Changing the face of PPI

In 2007, Defaqto likened the state of PPI to a Shakespearean tragedy: its fate seemed inevitable and fatal flaws numerous. In 2008, the financial reporting body asserted that the PPI party was over, while this year it questioned if there would even be a market for PPI in five years.

The mixed messages sent out recently have done little to clarify things. The success of Barclay's appeal against the Competition Commission (CC) on the point-of-sale issue sits awkwardly alongside the £700,000 fine delivered by the Financial Services Authority (FSA) to Swinton for mis-selling PPI.

With neither the FSA nor the CC able to make a final ruling in the immediate future, the lack of clarity has left many understandably reluctant to develop new products or enter a market caught in this quagmire. PPI is in a catch-22: how can it improve if the boundaries it must adhere to are not clear?

Steve Devine, business development manager at IGI Insurance Company and chairman of Protect - the association of creditor insurers - says: "Time has been wasted and the frustration is that, had it been dealt with efficiently and promptly, fewer people would have suffered in terms of the amount of cover that has been cancelled.

"Whatever the failings of the product, there are people that claim on this and benefit from it. The danger is pulling something before there is anything to replace it. There is no safety net. It is unfortunate that this all seemed to coincide with the feasting of the claims management companies, which effectively said 'there's a trough here, everyone dive in'."

There has been an onslaught of claims companies demonising PPI providers while promising those in vulnerable financial positions a simple solution that may be far from achievable. Insiders believe that, along with the negative impact of the recession, there has been a relentless hate campaign waged - fuelled by the media in the form of Martin Lewis and Which - that has irreparably damaged the industry. The gung-ho, no win-no fee culture has led to the Financial Ombudsman Service being inundated with complaints. In 2007-8, the regulatory body dealt with 10,600 complaints and it has forecast that in, 2009-10, this will increase to 25,000, accounting for 20% of all complaints that it receives.

Malcolm Membery, partner at Pinset Masons, says that the industry is crying out for regulatory bodies to provide solid support and boundaries to facilitate the product's revival.

On Barclay's successful appeal against the point-of-sale ban, Mr Membery points out that the battle is far from over: "This is not the end of the story; it remains possible that the point-of-sale ban may be re-proposed. It might be delivered in a slightly different form or might fall away altogether; that is creating a lot of uncertainty in the market both for existing insurers and intermediaries involved in PPI and possible new entrants that are looking to come up with new products and methods to address problems of the past. Until the CC clarifies what it is going to do, much of the work underway will have to be largely put on hold."

Criticising the lack of clarity in the FSA's draft proposal, Mr Membery is not surprised that the financial watchdog has stalled in its publication of the final policy on the reassessment of PPI complaints, which was to have been announced at the end of 2009.

Unfair responsibility

He highlights a specific concern that PPI providers have raised with the FSA since the publication of its initial policy draft in October: "A big issue causing industry consternation is that you could have situations where the insurer has a perfectly legitimate product that happens to be mis-sold through an intermediary. The draft, taken at face value, says that insurers may have to refund the premium, even though they had no role to play in the mis-sale."

However John O'Neil, partner at consultancy firm Barnett Waddingham, argues: "There must be an onus on the insurer to ensure that they have given enough information to the broker to ensure the sales they are making are genuine. I don't think brokers have done anything different in this situation than they might have done in others. It is their job to promote a product. Whether or not they went too far is hard to say."

What will be the upshot when the FSA and the CC finally reveal their long-term plans in the New Year? Mr Devine adopts a firm approach, saying: "The FSA has to set out its stall. The industry wants certainty and if its members know the rules then they can play up to them."

Mr O'Neil is unsure if the final proposals will be sufficiently clear: "Unfortunately, I think it will be a glorious compromise. Providers of the product will have to acknowledge that, actually, they may have fallen short of consumers' expectations and may have to offer some form of payment in the future and, in some ways, this is part of the solution."

Yet it is not the whole solution. There are many questions to answer about what must happen to PPI in order for it to survive into the next decade. Providers may try to shy away from insurance altogether, developing products with careful wordings that escape the regulator's remit; the cover may not focus on a specific area and become more lifestyle based; or it could be arranged on a monthly basis to accommodate people's changing circumstances.

Different theories swirl around but one thing is certain: a meaningful re-brand focused on consistency and transparency is crucial to rid this product of the stigma so very firmly attached to it. Hopefully, the industry will not look for a quick fix: doing so runs the risk of ending up with the same flawed product under a different name. n