Credit card insurer under investigation by FSA

1st January 2012  

Identity theft is a constant concern for online shopping consumers. For some time, credit card issuers and banks have relied on one organisation – CPP – to help reassure their customers that their details were safe, and if there was a problem with fraudsters taking over their identity, they wouldn’t suffer a financial loss. But now, as a result of a Financial Services Authority (FSA) investigation, the organisation is facing a crisis that could jeopardise online protection for millions of credit card and debit card users.

CPP watched its share price plummet by 25% once the investigation was announced. This was compounded by a statement from the company saying that their profits in 2012 would be ‘significantly lower’ as a result of the investigation. The irony is that there is nothing wrong with the service that the CPP has been providing. The FSA’s investigation is a result of concerns that some bolt-on insurances that are included in some CPP packages may have been mis-sold. It shows that something as ethereal as identity protection is just as prone to mis-selling as extended warranties on washing machines or purchase protection insurance on new credit cards. But the knock-on effect could be more serious.

Identity crisis

CPP has delayed the launch of a new identity protection product because potential business partners (including most of the main credit card lenders) have made it very clear that they don’t want to associate themselves with the company until the outcome of the investigation is clear. This includes some very big names such as Barclaycard, which has suspended selling some CPP products. Their partners have also turned their backs on the company’s new ID theft product, leaving CPP out in the cold at a time when the financial climate is already decidedly chilly.

The potential for compensation demands and further action as a result of the FSA’s investigation wiped a sizeable chunk off the company’s share price. Since March 2011, CPP’s share price has halved, and the company is worried that continuing uncertainty and a long, drawn-out investigation could do irreparable harm to both the reputation and the finances of the organisation. There are a number of remedies available from the FSA from a reprimand through to potentially heavy penalties, but until the regulator makes a final decision, the company is in the dark.

Operating profit is expected to be particularly hard hit in 2012 as renewal rates, which provide the company with their highest margins, are affected. However, CPP is trying to weather this storm and is confident that once all the bru-ha-ha has died down, organic revenue growth should be around 6%, boosted by robust sales of credit card and mobile phone insurance.

Everyone is hoping for a speedy resolution to the situation, especially the board at CPP. However, the FSA is notorious for moving at a snails pace, and until the outcome has been decided CPP shares, currently trading on around seven times forecast earnings for 2012, will remain flat. The unfortunate outcome for consumers is that CPP’s reputation has taken as much of a battering as its financial books, and as a result a number of innovative new credit card and identity protection products will remain in the wings until CPP can convince the credit card issuers that it’s playing by the rules.

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