Place your bets please
NICHE MORTGAGES - 1ST MARCH 2007
Who will be the next to get caught out over payment protection insurance? Simon Burgess, managing director of Britishinsurance.com, is opening a book.
Given the amount of pending enforcement actions against firms in the payment protection insurance sector, it is not surprising that betting books are being opened for who will top the table with the biggest fine in 2007.
Last year the dubious honour went to loans broker, Loans.co.uk, who were dispatched to the regulatory boundary with a crisp £455,000 fine. However in a fast moving market records are short lived and last month saw GE Capital Bank’s middle stump taken clean from the ground with an inswinging demand for £610,000.
Certainly GE Capital Bank represents a step up in not only the fine handed down, but also the size of firm caught out. Others will be worried of their own practices and procedures.
So far, enforcement actions in this market have come in relation to protection for loans, mortgages and retail purchases, but there is a much wider market out there that needs to be on its guard.
The problem for many is that given the secondary nature of the payment protection insurance sale involved, there is simply not enough effort put into managing the sales and administrative processes that lie behind it.
From where is the insurance sourced? How does it stack up in relation to what else is available in the market? Are clients assessed effectively to determined whether the insurance s appropriate for them? What sort of training have sales staff had in payment protection insurance? What checks are in place to safeguard against problems?
These are all questions to which firms offering payment protection insurance alongside financial, retail or any other products need to know and too many firms have their focus trained solely on their primary activity and see payment protection insurance as a profit-generating, secondary line of business, that just ticks away in the background.
The problem is that for these firms, the ticking will get louder and louder and when at last they realise it is a time bomb they are sitting on, it will be too late. First and foremost, firms selling payment protection insurance need to assess their operations and see how they stack up in answer to the questions raised earlier. If commercial firms themselves do not know what liabilities they are open to, then how can they guard against them?
A recent report form consultancy and outsourcing specialist Huntswood made interesting reading and stated: “There is undoubtedly a need to address both the structure and the existing selling practices. Forward thinking firms will therefore have been taking action in these areas to mitigate any company specific intervention form the FSA and use payment protection insurance as a driver for broader TCF improvement.” Such actions, the report states, should include an assessment of previous sales and remedial action in cases which have been highlighted as being of possible concern.
This may sound tiresome, expensive and problematic, but the bottom line is that if firms do not take this on for themselves, then the regulator will force them to do it when it comes knocking – just ask GE Capital Bank.
Many firms in the financial services sector will feel they have heard all this before and be happy their own processes are watertight. Maybe they are, but given the problems that have been highlighted by numerous market reports it seems a somewhat reckless approach to take.
Indeed, only recently the FSA said that while some of the bigger firms may have processes and procedures in place, they were often not adhered to rigorously enough, if at all, to provide the level of protection they were developed for in the first place. Having a safety net is all well and good, unless it is folded up and stuffed in the cupboard under the stairs.
Many intermediaries have been watching the payment protection insurance market with interest and increasingly wondering whether the furore around it means selling the insurance to clients will taint them by association. Others have questioned if the products on offer actually represent any sort of value for money and if there are not better alternatives elsewhere.
However the truth of the matter is that, at its best, payment protection insurance does offer good value and there are providers and distributors who run a very tight ship indeed. By looking to this part of the market intermediaries should be looking to differentiate themselves and highlighting the stark gap between what the insurance they have sourced represents and what that readily available elsewhere offers.
There is no question that protection insurance is needed, although there are questions surrounding its current distribution and design. Increasingly its seems there will be a move towards independently sourced products that stand up in the face of regulatory requirements and leave sellers confident in the job they have done for their client.
Clearly this is not something which will happen overnight, but there is no doubt it will happen. The simple fact of the matter is that firms cannot afford, in the competitive commercial environment in which they operate, to run the risk of sanctioning from the FSA. As its campaign against poor practice in the payment protection insurance market rumbles on, growing commercial, regulatory and media pressure will being to bite and significant changes will be introduced.
Those who make the changes first, will be best placed to take advantage of the new environment, while those left sucking the remaining fat out of the old and disproved market model may well be left behind.
What is for sure, however, is that GE Capital Bank is unlikely to be a wining bet in this year’s race for the market’s biggest fine.
