Setting the Scene
In July Reuters reported that the UK Financial Ombudsman has started to see a decline in the number of grievances it was receiving in relation to payment protection insurance policies. This does not mean that cases have completely ebbed. It simply means that they had peaked at 3,000 per working day and are now down to around 2,000 per working day.
A stark summary of the PPI situation is quite disconcerting: 15% of the 50 million PPI policies sold in the UK gave rise to claims for compensation. Banks have had to set aside significant reserves to handling mis-selling claims. Lloyds Bank, for example, set aside GBP 6.8 billion and the UK Financial Services Ombudsman was quoted in July stating that Barclays Bank were setting aside an additional GBP 2.6 billion specifically for PPI costs. Other high profile UK banks such as RBS and HSBC also have significant provisioning against PPI mis-selling claims.
These are staggering numbers but what is even more worrying is not so much the quantitative as the qualitative analysis of this debacle. Simple questions would lead to some very obvious answers namely:
1. Were the policies ‘bought’ or ‘sold’? Surveys revealed that several policy holders were unaware that the policy was in place (unconfirmed sources claim as much as 40% of survey respondents indicated that they were not aware that they had such insurance.
2. Were the policies ‘underwritten’ or ‘sold’? In some cases lending institutions seem to have been making more money on the PPI over-riders than from loan interest! Gross margins well in excess of 50% were not unheard of. Had they been charging these margins for lending they would have fallen foul of usury laws! This income was not filtering back to insurance companies as risk premium but constituted loadings of sorts structured into the repayment programme of borrowers.
3. Was there a meeting of minds? If borrowers were unaware of the PPI policy per se they would have been even less educated in the cover it offers them. This begs the question, “Were banks advising their clients or were they just selling this cover?”
Selling or Advising
This last question is a very pertinent one if we are drawing a parallel to bancassurance (or the marketing of insurance products by banks) in the United Arab Emirates.
‘Mis-selling’ implies that policies were sold to customers who:
1. Did not know what they are buying. This goes against the very foundation of insurance because insurance is governed by utmost good faith and not by caveat emptor;
2. In many instances were led to believe that this was an integral part of the loan structure and important for a speedy approval of the loan process. Therefore, insurance was diluted to a complement to another product (i.e. the loan);
3. Were ignorant regarding cost components in their repayment schedules and it is implied that banks preyed on innocent borrowers through the obscure concepts of ‘bundled pricing’ or ‘insurance wrappers’ or the infamous ‘negative option’.
An unalienable, absolute rule on any product (and this specifically applies to all financial services including all insurance products) governed by the principle of Utmost Good Faith is that Financial Services products are not ‘sold’. Rather clients are ‘advised to buy them.’
Disclaimers hidden somewhere in small print in the overall stationery of paperwork that a client is made to sign (or lengthy online conditions on which clients are expected to click ‘accept’) may not necessarily prove to be a formidable line of defense as the fall-out from the PPI debacle is amply illustrating. And so should it be. If the banks have misled clients and/or wrongly sold products then they should be held accountable.
The UAE Saga
This brings me to the situation (or ongoing saga) in the UAE where bancassurance or marketing of insurance products by banks of which credit life insurance, credit protection, loan repayment insurance etc. (i.e PPI under different guises) forms a large part.
The banking and insurance regulators remain indolent as to who should be regulating the insurance activity of banks in the UAE. Under this apparent inertia banks continue to grow their insurance sales.
The situation may be summarized into the following:
1. The UAE insurance law is very clear about all persons selling / providing insurance requiring to be licensed by the UAE Insurance Authority;
2. A few years ago a directive was issued by the Insurance Authority relating to ‘Marketing of Insurance Products by Banks’. Though a diluted form of subsidiary legislation it could have provided a start for bancassurance to be regulated. Whether or not this regulation was activated by the Insurance Authority is not known. What is certain is that none of the banks (and there are several of them) selling insurance have directly registered themselves or the insurance products they are selling with the insurance authority.
3. The Central Bank, as the banking regulator, on the other hand is the authority that regulates banks in their activities. The internal practice is that, while a Central Bank can mandate whether banks stick to their core banking activity or whether they are allowed to diversify into other areas (such as bancassurance), the Central Bank would not regulate insurance activity of banks if banks decide to sell insurance. This would still fall within the realm of the Insurance Authority.
4. In summary the international practice is such that banks who obtain approval from the Central Bank to diversify into insurance who then also seek authorization (and fall under the regulation) of the Insurance Authority in respect of their insurance activity.
The sad reality is that the compliance function of many UAE banks would tell you that they are regulated by the Central Bank and that (even vis-à-vis their insurance activity) they are not regulated by the Insurance Authority. This is further attested by the Insurance Authority who are blissfully aware of banks selling insurance and do not attempt to regulate, license and/or supervise their activity.
By default this translates into an accident waiting to happen.
Conclusion: Once the horses have bolted?
A reality that is integral to the life of an expatriate community is the transiency of the whole experience.
Sadly, to some extent, this brings with it an element of “let tomorrow worry for itself,” or “make hay while the sun shines … we may not be here when the proverbial hits the fan!”
UAE in particular, is such a melting pot of so many nationalities and cultures that in addition to the above we are also presented with dilemmas arising from the different perceptions of what constitutes accepted practice, quality or value. As a result we unfortunately have to learn these lessons in hindsight and one then tries to lock the stable doors once the horses have bolted.
Examples of this include:
1. The losses being incurred in multi-storey buildings exposing certain design, material or procedural inefficiencies (JTL Tamweel, the Oasis fire claim and others come to mind); or
2. The accumulation exposure of certain industrial areas that remain very bad risks as far as insurers are concerned (The Al Quoz Industrial Area fire loss illustrates this);
3. Closer to home, the default of two significant insurance brokers in the region adversely affecting a number of insurers with whom they dealt.
The emerging market nature of the region necessarily implies that some of the above may be inevitable. Or are they? Cannot lessons be learnt in hindsight from other jurisdictions and the principles translated into local practice?
With PPI, because claims, grievances or complaints can only be large in the aggregate (i.e. requiring class suits which are uncommon in the region) it is unlikely malpractice would surface. But it does not mean that it is not there. It does not mean that this policies are not being mis-sold and/or that borrowers are not being made to pay a high premium for cover they are purchasing which they do not fully understand and may not necessarily be capable of claiming for in the event of a claim (because of the selling function of the banks and servicing / policy management function of insurance companies operating at arms’ length).
It is the right of consumers, i.e. borrowers, to be protected and the duty of authorities (the Central Bank and the Insurance Authority in UAE in this case) to protect them. Consumer protection breeds confidence and confidence breeds long term, sustainable development.
This begs the question, “When will the two regulators jointly and succinctly address the matter?”
The answer to this is not rocket science. Even if, as a start, current legislation is effectively applied, we would be more than half way there.