In an open letter to the Office of Fair Trading, below, the BSA said:
Dear Sir / Madam
Payment Protection Insurance
1. The Building Societies Association is the trade body representing all 61 building societies in the UK. These societies have total assets of over £285 billion, around 15 million adult investing members and over 2.5 million borrowing members. Building societies account for 19% of UK retail deposits and 18% of residential mortgage loans outstanding. They operate through around 2,100 branches and, including their subsidiaries, employ nearly 50,000 staff.
2. We note that following your investigation, you propose to refer the selling of payment protection insurance (PPI) to the Competition Commission (CC). This is as a consequence of the OFT believing that the PPI market has features that may be preventing, restricting or distorting competition and thereby harming consumers. This referral will include the sales of Mortgage Payment Protection Insurance (MPPI).
3. We recognise that you found a number of areas of concern in your investigation of the general PPI market that have lead you to conclude that a referral to the CC is appropriate. We do not dispute your findings, and look forward to seeing the eventual outcome.
4. Few building societies offer PPI, and so we will not be addressing issues associated with the general PPI market in this response. However, with their emphasis on responsible mortgage lending, MPPI represents an important issue for societies.
5. We believe that the MPPI sector is fundamentally different to the general PPI sector. This is both in terms of how the product is sold and also customers experience of the product if they have to make a claim. You identified many of these differences in your investigation into the PPI sector and we trust that the CC will, if it goes ahead with an investigation, also identify these differences.
The Market
6. MPPI is a relatively new product. As noted in the report, changes in the socio-economic profile of mortgage holders and the employment market in the 1990s meant that mortgage borrowers found themselves with a higher risk of unemployment than they previously had. At the same time, Government policy was changing away from sole reliance on the state for safety net provision to new forms of partnership with the private sector.
7. As a consequence of this, MPPI products started to develop that covered mortgage holders for accident, sickness and unemployment. Mortgage holders can obtain policies covering all of these circumstances or just individual ones.
8. We note that you found that MPPI products are of better quality than general PPI products. We also note that you found the market to be more competitive than the general PPI market and that better sales techniques are used. As the market matures, we expect both existing providers and new entrants to continue making improvements to both the products themselves and also the ways that they are sold. These innovations will further benefit consumers.
Sales
9. MPPI is sold in a very different way to general PPI which reflects the increased levels of competition in the MPPI market.
10. As noted by your paper, MPPI products are carefully discussed with the consumer as part of the mortgage transaction. As such consumers are advised on the options open to them and, as a consequence of the length of time that a mortgage sales process takes, consumers have plenty of opportunity to consider the options available to them and to consider other providers. This may differ from many other forms of general PPI which are sold in a retail environment and where the consumer has little choice to research the market or is provided with little advice on the product or its suitability.
11. One weakness of the paper is that it fails to highlight the wide choice of different MPPI products. Although you acknowledge that MPPI can be purchased on a modular basis, you fail to recognise the differences between various MPPI products – while some policies, for example, provide just a very basic level of cover, others provide a whole range of ancillary benefits to claimants such as assistance with finding new employment. This increases not just the range of products available, but also the price of products available to consumers.
Claims Ratio
12. We note from the paper that one of the reasons to justify the referral of the PPI sector to the CC is the relatively poor claims ratio of PPI when compared to other forms of insurance.
13. However, we do not believe that this is an appropriate way to measure the effectiveness of MPPI. As a consequence of the relatively benign economic conditions that we have enjoyed over the last few years, job security has been high and unemployment low. Because of this, it is no surprise that relative few MPPI policy holders have made claims. However, we would expect MPPI providers to be building up their reserves in order to meet the claims that would almost certainly emerge in a less benign economic climate.
14. Were economic circumstances to change, and unemployment start to increase, then there would be a consequent increase in the numbers of claims under MPPI policies, and the ratio would start to rise.
15. We believe that a better measure of the quality of MPPI products is the numbers of claims that are honoured by insurers. For MPPI products sold by building societies, a BSA survey showed that 94% of claims made in 2004-5 were upheld by insurers.
The Importance of MPPI
16. MPPI provides a vital safety net for homeowners in affording them the opportunity to ensure that they can continue to meet their mortgage re-payments if they encounter economic hardship. This is at a time when unemployment is forecast by many commentators to rise and state assistance for mortgage holders is poor.
17. As a consequence, we believe that it is imperative that mortgage holders ensure that they have a means in place to ensure that they have a means of meeting their mortgage payments should they lose their job. MPPI provides them with that opportunity, and as the OFT report shows, it is both sold in an appropriate way and is a good product for customers who choose to buy it.
18. The value of MPPI to homeowners was demonstrated when the Sustainable Home Ownership Initiative (comprising representatives from lenders, insurance companies and the Government) identified MPPI as a key tool in ensuring that home ownership is sustainable. As part of this, it has sought to raise both awareness of MPPI products (and alternatives) and sought to encourage greater take up of MPPI by consumers.
19. The Initiative estimates that approximately £300million is paid out to homeowners each year by MPPI policies. Behind that figure are families who, if they did not enjoy the protection that MPPI provides to them, would, at a highly stressful time of their lives, be missing mortgage repayments, damaging their credit history and putting their homes at risk of repossession.
20. We believe that the OFT investigation into MPPI clearly demonstrates how the selling and effectiveness of MPPI is very different to that of general PPI policies. The benefits that are provided are of critical importance to mortgage holders. In view of that importance, we expect the OFT, if it chooses to refer PPI to the CC, will highlight the differences between PPI and MPPI and endeavour to ensure that consumers are not put off from buying MPPI as a consequence of any referral.
