Select Committee on Treasury Minutes of Evidence


Examination of Witnesses (Questions 120-139)

SIR CALLUM MCCARTHY AND MR JOHN TINER

24 OCTOBER 2006

  Q120  Chairman: As we know, the Treasury is looking at travel insurance and there is also an issue which has been brought to our attention in terms of extended warranties. Is that an insurance contract which for many people will be an issue? Certainly it is a live issue for politicians. Could you give us your views on those?

  Mr Tiner: The Treasury consulted on both those products at the time they were deciding the scope of the January 2005 regulation and decided that as far as extended warranties were concerned they should be excluded. I think there is some debate about whether they are insurance contracts or whether they are maintenance contracts.

  Q121  Chairman: What side would you come down on?

  Mr Tiner: I have not looked at it because it is a Treasury decision. The scope is set by them; it is not something we have looked into in detail. On travel, there is a slightly curious position where travel that is purchased from an insurance company is covered but travel insurance which is purchased at the time you buy a holiday is not. So there is a level playing field that I think the Treasury are thinking about at the moment. I think on travel they would have to look very carefully at what is the level of detriment that is trying to be addressed, and does that require, again, the full rigours of the Financial Services and Markets Act regime.

  Q122  Chairman: On extended warranties it is nebulous, is it not, on whether it is an insurance contract or not?

  Mr Tiner: That is my understanding, yes.

  Q123  Chairman: The wholesale market seems to be working better. Maybe I could ask you about contract certainty. It is my understanding that policies were not provided when insurance was arranged, and you have given the industry two years' notice to get that right. If I am correct, that notice is up in December. Has any progress been made on that?

  Mr Tiner: Yes, there has. I thought it was quite astonishing when we were just preparing to take over the regulation of this business in 2005 that in late-2004 it was evident that a very large percentage of insurance contracts between insurance companies and their commercial customers (this does not really apply in the retail market) did not have a policy issued, in some cases for months, in some cases for years—and some cases never. The terrible events of the World Trade Centre in 2001 ended up in court because there was not a clear policy, and there are many cases that end up in court, and basically the winners are the lawyers and the claimants take many years to get paid. So we challenged the industry in December 2004, before we started regulating the market, to sort this out within two years, as you say, Chairman, and the two years is up in December this year. We have been keeping very close tabs on this and our feeling, at the moment, is that the market has responded positively, and by December they will get something like 85-90% of contracts now being issued within a 30-day period of the cover being provided by agreement between the underwriter and the company.

  Q124  Chairman: As a Committee we would be interested in the 10-15% that are, maybe, not doing it by the end of December. It is something we could come back to. Also, on the issue of commission disclosure, that is not mandated presently, I believe. Obviously, there are big problems there with competition regarding the product provider and the distributor, and it appeared to me that in that area the customer is forgotten about.

  Mr Tiner: We wrote a rule into our rulebook at the time we started this which said that if a customer asked for commission disclosure then the broker would be required to provide it. What is, in a way, surprising is that the clients, the assured companies, have not asked for that—and this is not retail, this is in the wholesale market; these are companies. We have tried to encourage market solutions to this in the way that we have with contract certainty, but I think the incentives are so clear and, in a way, so divided between the underwriter, the broker and the insured that we now want to see whether there is a market failure that only the regulators can fix and the market cannot fix it itself.

  Q125  Chairman: So that is still a very live issue.

  Mr Tiner: Yes.

  Q126  Chairman: On the issue of contracts for difference, the Association of Investment Companies (the new name for it) have written to us arguing that these products have been used by some investors to build stakes in companies in a less than transparent market. As a result of that correspondence, I want to raise that issue with you. Is there progress that can be taken in that area?

  Sir Callum McCarthy: Yes. At the moment, we are considering what the policy on this should be because it is an issue which raises quite polarised views. There are some who argue, correctly, that there is an economic interest which is achieved by contracts for difference, and some people argue that there is a disclosure regime which is based very clearly on direct ownership. There are some quite difficult questions to sort out, on which we are consulting at the moment, but we have not come to any conclusion; it is a polarised and difficult issue.

  Q127  Chairman: We will look at Payment Protection Insurance, and I will hand over to Angela. Before that, I mentioned that the ABI had been before us and they gave us a memorandum on this issue. You stated your concerns regarding policy terms that, in your words, provide no refund of the single insurance premium if the consumer wishes to cancel the PPI policy without early repayment of the loan. The ABI told us in their evidence that they were not aware of companies that refused to cancel a PPI policy unless the loan has been repaid in full. However, our Committee has looked at the website of a major high street bank which says that once the initial 30-day period is over (and I quote): "You will not be able to cancel your loan protection insurance policy unless you also settle your loan early in accordance with the terms of your loan agreement". Do you think that is reasonable?

  Mr Tiner: I am not sure it is. We were very worried about this; that consumers were being persuaded to take out a single premium policy rather than a regular monthly policy, and then if they did terminate the policy halfway through they were losing their premium. We have said to the industry this is not fair on the consumer. All the ABI members have now agreed that that will not happen and that they will provide refunds if customers do terminate the contract before its maturity. That is to our understanding what the ABI members are doing, and it is working.

  Q128  Chairman: They gave us different information when they came before us. Let us get the ball rolling: if we give you the name of this high street bank (we will not mention it this morning—no naming and shaming or anything so vulgar) will you contact them and ask them to amend their practice?

  Mr Tiner: We will absolutely say to them that if they are members of the ABI they should fall into line with the ABI code of practice.

  Q129  Angela Eagle: Mr Tiner, on Payment Protection Insurance, you did last year make some fairly worrying conclusions when you found poor selling practices, mis-selling, poor information, high prices, and people being sold Payment Protection Insurance who were not eligible, actually, to claim when those selling knew they were not eligible to claim. What have you done to try to put that right?

  Sir Callum McCarthy: We did a variety of things. First of all, we published in November 2005 the results of our work. We wrote what we call a Dear CEO letter to all the major and medium-sized firms and we set out a general letter to the smaller firms. We have followed that up by a second survey of some 40 firms. That showed some improvement but not a good enough improvement. We have already taken enforcement action and fined one firm and we have about ten other firms which we are investigating with a view to possible enforcement action as well. In addition to that, we have set out strong advice for potential customers of PPI, and we have also, as John has just mentioned, agreed with the ABI, and, I believe, also a number of other trade associations, the treatment of single premium PPI payments which was a particularly objectionable practice. All those things have been done. What we are not doing is tackling the rather complicated competition issues which are basically questions of bundling products, which the OFT has just referred to the Competition Commission. We are concentrating on the issues of mis-selling, appropriateness, treating customers fairly and leaving the competition issues to the Competition Commission.

  Q130  Angela Eagle: You fined one company and you are pursuing potential enforcement action against 10 others?

  Sir Callum McCarthy: Yes.

  Q131  Angela Eagle: How many companies actually sell Payment Protection Insurance in this way?

  Sir Callum McCarthy: A large number. I am sorry I do not know the number.

  Q132  Angela Eagle: So quite a small amount of enforcement action you have taken, then.

  Sir Callum McCarthy: I would not agree with that because we would be prepared to take enforcement action whenever we have evidence of significant mis-selling. We have found prime facie evidence and have taken action against an overall enforcement programme which leads in total to less than 300 enforcement actions a year. That is quite an appreciable and very focused enforcement programme.

  Q133  Angela Eagle: Do you think commission should be disclosed when Payment Protection Insurance is being sold? Some of the levels of commission are quite hair-raising, are they not? According to Citizens Advice and the OFT, commissions with PPI products can be 66% of the premium. So, for example, on a £5,000 loan, the insurance cost of taking out a PPI would about £1,162, of which £750 is undisclosed commission.

  Sir Callum McCarthy: What I think we are more concerned about is to make sure that people recognise, first of all, that you do not have to take out PPI—you can get a loan without taking out the PPI—and, second, that people should check the terms. That should be both how much they are paying relative to a loan, because one of the things that is very alarming is the very high premiums for PPI versus the total capital sum of the loan. It is very important, also, in terms of the terms, that people should look at the exclusions very carefully. If you got people to recognise they did not have to take out PPI and got them to look at the terms I think we would have a huge improvement.

  Q134  Angela Eagle: Again, does this not come back to the business model, where there is a lot of hidden stuff going on, and people who are selling these very dodgy products (I think you have to call them that in a lot of cases) are actually on huge commissions, which are hidden, to do so. They are basically ripping off customers, are they not?

  Mr Tiner: I think the commissions in this area are much higher than many other products.

  Q135  Angela Eagle: The prices are higher.

  Mr Tiner: The prices are high.

  Q136  Angela Eagle: Significantly higher. The commissions are higher and hidden. It is rip-off time, is it not?

  Mr Tiner: I am not sure that disclosing the commissions to the customer, though, is the right remedy. I do not know whether the customer is going to know what to do with that information. I think probably the more important thing is that there needs to be competition brought into this market to drive commission rates down, and that is what the OFT are looking at. The customer benefits from that competition rather than (and we know levels of financial education and financial capability are not that high in this country) actually being able to detect what the commission is, even if it is disclosed, and knowing what to do about it. I think the work of the OFT is critical here to try and create some competition in that market.

  Q137  Angela Eagle: I know that the idea or the mantra is that the more competition there is the more prices will go down, but these are pretty dodgy products. They are very, very highly priced and they have a lot of exclusions that are hidden; many, many people take them out and find out that they cannot ever have claimed on them, and your answer is to have more of these products available.

  Sir Callum McCarthy: No, I do not think that is the position, if I may say so. Can I just take one point, first? Payment Protection Insurance is not, in its nature, a "dodgy" product; it is a product which meets a real need. The challenge for us—

  Q138  Angela Eagle: It could meet a real need.

  Sir Callum McCarthy: It could meet a real need.

  Q139  Angela Eagle: I am not sure it does at the moment.

  Sir Callum McCarthy: I agree with that; not all Payment Protection Insurance meets a real need or does so on fair terms. That is why the real thrust of all our work here is to make sure that people treat their customers fairly. There are lots of examples of people not doing that, and that is why we are taking action against a number of firms; that is why we have agreed changes in actual processes and performance with a number of firms. Those are the things we are concentrating on.


 
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