him that adding interest will not be part of its general approach and that each decision will depend on individual circumstances.
While issues remain unresolved, it is consumers that will suffer.
Insurance by accident
John Leonard, who is married with two children, too out a loan in the summer of 2005 to pay for a second-hand van he wars buying.
At the time Leonard, from Cumbernauld, was setting up his painting and decorating business and needed the van for the new venture.
He was put in touch with a loan company by the motor dealership and after going through a series of questions he took out a loan of £3,950.
Although Leonard, 44, agreed that payment protection insurance was a good idea during the interview, he did not realise he was being sold a policy and that a secondary loan would be taken out to pay the premium for the insurance, which had a one-off cost of £1,500.
“They did not let me know about the other loan and made it out to be all one package,” he says. “I was given no choice to go somewhere else for the insurance and it was not explained that it was optional.”
Including interest, Leonard will end up paying more than £2,000 for his insurance policy.
