Issue

CPP Group, an insurance company, is being fined by the British financial authorities for $33.4m for mis-selling of credit card insurance from 2005 -2011. The credit card insurance cost between $35-84 per year and protected the consumer up to $100,000.00 in case their credit card was stolen and misused. CPP group sold 4.4m policies, directly and through banks (third party banks sold 90% of the insurance). Tracey McDermott, FSA director of enforcement, said that the issue was that “…CPP encouraged its sales agents to be overly persistent. This exposed a very large number of customers to the unacceptable risk of buying products they did not want or need.” In addition, banks have been made liable for credit card theft since 2009, making the CPP’s insurance redundant.

http://www.ft.com/intl/cms/s/0/379ae58c-2fe9-11e2-891b-00144feabdc0.html

Analysis

The issue here is caused by the large asymmetry of information between the consumer and the producer. CPP and the banks selling the insurance for CPP understood the risks better than the consumers, in addition to knowing that the insurance was redundant since 2009. Banks benefit by selling the insurance as this meant they themselves would not be liable for stolen credit card losses. But what is the actual service being sold by CPP?

Excerpt from CPP Group website

Card Protection Service: “Report lost or stolen cards with one call from anywhere in the world. Key features include card cancellation and re-issue, emergency cash advance, protection for keys, valuable document replacement, handbag and wallet replacement.”

http://www.cppgroupplc.com/consumer-products.shtml#card-protection

Conclusion

Where does the responsibility lie? CPP’s card protection service included additional services for the consumer, for $35-84 per year – not a large cost – so consumers weren’t receiving zero value from the insurance package. In addition, when banks sold 90% of CPP insurance and the salespeople being the primary point of contact for consumers who bought directly from CPP, the issue of establishing responsibility becomes convoluted. I would be in favor of the FSA acting to decrease information asymmetry between consumers and producers rather than handing out hefty fines which threaten immediately the jobs of over 1000 CPP employees. While CPP and the banks that helped sell the insurance may have skewed moral compasses when they sell something that appears to be valuable but is redundant, consumers should understand what they value and be able to do due-diligence. Without specific analysis of the “overly persistent” selling techniques, it is hard to not evoke the old adage ‘buyer beware’.