Breaking the monopoly

Case studies of disillusioned and frustrated customers of payment protection insurance have been rife over the last year in the national press; parliamentary postbags bulged with customer complaints and the lobbying efforts of MPs increased. This inevitably resulted in those called to carry out the investigations into PPI sales suddenly shifting their efforts up a gear.

First out of the blocks was the Citizens Advice Bureau, which, in September, lodged a 'super complaint' with the Office of Fair Trading. Hot on its heels was the Financial Services Authority, which carried out a series of 'mystery-shopper' exercises and came to the conclusion there was much work to be done in this area. Those within the financial services industry were lambasted for their blatant profiteering, price variations, inappropriate sales and poor advice. And, sadly, brokers - by association - were tarred with the same brush.

So why have high street and other unscrupulous lenders been allowed to monopolise this market, leaving brokers in the minority? Sales of PPI have been on the increase for 20 years and there are currently around 20 million policies in force in the UK - a market worth around £8bn in premiums. It has been steadily growing as consumers continue to embrace the 'buy now, pay later' philosophy, allowing their personal debt to spiral out of control. As the level of debt increased, so did demand for this type of cover.

High-street lenders were quick to make the most of their position as mortgage and loan providers by selling payment protection as an add-on. Often the insurance was (and still is) bundled in as part of the mortgage or loan and consumers were misled into taking out policies without checking costs and exclusions.

These dubious sales practices have never, in the past, been brought to the attention of consumer groups and regulators, but now the tide is turning. An increasing number of complaints are being received about PPI because consumers are more financially aware - mainly as a result of the negative press coverage. Those in debt are fighting back and there is now a David versus Goliath scenario. And it has been a long time coming. There has not been an open market for years and brokers have simply left it to their competitors to take rich pickings from those who are at their most vulnerable.

Investigative measures

The announcements of the investigations in September and October were welcomed by those that have been frustrated by the lenders that mis-sell these products. According to the Citizens Advice Bureau, it conducted an investigation after receiving complaints from too many consumers who have been unable to claim on the policies they had been sold or were paying too much for their cover.

These findings were yet to be published at the time of going to press. However, having worked closely with the OFT (as well as the British Insurance Brokers' Association and the FSA), providing evidence, it is likely that the investigation will conclude that:

- lenders are operating in a disreputable way;

- people are being exploited;

- there are unacceptable price variations; and

- there is a monopoly that must be broken.

Similarly, the FSA called upon firms to take urgent action to ensure their sales practices are in line with regulatory requirements after its mystery shoppers uncovered a raft of poor selling tactics and a lack of proper compliance controls.

British Insurance has also carried out its own mystery-shopper exercises to verify price variations, and these were found to vary widely. In some cases, high-street lenders were charging 10 times more for loan protection insurance premiums than brokers (on a £7500 loan over five years).

With mortgage protection, the average cost per £100 of monthly cover from the UK's top-10 lenders is £5.78 a month, but cover can be purchased at less than £4 per £100 from a multitude of independent financial adviser and broker websites.

In a survey of lenders, in order to assess whether volume took priority over suitability, none were willing to check whether the applicants had pre-existing medical conditions that might invalidate their cover. This is irresponsible and could easily leave the applicant with a false sense of security. For those self-employed, many sales people failed to draw attention to the fact that the cover only pays out when the self-employed cease trading.

These findings clearly demonstrate why some firms have to be investigated and the FSA's announcement that it intends to tackle the issue is very welcome. It has undertaken to not only provide detailed feedback to those found lacking - asking them to address any problems raised - but that they will refer the more serious cases for further investigation upwards and possibly for enforcement action.

Seizing brokers' share

It need not be left to the consumer groups and regulators to tackle the issue. It is time more brokers tapped into the evident public discontentment and seized their long-overdue share of this market.

Around 20 million people are shelling out, on average, £400 per annum for their PPI and high-street lenders are currently taking some £6bn of an £8bn market. Lenders take 82% of PPI sales, loan brokers account for 15% while insurance brokers languish at the bottom, selling a meagre 3%.

Brokers' complacency may have helped to create this monopoly but now is the time to open the market up. They ought to educate and promote the fact to customers that they do have a choice and, hopefully, this will gradually change current perceptions. Brokers are better placed than most to sell this product - possessing the skills and talent, to target the right people in the right way and get to know them to best understand and identify their needs. Most importantly, brokers are able to provide that personal service.

There are swathes of disillusioned customers who are currently questioning whether the mortgage and loan protection policies they hold are right for them, plus many more who are considering purchasing one of these products. Brokers should be seizing the moral high ground and making the most of the opportunities that have been presented to them.

Shifting perceptions

PPI is perceived as a second-rate product that is overpriced and over-sold in circumstances that allow the distributors to profiteer. Brokers have a chance to change that perception.

For those brokers that perceive these products as 'too involved' or 'difficult to sell', there is good news. The Chartered Insurance Institute runs an online course for creditor insurance and any broker that can sell motor or household cover with its excesses and liability issues will be able to sell this. Specialist intermediaries provide low-cost online accident, sickness and unemployment insurance schemes for introducer or affiliate brokers via the internet. These products avoid the pitfalls of the volume-biased mortgage lender policies and can be added to a broker's product portfolio very easily.

Specialist intermediary products have clear benefits, for example, they usually offer back-to-day-one cover, while lenders' policies commonly do not to pay out until after a 60-day excess period. Specialists also will not load premiums on the basis of age, gender or occupation - a bonus for the self-employed, who are often the most likely to need this type of cover.

Because, by the very nature of the profession, brokers already treat customers fairly, they will not fall foul of the FSA's regulations. Also, by nature, brokers give customers a choice, offer competitive premiums, provide best advice and generally look after their interests. Only those who do not will come under consumer and FSA scrutiny, as some of your competitors may have found.

Penetrating this market is also easier than sceptics may expect, with a customer base in waiting. With consumer debt now reaching an all-time high of £1.3trn, it is vital brokers ensure their clients are not paying out more in PPI premiums than they need to.

The average amount owed by people under 25 has risen from £11 833 in 2003, to £14 984 in 2005. Some of British Insurance's clients have children, and do not have time to research what is on offer and are no doubt paying over the odds for their peace of mind. The average amount of personal debt for every adult is now £5500 and a recent survey by Prudential found that 52% of over-50s are still paying off their debts. Brokers have a duty to help these people - your clients - all you need to do is ask them.

Competition

Breaking the existing monopoly is key to brokers moving forward with PPI. The competition has become adept at starting with sales of creditor insurance and honing in on brokers' core broker business, so why not hit back? Brokers already have the core broker business, so this is the time to hone in on creditor insurance. Customers have been primed with the recent furore in the press, followed by regulatory intervention, to look towards moving on from purely convenience purchasing. As such, this could become a potentially important revenue stream for those willing to go into battle.

The cynics may say it is too good to be true and it is, which is why business is booming for brokers' competitors. There are no pitfalls to broking PPI - other than that clients may be suspicious when offered premiums that are one-tenth of the price they would normally have to pay in the high street.

Given the current climate, brokers are well placed to restore consumer confidence in PPI. The FSA recently announced: "When properly structured, explained and sold, payment protection insurance can provide worthwhile cover for consumers against unexpected changes in their personal circumstances." That is surely a cue for brokers.

The FSA plans to undertake a second round of 'thematic work' this financial year, checking that compliance levels have improved. So, while high-street lenders shift uncomfortably at the prospect of further investigation and more customer discontent, brokers can ensure their pain is our gain.

Brokers know insurance is about the delivery of a promise and that lenders have let consumers down, so it is now surely the turn of the broker to restore confidence in this sector, market these products properly and reap the rewards.

Simon Burgess, Managing director, British Insurance.