PPI has spelt little but trouble

The payment protection insurance market has given insurance a bad press in the last few years with the Financial Services Authority forced to clamp down on a raft of poor selling techniques from banks, brokers and insurers alike.

The latest chapter in this saga is the FSA fining Swinton £770,000 for adding PPI to cover monthly direct debit payments for home or motor insurance to 480,000 policies between December 2006 and March 2008. As a result, it is offering refunds to all customers affected.

Swinton defended itself by pointing out that it brought the issues to the regulator and noted that it had written to 40,000 potentially ineligible customers reminding them of their purchase and offering them a refund. Very few responded but that is probably as a result of a lack of understanding or apathy from customers. At the time, Swinton's introspection and admittance of culpability did not stretch far enough: you cannot shoehorn a policy on top of another no matter how low cost or beneficial to the customer - especially when almost all of the cost of the policy was taken by Swinton in commission.

The PPI market became an easy-money maker for too many companies, partly because it became too easy to sell. We have seen some of the most severe punishments handed down by the FSA for mis-selling PPI, with Alliance and Leicester fined £7m in October 2008; already this year, insurers and mortgage lenders have agreed to refund £60m to customers whose premiums rose too quickly.

The market can make hundreds of millions of pounds in profits when times are good but, like trade credit insurance, it is much tougher in a recession. The cycle can turn very quickly. Insurers, banks and brokers are going to need to come up with a more consistent approach to this market with fewer exemptions, more transparent selling and more professional advice. If that means selling less volume and increasing the price then so be it: knee-jerk reactions from providers are not good enough.