Payment protection insurance has been giving the financial services industry a bad name for far too long. It's overpriced, hard to claim on, and is often completely inappropriate for the unsuspecting consumers who are sold it.
As of next year, thankfully, it will also become all but extinct. The Competition Commission has announced that lenders will no longer be allowed to sell PPI at the same time they sell a loan or credit card. Consumers will have to be given at least a fortnight to explore other options; if they do decide to buy PPI, the full cost and exclusions will have to be clearly explained to them.
While these measures will go a long way towards stubbing out the PPI mis-selling scandal of the past few years, they will not address one of the main reasons such an atrocious product is sold in such great volumes: commission. Bank employees and loan telesales staff are heavily incentivised to sell as many of these policies as they can – effectively encouraged to over-egg the benefits of PPI.
Sadly, similar practice is still common throughout the financial services industry – not just for insurance. Furthermore, when it comes to, say, the sale of an unsuitable investment product, the financial damage can be much greater than the losses from a mis-sold PPI policy – and may not become apparent to the consumer for many years.
Fortunately, this issue of commission bias has not been overlooked. The Financial Services Authority (FSA) is due to publish a report outlining a new set of rules for the sale of financial products.
Last time the regulator reformed the advice industry, almost a decade ago, it stopped short of clamping down on commission: its own research suggested that consumers preferred it to paying upfront fees for advice. Instead, it simply told financial advisers that they must offer customers the option of paying by fees as well as commission – an option that most customers continued to ignore.
As a result, commission bias is still as great a problem today as it was 10 years ago. Unit-linked insurance bonds, for example, have continued to be best sellers, even though customers can often buy the same funds contained in these bonds for much smaller fees elsewhere. It is, of course, no coincidence that the bonds pay much higher commission than the alternatives. Meanwhile, life insurance executives talk openly to investors about how they can manipulate their sales by hiking or reducing their commissions.
This has got to stop – and surely the most straightforward solution is to ban commission altogether. Consumers may say that they don't like this, but they'll surely adapt once they don't have a choice. Besides, there's no reason why fees can't be paid on an annual basis, in a similar fashion to commission. Financially, there's no need for it to leave consumers any worse off.
This is the FSA's chance to start making the financial advice sector work for its customers again, not just for itself. The reforms at the start of the decade did not go far enough. Being bold this time around could finally help to rebuild trust in the damaged financial services sector.