Reforming Payment Insurance Will Backfire On Borrowers
Now is the time to apply the old medical rule - “First, do no harm”, which should be called the First Law of Downturns
One way that governments and regulators can avoid making things worse is to watch for unintended consequences of well-intentioned proposals.
The Government is, rightly, keen that the lending industry does all it can to help people who face difficulties repaying loans. The basis has to be responsible lending and responsible borrowing. Helping people also means doing all we can to maintain their access to suitable products and to assist them when they get into difficulty. The lending industry is working to improve its ability to spot problems early and so ensure that customers get the advice they need, when they need it.
Any safety net for borrowers must include protection from consequences of unemployment or illness, which might otherwise make it difficult to keep up loan repayments. Payment protection insurance (PPI) does exactly that. PPI continues, of course, to be the subject of much unfavourable comment. A new regulatory regime has been introduced recently by the Financial Services Authority (FSA) and is bedding down. PPI is also being investigated by the Competition Commission, which recently made proposals for market reform. This is where the First Law of Downturns comes into play.
The commission argues that more needs to be done to improve the way in which PPI is sold, so that customers have a clearer view of what they are buying, and how it is priced. We support many of the commission's proposals, especially those that build on good practice in a market already changing fast. Contrary to popular myth, 80per cent of claims made on PPI policies sold by Finance and Leasing Association member companies are successful. Our members have also improved the cover and benefits they provide, reduced exclusions, lowered prices and improved refunds when policies are cancelled.
Some suggestions on the table would make things worse. Press speculation said the commission may this week propose a ban on customers buying PPI when taking out new credit. This would result in large numbers of people going unprotected during this time of economic insecurity. It would also drive up the cost of credit when many people are already struggling to make ends meet.
Similarly, preventing customers from choosing to pay for PPI in a lump sum - an idea recently reiterated by the FSA and thought to be one of the draft proposals that the commission may announce this week - would mean that many found themselves without cover as soon as they missed a monthly loan payment, when they need it most.
Our aim must be to improve the PPI market so that people can get the peace of mind they want, in a way they understand. We should not make it more difficult for people to protect themselves against the credit crunch and an economic downturn. We hope that the Competition Commission and the FSA will agree.