uSwitch.com: Selling standards of PPI

Following today’s announcement by the FSA’s on the ongoing PPI selling standards investigation, Nick White, Director of Personal Finance at uSwitch.com comments on the outcome of ‘phase three’ of the investigation.

Good news:

90% of firms are now making it clear to customers that PPI is optional , 1.1 million people will be contacted by the end of the year about their refund terms
92% of shoppers said they were told PPI was optional, over 80% did not feel pressurised to buy PPI

Bad news:

Almost two years on from phase one, little improvement has been made by certain providers on pricing transparency and their consideration of the eligibility and suitability of PPI policies for individual customers. According to the FSA:

Only 62% of shoppers were told how much PPI would cost them in total over the term of the loan
1/3 of firms could not demonstrate that they had properly established whether customers were eligible to claim under the policy
1/3 of firms were not explaining properly the significant exclusions on the policies
40% of firms selling PPI on an advised basis could not demonstrate that they had determined whether the PPI policy was suitable for the customer

Results of the FSA Investigation:

11 firms have stopped selling PPI either permanently or temporarily until their sales procedures are in order
3 firms have cancelled their FSA authorisation of PPI
4 large firms are reviewing their past PPI sales to ensure they were appropriate

“We can’t deny the fact that the investigation into the sale of PPI is a hugely complex process and there is no quick fix solution. However, nearly two years on from phase one, it seems that there are still a series of flaws in the selling practices adopted by the industry which have not been corrected by some PPI providers. The continued failure to disclose price and policy details and a lack of clarity around the eligibility and suitability of these policies for consumers have been identified as key areas for improvement by The FSA. Previous research has shown that over half of the people paying for PPI did not know the amount they were paying and 34% thought there were no exclusions on the policy.

“Banks have been attempting to claw back money lost by offering low APR’s and cut price products through PPI. The high pricing of PPI by banks is clearly subsidising the historically low loan rates on offer that consumers have been enjoying. As such, we would not be surprised to find that the knock-on effect of a clampdown on the selling practices surrounding PPI policies will result in a steady increase to interest rates - signalling the end of an era for rock-bottom loan APRs.

“The fact that high street banks and building society’s dominate the sale of PPI policies is no surprise as they enjoy a huge point of sale advantage. While PPI policies have an important part to play in the personal finance market and can offer important protection for certain customers, we must become better at being consumers. We all need to shop around for the best deal while remembering that some policies have different features than others. Customers should always ensure that they understand what is covered in the terms of the contract by reading the small print and that the policy meets their requirements. Some policies automatically include life cover, but this could be doubling-up on insurance as the customers may have their own life policy already.

“It is reassuring to see that the FSA will continue to police the issue and is planning to increase fines for those firms that do not comply with the PPI selling guidelines. The FSA has taken decisive action over the last year, fining a total of 10 firms for mis-selling PPI. This should go some way toward reassuring those customers looking to buy PPI policies, as the industry faces closer scrutiny than ever before.

“But the question as to whether fines will provide a strong enough deterrent to stop inadequate sales practices remains unanswered. The industry is extremely profitable and is worth £5.4 billion. With the claims ratio on the 20 million policies that have been sold standing at just 20% and market growth of 19% every year since 2000, one is left to wonder if the profitability of PPI could, by far, outweigh the cost of a fine.”

White concludes: “People who are looking for a clear indication of what their monthly repayments will be if they opt to take out PPI should use a price comparison site such as uSwitch.com, which lists the options by the total or monthly cost.”