It looks like Martin Lewis, founder of Moneysavingexpert.com has been ruffling a few feathers again. This time he is having a go at lenders for mis-selling payment protection insurance (PPI).
He appeared in an investigation for ITV1’s Tonight with Trevor McDonald, which stands accused by some of misrepresenting the PPI industry because it did not differentiate between standard PPI and mortgage payment protection insurance (MPPI).
Lewis insists that he made the differences clear and stresses that the lenders are ones at fault and that they are responsible for tarnishing the industries reputation, not him. He did however stress subsequently that both PPI and MPPI are essentially good products if properly sold. And here lies the fundamental problem.
When properly structured, explained and sold, PPI can provide worthwhile cover for consumers against unexpected changes in their personal circumstances – even the Financial Services Authority (FSA) concedes that much. So why is this sector taking such a hammering?
A strong interest
Lenders, whether they be mortgage or secured loan lenders for that matter, have a strong interest in encouraging borrows to take out PPI, particularly in terms of risk management.
Brokers are often encouraged by lenders to sell the lender’s protection product to generate an additional income stream and let’s face it – in the current market, we all need to be identifying and exploiting additional income streams. Selling high margin insurance off the back of a primary purchase also enables a broker to discount the cost of the primary purchase in the hope of attracting more business.
But as John Parker, chief executive of the Financial Industry Standards Association, said: “This practise does not fit well with the trend of UK consumer protection policy, which is against cross-subsidisation – consumers should be told the true price of each element so they can decide what they want.”
Given that take up of lender PPI schemes by consumers has fallen – not least due to bad publicity – the industry must look at ways to address this issue, as a continuation of this trend is in no one’s interest. One option is for master brokers to start selling PPI. This will inevitably lead to a loss of income for lenders and those that could suffer most are the ones that have heavily cross-subsidised their products with PPI commission. This could also lead to an increase in price of the primary product to recover some of the lost income from the sale of PPI.
Vital protection
It seems self-evident that in some cases there have been issues in selling this cover. But let’s not forget that there are about 20 million PPI policies in force and around seven million taken out each year.
This insurance offers vital protection to millions of people in what is rapidly becoming a world where there are few guarantees regarding employment or healthcare. Instead of constantly hammering the sector, the government and other agencies should be proactively supporting it and highlighting the protection and peace of mind this cover offers.
They must acknowledge and accept there are some poor practices which need to be eradicated, but must also highlight that there are firms that sell these policies in a compliant manner, that treat their customers fairly and that as long as the product is appropriately sold and is suitable, it does offer valuable protection to the client and the economy of the country as a whole.
The danger is that, following all the barrage of bad press, brokers will shy away from recommending this product to their clients, where it is appropriate. This would be detrimental to the very customer base that the agencies and media are seeking to protect.
Increased take-up and security of cover is crucial as the economy moves onto shakier ground with the ability of home owners to meet mortgage payments being stretched by higher interest rates and rising inflation.
Meeting requirements
Anyone selling general insurance products needs to ensure that the product sold meets the customer’s requirements. Moreover, the broker needs to abide by ‘Treating Customers Fairly’ rules and the best way to do this must surely include an obligation to sell them the best product that suits their needs.
This includes making them aware of the pitfalls that await them should they find themselves in circumstances where repaying the loan to the lender becomes impossible. They should also be advising on how to protect against worst-case scenarios and sourcing the most suitable products for their clients.
Although the likes of Lewis and high profile television programmes like Tonight with Trevor McDonald are quite right to highlight the issues facing the PPI sector, I can’t help thinking that a little less doom and gloom and a large helping of positive news should be on the menu, not least given the current negative publicity surrounding the future of the housing market post-credit crunch. But then again, positive news doesn’t make great television apparently.
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