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Tough on cover

Regulation has been good for firms that sell insurance along with mortgages but the FSA must clamp down on those not playing by the rules, says Simon Burgess

Two years ago, the insurance market had something of a Wild West feel about it. A new sheriff was heading into town, enter The Financial Services Authority, and the market was worried about how things would work out.

The protection it would afford clients was welcome but nobody was sure if its methods would work or fit in with the established way of working.

The good news is that many fears have subsided since the FSA took up the reins in January 2004 and brought the insurance market within its remit.

Admittedly, training requirements, newly established baseline standards, improved documentation of practices and procedures and firmer rules governing sales have all brought extra work.

But they have not, as some still claim, been stifling to the industry or left providers and distributors unable to operate effectively. Indeed, those suffering most under the new rules are most likely the firms that were operating least efficiently in the first place. In many ways the FSA has simply forced firms to modernise and put IT systems in place that deliver the audit trails and recording systems needed to comply with the market’s new watchdog.

This means firms can serve their clients better, handle larger volumes of business and work from a more effective platform.

The FSA has also done a good job in establishing its role and giving firms help in getting to grips with its demands and time to adapt to the new legislation. Nobody was made an example of in the first year and only in the past few months have we seen an increasing tide of sanctions against firms that refuse to cooperate.

But firms selling insurance in the mortgage market must be under no illusion that poor practice will be tolerated and the growing number of firms being fined is likely to continue into 2007.

There seems little doubt that the grip the FSA has on the market will only get tighter for those continuing to flout its rules.

Its focus on insurance sales in relation to mortgages is also unlikely to waver. Inevitably insurance sales play second fiddle to the sale of the mortgage itself and policies which come on the back of the mortgage have unfortunately, in too many instances, not received the kind of attention needed to ensure they are appropriately sold.

Term assurance, life assurance, critical illness, income protection and mortgage payment protection insurance are important products but we have lost sight of why they are important and what they can do for clients.

Term and life products have in the main avoided controversy and do a good job for clients. The market is well developed and competition goes a long way towards helping the regulator ensure the insurance sold is fair, good value for money and sold in the right way.

One irony that the FSA can do little about is that even though older people can now expect to live longer, life expectancy for those in their 30s is decreasing, mainly due to changing dietary habits.

In living longer we should be seeing premiums fall but for many in their mid-life years it is predicted that premiums may harden into the foreseeable future. This is something for actuaries to struggle with if we are not prepared to change our lifestyles.

As an aside, much has been made in recent months about the possibility of a non-contestability clause – a provision within a life policy aimed at stopping providers from refusing to pay claims – but again this is not a matter for the regulator. Rather it is an issue for the industry to address in conjunction with contractual law experts.

This is a good thing given that the CI, IP and MPPI markets are not looking so good in terms of regulation and work is fast piling up on the FSA’s desk. There are a number of basic problems which need to be addressed as well as a number of flawed practices, and the regulator has only gone so far in doing this.

At a basic level, the products in much of the protection market are too complicated. Excess and exclusion periods remain too long for threshold products while inconsistent terminology and product structures make it difficult for consumers to find their way round the market and compare products effectively.

And pricing is still too high for many of the insurances being sold. Much of this is down to the levels of commission and margins that are being incorporated into policies.

Unfortunately, in the protection insurance market for first and second charge mortgages there isn’t much competition and while this is the case high street banks and building societies will continue to enjoy a powerful position in the sales chain.

This sees them put under no pressure to offer value to clients and along with the underwriters and associated distributors they have been able to sit back and watch the profits roll in at the expense of clients.

So where does the regulator come into all this? There are two things that would make a difference. One is that when, as is expected, the Office of Fair Trading refers the PPI market to the Competition Commission and makes recommendations to the FSA these are followed up, implemented and monitored zealously.

The other is that in making its rounds of the market and examining practices and procedures, it does not shy away from looking at some of the biggest and, in the eyes of many, worst offenders in the market.

If the premiums charged by some of the large players are unjustifiably above what is available elsewhere in the market, how can these providers be treating their clients fairly? If clients are still being sold policies that do not provide cover for them in the event of a claim, how can this be treating customers fairly?

There is no doubt that the regulator is serious about its principles on treating customers fairly but it will need to act against one of the big providers in the market for the message to hit home. It’s not so much about making an example of a firm but showing the market that it’s not just the smaller players that will be sanctioned and that the FSA is determined to root out poor practice where it exists.

One of the most telling events last year in terms of the protection insurance market and regulation was the virtually non-existent response by large-scale providers and sellers of the insurance in the face of widespread and heavy criticism.

Spokespeople were conspicuous by their absence and had little to say despite coming under attack from the OFT, independent market studies and the FSA itself.

It is not good enough that even though the PPI market is widely seen to be failing clients on the back of mortgage sales as well as in relation to other credit products, the problems are allowed to continue.

This must be the year in which we see strides taken to open up competition in the market and prevent the major underwriters and suppliers simply being given a licence to print money.

In the retail banking market the unfair charges being levied against clients are under attack and credit card providers have already seen the financial penalties they can impose on clients slashed.

In the PPI market worse abuse is happening whereby clients are being penalised at the inception of a policy through the rates charged.

But for many, paying inflated premiums is the least of their worries when they then go on to find their policy has been mis-sold and does not even provide cover for them given their circumstances.

There has been talk that the rules regarding the PPI market will change this year but changing legislation should not be as important at the moment as enforcing the regulation already in place.

There is more than enough armour in the FSA’s store for it to deal with problems in the market where they exist. The problem is bringing them to light. This must be the priority.

Firms have had time to get their houses in order and meet the stipulations of the FSA. If they are unprepared to meet these it can only be for so long that industry discussions are allowed to drag on before something more direct is done to offenders.

Simon Burgess is managing director of


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