By John Ficenec, 21 February 2012
What is the point in card and identity protection insurance? If your credit card is lost or stolen the bank replaces it free of charge and covers you for any financial loss. And if someone steals your identity and goes on a shopping spree, once again your bank covers all financial loss.
Given the above information, clearly stated, just how do you get so many people to buy your product? It seems that I'm not the only one that has been asking this question recently, as card and identity protection group CPP had its shares suspended at 103p after it announced the FSA now want to review past sales practices and make certain changes to the renewals process. In a statement CPP said these requirements were disproportionate and that the action threatens the viability of the business. CPP did admit that the review of past sales is 'appropriate', but went on to warn that any outcome of the investigation is likely to have significant adverse financial impact, and that they cannot predict the scale or consequences of the action.
The sales practice that the FSA particularly didn't like was the blurring of the lines between what your bank already covered and what CPP were offering. The clause in question, which has now been removed from both CPP's card and identity products, was insurance for out of pocket expenses connected to losing your cards. It's easy to understand how customers could become confused between just which financial costs and out of pocket expenses were covered by who; semantic points like these can easily be lost in translation during sales patter.
A company getting its wings clipped for pushy sales tactics is nothing new, but the FSA action has had some serious impacts for shareholders in companies like CPP and Homeserve, which have seen their share prices collapse 66 and 45 per cent respectively since the start of last year. These companies floated with racy valuations that require double digit growth rates. Those growth rates relied on customers trusting in the product and the company that sold them, and for the companies themselves, strong partnerships with banks and utility companies. When the company in question is under investigation by the FSA like CPP, or has to halt sales during a dialogue process with the FSA like Homeserve, that trust is rapidly lost.
In CPP's case, the recent announcement that partner Barclaycard would not renew its agreement with the firm at the end of March raises question over whether it has lost the trust of its partners as well as its customers. And the comments in its latest statement about renewals raise fresh concerns, because for CPP retaining existing customers and renewing them on revised rates year after year is a key part of the business model. CPP may not be alone, however. Andy Smith, support services analyst at Charles Stanley Securities, said that if the FSA has concerns over the renewal process at CPP it could have much wider implications for the industry.
IC VIEW:
The most important thing that investors are missing at the moment is clarity. There is no clarity over what exactly is being investigated, no clarity on what specific revenue lines are being affected and no clarity on what exact costs are for. This is not acceptable; until investors get this disclosure from management they should stay well clear of shares in both Homeserve and CPP.
