At the end of November the Competition Commission (CC) consulted on its draft Order to address consumer detriment in the payment protection insurance (PPI) market. And in December the Treasury started a consultation to develop simple financial products, including protection.
It is essential that the two consultations are not seen in isolation. This is especially important for income protection insurance which could, with a proper quality standard, take up much of the space currently occupied by MPPI/PPI products.
Despite its problems, MPPI/PPI was the biggest mass market ‘income protection’ product around.
The Office of Fair Trading’s (OFT) report was published in 2009 and was the subject of a legal challenge to the Competition Appeal Tribunal by Barclays, Lloyds and Shop Direct. Apart from a minor concession on not inconveniencing customers (e.g. allowing them to choose to buy at a point earlier than seven days after a loan/mortgage sale), the Tribunal ruled in favour of the OFT.
As expected, the CC Order means a ban on selling PPI at the point of sale of the credit, until seven days after the sale, and single premium policies.
In addition, there are obligations to provide – a personal PPI quote, setting out the cost of PPI along with details of the cover provided; information making it clear that PPI is optional and available from other providers; information to the OFT and the new CFEB for monitoring and publication; information about claims ratios; an annual review of the cost of PPI; and independent ‘mystery shopping’ exercises.
In the other part of the forest, the Treasury believes that there is a role for ‘simple’ financial products which can be easily understood and compared. These products would ‘do what they say on the tin’, so that consumers can compare products across a set of standard features to simplify decision making.
On the other hand, it notes that many consumers lack the confidence and capability to make effective decisions about their money, and that many people face problems flowing from poor choices.
It also quotes research showing that consumers fear not making effective decisions or not having found the ‘hidden catches’ when purchasing products.
As for the concept of ‘simple products’, the Treasury commissioned Professor James Devlin to look at previous ones (CAT standards and stakeholder pensions). Its conclusions are that simple products should not be subject to mandatory price caps, which the previous ones were.
Rather, if products are transparent and easily comparable, competition between providers should lead to prices being kept low, without the need for price regulation or standardised costs.
The Treasury would like to see a partnership develop between representatives from industry and consumer groups, to ensure that the products are appealing to both sides. The government has no plans to mandate the development of simple products, or to require that all providers supply a simple product option. The consultation ends on 25 March 2011.
So, what does this all boil down to for income protection?
In my view, it reinforces the need to make progress on a quality standard, which not only supports the development of mass market products, but raises the bar on removing consumer detriment.
It may be that an industry-wide option will appear, but from past experience that is likely to be at the lowest common denominator.
I hope we will continue to make progress this year on a real income protection quality standard which will be seen by consumer groups, the regulators and the Treasury as a beacon of what can be achieved by an innovative group of insurers to meet social policy aspirations.
Richard Walsh is a director and fellow of SAMI Consulting
