Cicero Policy Briefer

Issue 27, August 2008

Comparison websites: Taking care not to do consumers a disservice

By Mark Twigg

I am not usually one for knocking the FSA. On the contrary, I often find in discussions with clients that I ‘go native’ in defence of our increasingly beleaguered regulator. However, some of its recent forays in the field of consumer awareness have left me questioning its approach, however well-intentioned it may be.

Take a recent example: “Confused about PPI? Compare products online!” Well, that is at least what the FSA’s latest financial capability newsletter implores us to do. So I did. And I have to say that I am none the wiser. That’s not because the FSA has not made a good effort to construct what is, when all said and done, a fairly decent comparison site. The functionality and design are pretty impressive. However, the problem is more fundamental than simply assessing whether the website’s look and feel meets the consumer-friendly test. The problem is, put simply, that websites are currently a poor tool to try to encourage informed consumer decisions in the protection market.

The price comparison website is a very useful tool when applied in it rightful place, but its value is rather limited to what might be considered commodity products or what Dan Waters, Head of Retail Policy at the FSA, recently referred to as ‘search’ products—that is, ‘vanilla’ consumer propositions which offer the consumer little scope for product differentiation. They are by design more easily understood and allow consumers to make direct comparisons. Investment funds and general insurance products are awash with such online ‘supermarkets’ offering ready-made price comparisons in what is becoming a major driving force in the development towards a largely advice-free environment. The problem with PPI is that is it not a commodity. One policy can differ greatly from another. PPI also competes with other protection products, such as income protection, which may act as good substitutes offering more comprehensive cover. Because these alternatives are more complex and may require financial advice, they don’t sit well in this non-advised internet universe, and it therefore suits the providers of web-based information tools—though not the consumers—to simply ignore that such products exist. The result is that consumers get only a partial image of what is out there and may make poor decisions in the mistaken belief that those decisions are in fact well-informed.

Given the availability of good value alternative products, one should question whether encouraging consumers to make comparisons between PPI products in isolation from the rest of the products in the protection market delivers much consumer value. Surely the whole tenor of the ICOB review process, and its outcome as seen in the recent changes to the FSA ICOB Sourcebook, is that there is a growing need for the regulator and industry to recognise that protection is not a commodity sale, but in fact a highly emotive consumer purchase; and that there are a suite of products out there which all seek to meet similar consumer needs and could therefore be seen as direct substitutes. Indeed, products are often sold offering a mixture of cover which may involve combining critical illness and term assurance for example. It is by nature a complicated market. Better product design could help to address that problem, and the market is starting to innovate in this area. But given the current complexity, one can see the perfectly sensible rationale behind the FSA’s decision to create under the ICOB reforms a new ‘protection suite’, which includes term assurance, critical illness cover, income protection and payment protection. And it is odd therefore that the FSA’s new comparison website—which looks at PPI in isolation—should go against the grain of the FSA’s broader and laudable objective of creating a marketplace in which consumers are able to more clearly identify the whole range of protection products available to meet their needs.

That is not to say one should construe my comments as PPI-bashing. PPI is a legitimate part of the protection mix which, in some cases, will no doubt serve consumer needs well. But the current balance of the market share between the various parts of the protection family of products suggests that there are factors other than consumer needs which are determining what products people actually buy. The sheer dominance of PPI sales illustrates that protection sales are in the main driven by other financial transactions—the sale of protection products (PPI) is typically linked to the sale of other financial products such as mortgages and bank loans. In essence, it is the growing mountain of consumer debt which is driving protection sales, rather than those sales reflecting the changing patterns of financial risks facing consumers. What we need are consumer information tools which provide a wider, more holistic view of the protection needs of the UK population. What the FSA’s new website provides is a perpetuation of a current market failure—by directing people towards PPI products rather than enabling consumers to compare across the protection suite.

A consumer’s experience: does the website produce valuable consumer outcomes…

In testing the FSA’s PPI price comparison website I went through all the basic questions they asked me to help guide me towards an appropriate product.

• A question of definition

Some of the terms used on the site may be defined very differently in the terms and conditions as used by insurers. For example, the FSA website asks if you are employed or self-employed. It does not make clear that different insurers may define ‘self-employed’ differently, which will in turn have an impact on the appropriateness of the products being compared. This is an important issue when one considers the findings of the FSA’s thematic work on the PPI market, which showed that products were being sold commonly to people who could not claim on them, including self-employed people.

• Too much choice

The FSA website generated a selection of 474 products. Realistically, this is far too many to expect the average consumer to make suitably informed comparisons.

• Mismatching short-term protection with long-term needs

In perhaps the website’s biggest flaw, I am being directly exclusively towards PPI products on the assumption that they are the only or indeed the best way to protect credit repayments. Not only are all of the products offered PPI, but many of them offered limited cover for no more than one or two years, even though I stipulated that I had 15 years to run on my mortgage. The site will, at best, offer me a mismatch of short-term protection products to cover a long-term protection need.

• Deliberate confusion of product types

Viewing the list of 474 protection products I saw policies calling themselves income protection, even though they didn’t actually protect my income. The PPI providers listed seem to use terms like payment protection and income protection interchangeably, even though the function of the products is materially different and the level of cover will in practice vary markedly. The FSA should be cracking down on this practice and not allowing providers to blur the distinctions. The PPI website, however, turns a blind eye. This reflects a major weakness in current market practice, whereby the boundaries between different product types are often blurred even though the products in question may have very different features. It is a moot point as to whether the FSA takes this seriously.

Given the current flaws in the approach taken by this, and other, websites, there is a clear challenge to the product ‘search’ industry. Until it can demonstrate an ability to search the market comprehensively—which means including some of those more complex protection offerings—then it remains a concern that such tools may actually do the consumer more harm than good.

Mark Twigg can be contacted on +44 (0)20 7665 9537 or click here to email.