Loan protection insurance – The truth
NICHE LOANS - 1ST JULY 2007
Let’s cut straight to the chase. When it comes to loans and the insurance that protects them, the overriding factor is rate. It has to be. Unlike mortgages where services levels can vary hugely and clients can wait for weeks to get a particular product approved, this is not the case in the loans market. People want to borrow money and they want to pay as little as possible for that borrowing.
In many situations they also want to protect themselves against the ups and downs that life may put in their way. In taking out this insurance clients not only want to know that it will pay out when called upon, but that they are not paying through the nose for it.
Despite this, the loan protection insurance market is riddled with cases of miss selling and over pricing. One needs look no further than the premiums charged by high street lenders in this market for the protection policies they offer alongside their loans. In some instances, providers are charging more than 12 times the cheapest policies available and over a five-year term, racking up profits, which are impossible to justify. Bank of Scotland, for example, charges £40.62 for every £100 of cover. Other high street lenders including Barclays, Halifax, NatWest and Northern Rock all charge over £20 for every £100 of protection provided. Given that the insurance is available for as little as £3.25 per £100, it is easy to see the scale of the profits these larger providers are making and understand their reluctances to shut off the revenue stream that is so self serving.
And the clients? Well it would seem that no one is really bothered. It they choose to buy the product offered to them, then so be it and that’s that. When there has been such an outcry over the amount that credit card providers can charge customers for going over their limit and banks can charge borrowers exceeding the terms of their current account, why the ongoing scandal in the sale of protection insurance remains unchecked is amazing.
For those purely selling secured and unsecured loans, the regulatory requirements are minimal. Yes the Consumer Credit Act of 1974 has recently been tightened up and the Office of Fair Trading has powers over the licenses it grants, but how may providers and intermediaries have had their trading permission revoked?
Other than go through a number of basic checks, what scrutiny are these people put under when it comes to providing finance for clients? In comparison to that undertaken by mortgage advisers it is certainly minimal. However when one considers how little mortgage advisers and insurance brokers have to know about the protection market to pass their threshold market exams, it becomes frightening to consider the lack of expertise that some loan providers and intermediaries must be bringing to the table.
Protection insurance makes up only a tiny fraction of the CeMap and CERGI qualifications and while this is not an unreasonable starting point, those brokers looking to sell protection insurance in any sort of volume should have to prove they are able and competent to do so. However very little in the way of specific training is available and virtually nothing has been done to try and benchmark the level of knowledge in the market and seek to improve it.
If the Government took the bull by the horns and insisted that the secured and unsecured loans market came under the FSA’s remit, and that those selling protection insurance had to pass specific training, we could eradicate a lot of the problems immediately.
Thereafter the FSA should consider regulating the products sold in this sector rather than relying on a principles-based regime that governs the sales process. The Treating Customers Fairly principles have done nothing to prevent the sale of wholly inappropriate insurance in the loans market and so why a move to a more principled-led regime should work here is a mystery.
Until regulator and legislators are prepared to really tackle the problems head on, over prices insurance will continue to be sold by those who should know better but don’t.
Simon Burgess
Managing director
Britishinsurance.com
