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Money Programme

Get the facts behind the big business and finance stories from around the world – and down your street, in The Money Programme.

First of all it is important to say that there are two types of counterfeit product purchases by consumers. Deceptive counterfeiting takes place where the consumer does not know that they have purchased a counterfeit product. In contrast, non-deceptive purchases of counterfeit products take place where the consumer willingly buys the counterfeit products. We’re dealing here with the latter type of purchase. If lawmakers and the producers of genuine branded goods want to take action against counterfeits as well as dealing with the suppliers they may need to consider why the demand exists. Much in the same way as health campaigns against cigarette smoking were based on understanding the various reasons why people smoke, so it is also clear that the consumption of counterfeits is a complex activity which has many causes that need to be understood.

There has been a significant amount of research into why people buy counterfeit brands and the types of people who may be more willing to buy them. Unsurprisingly people who have relatively little regard for the law will be more likely to purchase counterfeit products. Also people who have negative attitudes towards big business are more likely to buy counterfeit products. This may be because they feel that genuine brands charge unfair prices, those people who see themselves as being shrewd shoppers willing and able to beat the system may also be more likely to buy counterfeits. Counterfeits may also appeal to those people who want to demonstrate their status, but don’t have the funds to do so with genuine products. Another factor that may encourage counterfeit consumption is where people are curious and want to experiment. Some people are also comfortable with taking risks and doing something that is illegal may not be a problem.

"an individual’s crime may not be obvious to those around them"

As an illegal activity, what is peculiar about buying and using fake brands is that this is something where an individual’s crime may not be obvious to those around them. The consumer knows of their true origin, the people amongst whom the consumption takes place will only know if the consumer tells them, depending on the quality of the manufacture. So are counterfeit brands popular because they are difficult to distinguish? Or is it because there is a cachet to having bought something much cheaper than the genuine product (even if it is fake)?

The most obvious factor motivating consumer purchase of counterfeit products is their relatively low price but it is commonly appreciated that such products will be of lower quality than genuine products. However some research has found that people who have previously bought counterfeit goods believe that they are as good as genuine products – no doubt that will encourage them to repeat their actions.

Clearly the manufacturers of branded goods have a great deal of work to do when it comes to consumer perceptions of counterfeit goods and the attractiveness of buying them.

Weblinks

• Fake football shirts - Can Umbro stop the flood?
• Securing your brand – how do you build value into a brand and how do you preserve that value?
• Take it further - sharpen up your business skills
• Join the discussion - why do people buy fakes? Is it really such a bad thing?

Further reading

• Counterfeiting Exposed: Protecting Your Brand and Customers by David M. Hopkins, Lewis Kontnik and Mark Turnage, published by John Wiley & Sons

Courses

• Marketing in a complex world

About the author

Haider Ali is a lecturer in marketing at the OU Business School. He has extensive experience of delivering courses to people in industry ranging from the most junior functions in organisations to senior executives.

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Blogging about

Money Programme

Get the facts behind the big business and finance stories from around the world – and down your street, in The Money Programme.

At one level the problems with motorway service stations are not difficult to assess – little choice, poor quality and high prices. More often than not, customers are experiencing an acute gap between the service they expect and the service they’re receiving.

Yet, the solution of turning motorway services into a sort of retail centre, as explained in 'Motorway Attractions', leaves me feeling uneasy.

Overcrowded motorways and service areas epitomize one of the problems of our time: we all use our cars too much. Also, too many of the goods we buy are transported over long distances. We live in a consumer society. We have access to a previously unknown quantity and variety of consumer goods, and shopping has become a major pastime.

This enjoyment comes at a heavy price. Choked motorways are only one problem. Overflowing landfill sites have to take all the packaging and all those nice new goods at the end of their - sometimes very short - useful life. Global warming is linked to the energy used for travel and for the production and transportation of all those consumer goods we enjoy.

In this context, motorway service areas as retail havens ring all sorts of alarm bells. Do we really need yet more retail centres where we can spend yet more time, buying yet more things? And do we really want to encourage yet more traffic in order to get to such retail centres?

Perhaps there are different ways of consuming and enjoying ourselves, which still allow us to flow with the crowd, to hunt for new objects, to show off our good taste, to bring variety into our lives. Quirky second-hand markets, colourful farmers’ shops, exchange and sharing schemes: could we as a society make more use of these and thus give our poor roads and the environment a break?

Maybe then motorway service stations could concentrate on what they were meant to provide, that is clean toilets, decent hot food and a chance to stretch our legs on those unavoidable journeys.

Further reading

• Calling companies to account – explore the tactics used to keep companies in line
• Your trip at what cost? – what is the environmental impact of your holiday choices?
• The End of Over-Consumption: Towards a Lifestyle of Moderation and Self-Restraint by Marius De Geus, published by International Books
• The Myth of Green Marketing: Tending our Goats on the Edge of Apocalypse by Toby Smith, published by University of Toronto Press

About the author

Anja Schaefer is a Lecturer in Management at the Open University Business School. She’s been lecturing in marketing and corporate social responsibility for eight years. Anja has published material on consumer behaviour, sustainable consumption and corporate environmental management.

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Blogging about

Money Programme

Get the facts behind the big business and finance stories from around the world – and down your street, in The Money Programme.

The last ten years have seen the level of personal debt in the UK nearly triple in size. The total of personal debt passed £1 trillion in 2004 and currently amounts to £1.2 trillion.

Faced with burgeoning debts, millions of borrowers have taken out payment protection insurance (PPI) to provide the upkeep of payments on loans, mortgages and other commitments in the event of accident, sickness or unemployment.

The market has become huge with around seven million policies being taken out each year generating some £5.5 billion in premiums for the lenders and the insurance companies underwriting the products. The majority of the products (about 60%) are sold in conjunction with unsecured personal loans with the remainder being related to credit card, store card and mortgage borrowing.

On the face of it insuring against such risks would seem to be a prudent course of action – it is little over a decade ago that a period of high unemployment and high interest rates forced thousands of homeowners to default on mortgage payments and lose their homes during the recession of 1990–1993.

However, increasingly evidence is being gathered that questions both the way PPI policies are being sold and the value of the products themselves. In many cases the terms of the policies may mean that a financial lifeline may not be forthcoming in the way expected by policyholders in times of need.

In response to these growing concerns the Financial Services Authority – the body that regulates the UK financial services industry – undertook a review of the selling practices for payment protection insurance and its results were published in November 2005 in the report 'The sale of payment protection insurance'.

Then, in December, the Office of Fair Trading (OFT) published its initial response to the ‘super-complaint’ submitted to it by the consumer advice body, Citizens Advice, on the cost and effectiveness of PPI. This followed Citizens Advice’s own survey, 'Protection Racket', that suggested that aspects of the PPI market are damaging to the interests of consumers.

Further question marks about PPI have now come in the Competition Commission’s report on store cards published in March 2006.

So what are the issues?

There are three main areas of concern: price, insufficient cover and mis-selling:

1. The price of PPI products appears excessive

This finding was supported by the report 'UK banks: PPI – Time for change', carried out by the investment bank Credit Suisse First Boston (CSFB), and the OFT which found the claims ratio for PPI products (claims as a percentage of premium income) to be around 20%. That is, for every pound paid in as a premium, the PPI schemes were paying out just twenty pence in claims.

This figure is markedly lower than for other types of general insurance: for instance 74% for motor insurance and 55% for household insurance. For an industry facing tight margins in many conventional areas of business the high margins offered to financial companies by PPI have clearly been attractive.

The risk of purchasing an overpriced product is exacerbated by the fact that PPI is a secondary transaction involving little in the way of shopping around by consumers. The Competition Commission’s inquiry into store cards supported this view and found "that little or no competitive pressure is brought to bear on the elements, or the pricing, of insurance sold with store cards".

2. The protection offered is only partial, with many policies having unreasonable exclusions of cover for common causes of credit default

Around one in six claims under PPI policies are rejected by the insurers. The evidence from the recent surveys sheds much light on the reasons for this high rate of rejection. The FSA found that nearly half of the firms it visited that were selling PPI "were not providing the customer with balanced information on the exclusions as well as the benefits".

Indeed, firms offering products are not required to reveal exclusions verbally in face-to-face sales. In one case the FSA found that a policy with an age limit of 65 had been sold to a 68-year-old man. Not only did this mean that he would have been ineligible to claim on the policy but also, because he was retired, the majority of the benefits from the policy were not relevant to him!

More generally the exclusions in PPI policies are wider than many consumers might have anticipated – including claims by those with chronic illnesses or mental health problems. Citizens Advice also discovered some cases where customers have been unable to claim because of unreasonable requirements to provide medical evidence.

3. There is evidence that products are mis-sold and that high pressure and unfair sales tactics are employed

The FSA survey does not criticise the sales techniques in all the firms it surveyed. However, in two-thirds of the firms visited aspects of selling practices were discovered that did not stick to all the rules, therefore posing a risk to consumer protection.

In certain cases, the FSA found incentive structures in place that risked increasing the scale of non-compliant sales. In one loans company staff were paid a £20 bonus for each PPI sale and the bonus system was structured in a way that could double staff salaries. Individuals not meeting their targets got no bonuses and were earmarked as having a training need.

Another example of poor sales practice emerged from the sales script used by one loans company for PPI products. This stated that "we do not offer advice but will provide you with information on accident, sickness, unemployment and life cover" – but then later, the script tells the salesperson "if the client is unsure then you can tell them that we strongly recommend that you consider taking out PPI".

A further angle on the issue of mis-selling has come in the Competition Commission’s report on store cards. It found that PPI is being sold to customers in a package with price and purchase protection. (Price and purchase protection insure the policyholder against, respectively, the risk of the goods being subsequently offered for sale at a lower price and the risk of damage to, or loss or theft of, the goods purchased.) As a consequence customers are at risk of buying insurance they do not want or need.

In addition to these three main issues the survey evidence also found that, in certain cases, the administration of PPI claims is slow and unfair, thus exposing consumers affected to serious debt reinforcement action.

Following its initial response in December 2006 the OFT is now planning to undertake a detailed study of the PPI market. We will learn more about the OFT’s intentions later in 2006. Following the publication of its survey, the FSA sought feedback from the companies providing PPI and is expected to undertake a further review of sales practices in the near future.

The prospect, given the current apparent shortcomings, is that the sales of PPI will become more tightly regulated. Already the FSA’s Insurance Conduct of Business rules, introduced last year, have resulted in many retailers stopping the in-store sale of PPI with telephone sales being used instead to market the product.

For consumers the phrase caveat emptor (buyer beware) clearly applies. You may be paying over the odds for PPI and the insurance product may not offer you financial support when you need it.

Further reading

• Association of British Insurers
• The sale of payment protection insurance – results of thematic work (pdf document) by the FSA
• Financial Services Authority
• Response to the super-complaint on payment protection insurance made by Citizens Advice (pdf document) by the OFT
• Office of Fair Trading
• Protection racket – Citizens Advice
• Citizens Advice
• Storecard Credit Investigation – Competition Commission
• Competition Commission
• 'They get you to buy cover, then leave you naked' by Esther Shaw, from The Independent on Sunday (12 Feb 06)
• Why do we get into debt? – is debt always a bad thing? asks The Big Question
• You and Your Money: Personal Finance in Context (DB123) – the course includes coverage of personal debt and the insurance markets

About the author

Martin Upton is lecturer in finance at the OU Business School. Previously he spent 20 years in treasury management, including 12 years as Treasurer of Nationwide Building Society. Martin's particular interests are financial services, the housing market, financial markets and risk management.

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