19 June 2015
The challenge of cleaning up a dirty market
I always love seeing companies weigh into a fight with their competitors when it's in the interests of customers. Nationwide Building Society has been one of the most adept at this over the years - leading the charge to make cash machines free over a decade ago, and then pushing for various reforms in the credit card market - some of which they have achieved, some of which they continue to fight for.
These battles are easier for mutuals than they are for PLCs, as they don't have shareholders baying for every extra penny they can squeeze out of their customers. So it's good to see another heavy hitting mutual stepping up to the plate, using its muscle to try and get a better deal for customers across the board.
The purple crusader
In this instance, the company in question is Royal London, which last year raised a few eyebrows when it launched a new direct to consumer business, starting with a product that has one of the most toxic reputations in financial services, Over 50s life insurance. Full disclosure: Royal London have been a client of Fairer Finance's over the past year, and have made it clear that they very deliberately chose one of the most maligned markets as their starting point - as they wanted to establish themselves as a real crusader on the customer's side. But taking on a market where their leading competitors have continued to make super-charged profits for years - in spite of the criticism that has come their way from the media and consumer groups - was never going to be easy.
Over 50s plans are hated by consumer groups and the media for a number of reasons. Top of the list is that it's possible to pay in more than you get out from these plans - much more. And in some cases, companies will force you to continue paying premiums until you drop, even if that happens to be at 120. This builds in a permanent set of bad news stories waiting to hit the papers - as every few years an exasperated son or daughter discovers that their parent has already paid £4,000 into a plan that is only going to pay out £2,000 when they die. Worse still - and this is the second red flag - customers who stop paying into their policy lose everything.
Use of celebrities and free gifts to sell Over 50s plans is another trademark of these policies which winds the commentariat up. Sharon Osborne promoting Moneysupermarket is one thing. But Michael Parkinson staring down the lense of a camera telling you about all the benefits of Over 50s plans understandably leaves commentators angry. And the fact that you get a free gift also seems like a bit of a distraction.
Making money from people's misfortune
Royal London's tried to tackle each of these in turn. It offers a protected payout so that once you've paid in for a certain number of years, you won't lose everything if you have to stop. And new research that it's published this week has revealed that some £86m goes straight into the pockets of insurers every year, as a result of customers cancelling their policies.
In the industry, this is known as "lapse profit", and companies rely on it to boost their margin. But the tragic part is that many of those people who cancel do so because they can't afford their policy anymore. Unlike most of its competitors, Royal London allows customers to cut their premiums if they need to - reducing the likelihood that they'll need to cancel and lose everything. They've also sworn off celebrities and free gifts - at least for now.
From a consumer campaigner's perspective, Royal London's challenge to this market has been great. There's no doubt that it's product is fairer than everyone else's out there. The sad reality, however, is that it's incredibly hard to take on Sunlife - who dominate this market - without indulging in some of the same tactics. Most people who buy Over 50s plans respond to the adverts on the TV or in the newspaper - they don't carry out a forensic comparison of which policies are the fairest.
What's more, free gifts and Michael Parkinson are incredibly effective at getting customers in the door. While not using these tactics is the right thing to do, Royal London are walking into the ring with one hand tied behind their back.
It pays to be bad
In spite of Royal London's best efforts to get itself noticed, there was very little coverage of its revealing report that it published this week. The media love writing about Over 50s plans when they see people getting ripped off - but when a company is trying to clean things up, it's so much harder to get people to write about it.
The most successful campaigns - such as Nationwide's cash machine crusade - affected just about everyone. But Over 50s plans are fairly niche. Although hundreds of thousands of plans are sold every year, they're not a suitable product for many people - there are better alternatives. So getting people to notice you when you're fighting the good fight is tough.
There's a sinister undertone to this story. If Royal London can't make the moral high ground pay, then it will have no choice but to withdraw from this market or to resort to the same tactics that its competitors are using. This isn't just worrying for the Over 50s market - it's a concern across the industry. If being good does not get rewarded financially, then no one will do it.
I've said before that I think the regulator needs to play a bigger hand in cleaning up this market. Last time the FSA looked, it seemed unconcerned by Sunlife's Michael Parkinson adverts, and to some of the less fair product features that prevail. It's a market that's ripe for a new FCA enquiry, as well as perhaps a Competition and Markets probe too. If consumer-centric innovation does not provide a competitive advantage to a new player, then it's a clear sign that a market is failing and intervention is necessary.