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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