In the intermediary mortgage sector, comment about payment protection insurance (PPI) seems to fall into two schools of thought. The first is all about how intermediaries can sell more of it, thus increasing their own commission and helping mortgage borrowers to protect their homes should circumstances deprive them of their normal income. The second common theme is that mortgage payment protection insurance (MPPI) is a good product and is not to be tarred with the same brush as the sort of PPI that is sold alongside consumer credit such as loans and car finance, etc.
While I have some sympathy with this viewpoint, I don’t believe that those who advise on and sell MPPI can afford to be complacent and simply ignore the current concerns being voiced by powerful organisations such as the Office of Fair Trading (OFT), Citizens Advice and the Financial Services Authority (FSA) itself. These bodies make very little distinction between MPPI and other types of PPI, so those who believe that MPPI has already received a clean bill of health are possibly being too hasty. There are still improvements to be made. Until MPPI is recognised as standing apart from PPI, whoever provides and sells it needs to understand the nature of the debate that is going on and what is likely to happen next.
PPI reform
A very good place to start is a report entitled Protection Racket researched and published by Citizens Advice Bureaux (CAB) in September 2005. From its roots of being a drop-in centre where anyone could seek free advice, CAB has grown into a substantial campaigning force and the Protection Racket report is by no means blue-skies research, but a formidable piece of evidence to argue for the reform of PPI. The report points out that PPI is very big business with 20 million policies in force and annual gross premiums in excess of £5 billion. Previous research by CAB had revealed that 85 per cent of its debt clients had been unsuccessful when trying to claim on their PPI policies, against an industry average success rate of 85 per cent, which indicated that PPI is a particular problem for the most vulnerable borrowers who are also at greatest risk of financial difficulties.
The problem was seen as four-fold. First, the price can be very high – with the most expensive example cited amounting to 56 per cent of the price of the loan it was supposedly protecting. Second, many policies are designed to exclude those who may need them most – specifically the self-employed and those on fixed term contracts, people with bad backs, and those with mental health problems. Third, the products are often unfairly and inappropriately sold and, finally, claims are administered in a bureaucratic and insensitive way, often incurring added costs such as medical evidence and lenders’ admin charges.
The CAB report ended with a list of recommendations, which included a call upon the OFT to undertake a market investigation into the sale of PPI; an appeal for the FSA to investigate whether PPI policies treat customers fairly in respect of design, price, risks covered and exclusion; and a recommendation that the FSA and OFT work closely together in developing guidance on standards of conduct in promoting and selling PPI. CAB is one of a number of bodies that are able, under the 2002 Enterprise Act, to make ‘super-complaints’ to the OFT (to which the OFT is obliged to respond within 90 days) and the Protection Racket findings were submitted as such.
The OFT’s response to the super-complaint, published in December 2005, concluded that the complex and wide ranging issue of PPI needed more investigation. Therefore, it announced its intention of carrying out a market study into PPI with a set of desired outcomes including: publishing information to help consumers; encouraging firms to take voluntary action; making recommendations to the government and/or sector regulators; and investigation and enforcement action against companies suspected of breaching consumer or competition law. Citizens Advice declared itself delighted by the announcement of this market study, but went on to urge the industry not to wait for the outcome of the investigation before reviewing their PPI products and making changes that would give consumers a fairer deal.
While all this was going on, the FSA had been doing its own thematic work on PPI, the results of which were published in November 2005 shortly before the OFT’s announcement of its market study. Just to remind ourselves: the FSA’s thematic work is one part of its overall activities to reduce risk within the financial services industry, and it looks at identified areas of risk across the spectrum of firms that it regulates. The risks that cause the FSA concern are those that may put its four statutory objectives and 11 principles for business in jeopardy and, in the case of PPI, the thematic work focussed on Principle Six: ‘A firm must pay due regard to the interests of its customers and treat them fairly’. The PPI thematic work was based on the FSA’s supervisory visits to 45 firms and on mystery shopping research carried out by GfK NOP across 19 firms.
Poor compliance
Although the sample was small, the same issues occurred in most firms, leading the FSA to the conclusion that poor compliance levels exist in some areas of the market. One-third of the 45 firms that had supervisory visits were selling regular premium PPI in the prime mortgage sector and generally had better levels of compliance than in the remaining two thirds of firms that traded in other sectors (revolving credit, unsecured lending, and non-conforming mortgages/secured loans).
The majority of these 30 firms were considered to be posing a risk to the FSA’s statutory objective of consumer protection. For example, a few firms had PPI penetration rates of 70 per cent and above, which caused concern because eligibility requirements for claimants would indicate that PPI would be suitable only for a much lower proportion. Another concern was about the advised/non-advised dividing line for PPI sales, with instances of advised sales being labelled non-advised and not complying with suitability rules. Where given, advice was of poor quality and there was also a lack of effective controls to mitigate the effect of sales inducements and targets that could encourage mis-selling. In addition, single premium PPI was not being properly explained, training and competence of sales staff was not sufficient in many cases, and compliance monitoring was of variable quality and poor in many cases.
With conclusions like that, it’s hardly surprising that PPI is listed in the FSA’s major thematic work for 2006, with more supervisory visits planned in quarter two and findings/recommendations to be published in quarter three. In the meantime, all firms involved in selling PPI are being urged by the FSA to take ‘urgent action to review their sales practices’. In December 2005, the FSA published its PPI factsheet that sets out clearly how firms should be addressing the shortcomings pointed out by the initial thematic work, and it can be found in the small firms/general insurance firms/library section of the FSA website. In accordance with one of the CAB recommendations, the FSA and OFT have now announced that they will collaborate more closely in future on matters of mutual interest so that the seeming duplication of expense and effort can be lessened.
Encouraging attitudes
The Association of Mortgage Intermediaries (AMI) recently carried out research among 166 of its members, that revealed some very encouraging attitudes to PPI and evidence of good practice. Less than one fifth of respondents currently offer single premium PPI contacts and 97 per cent believe that intermediaries who offer single premium PPI contracts should also offer a monthly premium option. 80 per cent think that there should be an industry standard baseline PPI product – but just 42 per cent had seen the FSA’s PPI factsheet and of those, less than two-thirds had altered their processes as a result. Perhaps the most interesting topic to emerge from this survey was the massive support for two proposals: de-linking of PPI from the loan provider (92 per cent) and de-bundling of the accident, sickness and unemployment elements of PPI (93 per cent). Combined, these measures could lead the way to simpler, easier to understand and fairer PPI products becoming available and being sold to consumers in a more compliant way – which would be a good outcome for both firms and customers.
