The Competition Commission has finally published its long awaited report on PPI following a two-year market investigation. Drazen Jaksic of Assurant Solutions analyses the conclusions
It has taken two years for the Competition Commission to complete its review into payment protection insurance (PPI) and used up thousands of man hours to deliver at a cost of goodness knows how much to the taxpayer. It was started with the best intentions, but has all the effort been worthwhile? Will the remedies drive change and result in a more competitive environment? Will the consumer reap any real benefits as a result of all this work?
To answer all these questions, I think we need to look at the remedies in a little more detail; the impact of some is, perhaps, more self-evident than others.
Option 1 requires standard disclosure of cost to the customer of PPI and credit and provision of a statement of ‘key’ messages’ in marketing materials; while Option 6 requires the provision of an annual statement of cost and reminder of the consumer’s right to cancel and early settlement terms. Both are in the spirit of treating customers fairly, and it would be difficult to argue against any improvement in the quality of information customers receive, not just at the point of sale but throughout the ‘life’ of their policies. Yes, there will be cost implications, and consumers may well have to bear an increase as a result – although, arguably, this could be off-set by lower commission rates if true transparency is implemented.
Single premium
The prohibition on single-premium policies under Option 7 was not surprising. The spate of announcements at the beginning of the year by a number of high street names that they are to stop selling this type of policy with unsecured loans demonstrates that the industry, for better or worse, has accepted that single premium is dead and buried.
However, it is worth noting that this remedy could have the severest impact on the actual size of the market. Single premium products represented around 68 per cent of the total creditor market in 2007, according to Datamonitor. Its demise could see the market shrink by as much as a half. I do believe, however, that there are opportunities for providers to introduce more acceptable alternatives, such as annual policies to mitigate cash flow and, arguably, provide more secure protection for the more vulnerable consumer.
Information provision
Option 3 is more interesting. It requires distributors to provide information about PPI and credit products to third party providers of comparative information for publication. Consumers should be able to compare products whether they choose to wear out their shoe leather on the high street or, more likely, go online and visit the FSA’s Money Made Clear site or one of the many comparison or aggregator websites.
The issue here is not one of provision of information itself, rather the consistency of information provided. To enable complete customer transparency, the consumer needs to be able to see like-for-like information, and prices should be quoted net of commission to enable a valid assessment of true value, flexibility and choice. Currently, I would argue that it remains nigh on impossible for a consumer to make direct comparisons where such variations exist. The proposed remedy does nothing to address this vital issue. I can’t understand why the Competition Commission failed to take the opportunity to enforce a benchmark product to facilitate a true comparison of the options available.
A further point with regards to Option 3 is that of competitive advantage. While the FSA’s Money Made Clear site has been designed to deliver facts and information as clearly as possible to consumers, the primary function of a price comparison website is to sell not to inform. Sure, they enable consumers to review a range of products and prices – but the emphasis is on price, not on the quality or variation in the different options displayed. Moneysupermarket’s own strap line is ‘the price comparison site’. Comparethemarket positions itself as being ‘the simpler way to cheaper deals.’
Thanks to their superb business models, these aggregators can negotiate some outstanding deals with the companies that choose to use them as a shop window – deals that are only available through each particular site. If distributors of PPI and credit products are going to be forced to provide information about their products to these sites for publication, will that not be handing information on a plate to the aggregator and enable them to bargain even harder to get those all important exclusive deals? This surely flies in the face of what the Competition Commission was trying to achieve in terms of addressing adverse market conditions and could actually result in simply shifting point-of-sale advantage from the credit point of sale to the aggregators?
Point-of-sale ban
It is the prohibition on selling PPI at the credit point of sale and within a fixed time period of the credit sale (the ‘point-of-sale ban’) covered by Option 4 that has attracted the lion’s share of the debate as to the real value of the package of remedies put forward. Many have voiced reservations, and I’m going to add my own to theirs. The underlying basis of the market investigation was to promote consumer choice. It stands to reason, therefore that in addition to product, price and provider, how and when a decision to purchase is made should also be the consumer’s choice.
MPPI
The decision by the Competition Commission to include financial advisers and mortgage brokers in the scope of the point-of-sale ban is quite simply baffling and could have a direct impact on the sale of mortgage payment protection (MPPI). This decision demonstrates a fundamental lack of understanding of the role of the intermediary in the mortgage sale and the added value that such intermediaries bring to the consumer in the financial planning process.
The sale of MPPI is substantially different to the sale of other forms of PPI. In a large proportion of cases, the sale of this particular type of product is made on an advised basis conducted under the robust regulatory conditions prescribed by the FSA. Arguably, intermediaries facilitate the shopping around process by searching the market and providing a recommendation best suited to the consumer’s personal circumstances and eligibility – most of which has been established during the sale of the mortgage product itself.
Given that statistics from the Council of Mortgage Lenders (CML) show that 72 per cent of first-time buyers and 60 per cent of existing mortgage holders rely on intermediaries to arrange their mortgage loans, this demonstrates that a significant number of consumers are not financially equipped or confident to deal with the arrangements themselves. Consumers look to an adviser to advise them not just on the mortgage loan but also on products that are a requirement of the mortgage, such as buildings and contents. What is the difference with selling this type of insurance and suitable protection for repayments on the biggest investment they’ll ever make?
Forcing a consumer to seek alternative advice may in fact result in the selection of an inappropriate product as an alternative adviser is unlikely to be fully apprised of the customer’s circumstances. Moreover, it may not be in their best interests to seek professional advice rather than place their trust in a stand-alone web offering as they may well face an additional fee.
Our financial literacy is a national embarrassment, according to a report issued last year by the Organisation for Economic Co-operation and Development. It concluded that Britons systematically overestimated their knowledge of money matters. While the FSA has already started to tackle this issue, and the government has introduced a multi-million pound scheme to boost financial education in schools, this does not address the fact that consumers need to understand their financial situation and risk exposures NOW.
I am yet to be convinced that the consumers who really need MPPI will actually go out and shop around during the point-of-sale ban period and make an adequate decision. You only have to look at buying habits amongst consumers in the motor and household markets to see the very real danger that in buying mortgage or income insurance protection, their choice will be dictated by price and not whether the cover is really suitable for their own unique set of circumstances. Recent research conducted by Assurant Solutions revealed that affordability of cover is the single most important factor in their purchase decision.
Through the introduction of the point-of-sale ban – the fact that it was reduced from 14 to seven days is neither here nor there – the Competition Commission may unwittingly have made consumers worse off. Would it not have been more effective to require all distributors to provide consumers with a top ten league table of products and providers available based on the concept of a benchmark product and transparent pricing? This would enable them to make a fully informed choice in their own time.
Impact on lenders
Clearly the investigation has had the consumer in mind all along. However, in discussing whether they will really benefit from the outcomes we should give some thought as to the impact on lenders as there are, perhaps, consequences not thought of by the Competition Commission.
There is no doubt that those offering insurance protection alongside the credit product itself have enjoyed the lion’s share of the creditor market up until now. Their so-called competitive advantage will be swept away by the point-of-sale ban. Is it likely that they will ever achieve the same volumes under the new sales environment? Given the costs of implementing new administrative processes in line with the remedies in addition to the likely loss of income, how many will come to the conclusion that the risk of pulling out of the sale of PPI altogether actually outweighs the potential rewards?
While the regulator is yet to come out with definitive guidance as to how it will expect financial institutions to calculate future capital requirements, there is no doubt that banks in particular are going to have to recalibrate their financial models. Some have already accumulated huge losses in the current financial crisis. While the impact of rising repossessions may represent a small impact on their actual revenues, this seemingly inexorable trend could well have a sting in its tail in terms of the impact on a lender’s capital requirements. There are going to be some severe testing of models ahead – so will the additional burden of reconfiguring processes surrounding the sale of PPI be seen as worthwhile?
Given that some of the Competition Commission’s remedies will make the sale and fulfilment of PPI difficult, it is feasible that some high street lenders may well take the opportunity to write off PPI sales and any associated historic financial benefits and simply stop selling the product altogether. Such withdrawals, whilst arguably understandable, would only result in reduced competition and reduced choice for the consumer – hardly the desired outcome of the inquiry.
So has all the effort been worthwhile? I can’t help but feel that a significant amount of the inquiry could in fact have been covered off through the FSA’s ongoing thematic review with many of the measures being addressed through its regulatory platform. While the point-of-sale ban should in theory facilitate competition, I am not convinced that consumers will take advantage of a more open environment – rather the opposite.
Our economy was in a very different place when the Competition Commission kicked off its investigation two years ago. No one then could have forecast that we would find ourselves in an ever deepening recession at its conclusion. The very products it has tried to address are needed more than ever, and who knows what the future landscape will be? Will the remedies be fit for purpose when finally implemented? I hate to say it, but I strongly doubt it.
Drazen Jaksic is sales & marketing director at Assurant Solutions
Date: 2nd, March, 2009
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