Add-ons: the next PPI scandal?

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OFT’s call for evidence on ancillary products in private motor could uncover wide-spread mis-selling

The press, both trade and national, have devoted plenty of column inches to the issue of referral fees and their proposed governmental ban. Although revenue derived by brokers from referral fees is, in some cases, significant, brokers have been warned that the real legislative threat to their businesses is the Office of Fair Trading’s (OFT) investigation into the private motor market.

graph-p4-oct11-2The OFT has asked for evidence around the role of aggregators; the provision of credit hire replacement vehicles to non fault drivers; insurer use of panels of approved repairers; and ancillary products.

It is this last point that should concern brokers most. Ancillary products, or add-ons, can be anything from legal expenses cover to handbag insurance. There is no suggestion that 
there is anything wrong with these products as such, but 
what has piqued the OFT’s interest is the manner in which they are sold. The body is concerned their sale, in the majority of cases, is less than transparent.

The OFT has issued a set of questions on each of its areas of interest and has asked brokers specific questions about the sale of add-ons (see box below).

If the OFT’s call for evidence highlights any concerns it could launch a market study into specific aspects of the market, undertaking further work to consider referring the market to the Competition Commission for in-depth analysis. It could also call on the industry to make changes, or undertake consumer or competition enforcement.

And why should brokers be concerned? Well for starters, the Financial Services Authority (FSA) has reissued a factsheet on add-ons reiterating what it said five years ago (see useful links). Long story short – the FSA said back then that it had taken a look at this part of the market and was not happy with what it found. It has taken another look more recently and is still not happy.

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Which is where the OFT comes in. So what exactly is it that has the regulator and its attack dogs so uptight?

Compliance consultant, Branko Bjelobaba explains: “The FSA expects that with any add-on you have assessed the client’s demands and needs for the product. How do you know they don’t already have breakdown cover?

graph-p4-oct11-3“With any added on product, you have to make sure the client needs it, otherwise it is mis-selling,” he warns.

He cites a conversation with the CEO of one large broker as an example of a renewed regulatory focus on this area.

“He told me that the FSA was currently interested in how the broker was selling add on products – this happened in the last couple of months so it’s very much a live issue.

“You are looking at integrity issues here. If you are bundling products just to increase bottom line, that is an issue of integrity.”

Fellow compliance consultant, Mike Cranny, has an even starker warning for the broking market. He believes that the OFT is more fierce and more proactive than the FSA and that past behaviour should strike fear into both brokers selling add-ons and the wider market.

“The OFT has called for evidence and by December they will decide what it is they want to do. They can consult with the FSA and the government on what to do next and, if they want, they can refer it to the Competition Commission.

“This was the route taken in the whole payment protection insurance (PPI) saga. It was the OFT that referred the issue to the Competition Commission and they stuck the pin in the PPI bubble and burst it. The FSA was picking off people one at a time but it was the OFT and Competition Commission that took on the market.”

A stark warning indeed. Although the cost of these add-on policies is nowhere near that of PPI, and therefore any claims of mis-selling would have a lesser impact, this could easily, if the OFT decides there are problems, turn into the broking market’s very own PPI scandal.

Useful links

▶▶ To read the reissued FSA factsheet on add-ons go to: www.fsa.gov.uk/pubs/other/factsheet_extras.pdf

▶▶ For more on the OFT investigation see: www.oft.gov.uk/OFTwork/markets- work/othermarketswork/motor-insurance and www.insuranceage.co.uk/tag/regulation

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