Sam Dunn: The FSA went trawling among loan cover sales and came up with something fishy
Sunday 18 February 2007
It's like shooting fish in a barrel. Another week brings another fine from the Financial Services Authority (FSA) for a provider of payment protection insurance. The culprit this time is Capital One, which has failed to treat its customers fairly.
PPI is intended to cover loan and credit-card repayments in the event of illness, accident or unemployment, but it has become a monstrously fat cash cow for profiteering lenders. The industry's recent referral to the Competition Commission (CC) promises to bring an end to this - even if that end is still a long way off.
The CC's investigation will probably take at least a year to conclude. In the meantime, the FSA is busy exposing all those whose practices fall foul of its rules. Since deciding that the industry suffers from serious "thematic" flaws, it has fined four companies over poor sales practice relating to PPI.
The companies in question are the brokers Regency and Loans.co.uk, the home-shopping outfit Redcats and GE Capital Bank Others, including Eastern Western Motor Group and broker Capital Mortgage Connections, have been issued with financial penalties for less serious breaches of the rules.
And, as the regulator is keen to tell us, "other PPI enforcement investigations are under way".
While all this sadly suggests that millions of consumers have bought distinctly duff financial products, the upside of the FSA's activities has been to expose grotty sales practices. The official "final notice" sent by the regulator to Capital One identified the nitty-gritty of the problem: telephone sales scripts.
Many borrowers taking out cards and loans do so over the phone, and are often easy pickings for staff selling PPI as an add-on - especially if they've never bought the cover before.
In the case of Capital One, the FSA found, the scripts for staff to follow "did not always ensure adequate disclosure of significant and unusual exclusions and limitations of the policy".
For instance, customers did not always receive accurate information about the length of time PPI would actually pay out for (a maximum of 12 months).
PPI sold like this is an accident waiting to happen, especially when the person on the other end of the line is anxious about whether they're going to qualify for a loan or credit card - as is often the case. Since 41 per cent of Capital One's PPI policy sales between January and November 2005 took place over the phone, the FSA is right to call this a "serious issue".
Even where policies do pay out, PPI is an expensive purchase that should be sold in a more competitive market and a more heavily regulated environment.
The FSA makes clear that none of Capital One's breaches stemmed from "deliberate or reckless conduct". This may well be the case but the prevalence of shoddy sales practice across the PPI industry suggests that something stinks. That bountiful profits have long accompanied such behaviour is more than fishy.
Maybe the CC will find the source of the smell.
It's all in the name
Many thanks to readers who tried to find a better name than "asset allocation" for the splendid practice of spreading your cash across many different investments. Entries are still coming in and a winner will be announced next week.
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