The PPI sector is a large market to investigate – the OFT said around seven million policies are taken out each year and the sector is estimated to be worth around £5.5bn.
We at Paymentshield, like most people involved in mortgage payment protection insurance (MPPI), were disappointed that there was no clear distinction made between MPPI and PPI by the FSA and OFT.
As you know they are very different products sold by different people, but this was not identified by the investigators.
MPPI does what it says on the tin and provides protection should a client’s circumstances change - for example they lose their job or become ill - and they are left struggling to meet their mortgage payments.
PPI, on the other hand, is sold with anything from a car to a washing machine.
While the distinction between the two is clear to intermediaries, the general public will not be so clued up and the FSA and OFT have done nothing to provide clarity.
This is despite Clive Briault, managing director, retail markets at the FSA stating last year that he has no problems with the way MPPI is sold. We had hoped the FSA and the OFT would spell out that they are happy with MPPI and separate it from the PPI market as a whole.
Instead the statement issued by the FSA following visits to 40 firms across the UK identified three key areas of concern with PPI:
Firstly, it said, many firms are still not giving customers clear information during the sales conversation. It is not being made clear that PPI is optional and customers are not getting full information about how much the insurance will cost.
Secondly, customers are still not being made fully aware that there may be parts of the policy under which they cannot claim.
Thirdly, where customers are sold single premium policies, this is not always done with the best interests of the customer in mind.
But one good thing to emerge from the FSA’s investigation was its decision to single out certain parts of the PPI market as being key areas of concern: namely, motor dealers and retailers and others for whom the sale of PPI is a minor activity relative to their main business. Mortgage intermediaries obviously do not fall into any of these categories.
Turning to the OFT’s investigation, we welcome its decision to refer the entire market to the Competition Commission and we hope the latter will realise how MPPI differs from PPI.
In its statement, the OFT said many consumers are failed by PPI as it gives them a poor deal and often less protection than they think. It also found limited evidence that the industry is taking steps to improve the situation.
Problems include: consumers not shopping around for the best deal; the complex nature of PPI making comparison between different policies difficult, and consumers in some cases assumed, were told or given the impression that taking out the PPI would help the application for credit.
Its evidence also showed that PPI has low claims ratios when compared to other insurance products and, with no evidence to suggest costs are high, it seems reasonable to assume that distributor profitability is sizeable. It warned commission rates, which look to be high compared with other general insurance products, reinforce this conclusion.
While awaiting the Competition Commission’s decision on what to do next, there are steps intermediaries should take to ensure they are selling MPPI compliantly and in a way that suits a customer’s needs.
Intermediaries should ensure customers understand the limitations of the policy as well as the benefits; check eligibility before application and make people fully aware of any parts of the policy under which they may not be able to claim.
Intermediaries should also assess whether existing cover is in force and take this into account in the advice process. Clients should be supplied with a tailored demands and needs statement which is retained on their record.
We recommend intermediaries check that their customers not only understand the benefits of the policy they are applying for but that they are also aware of any applicable limitations.
Customers need to be made fully aware of all parts of the policy under which they may not be able to claim.
It is the intermediary’s responsibility to ensure that customers know, for example, what is classified as a ‘pre-existing medical condition’ and that they understand the importance of disclosing such to the adviser at the time of application.
Any intermediaries selling MPPI should be aware of the above and be very thorough in their advice and compliance. A compliance trail is vital as the FSA will no doubt be keeping a close eye on the market.
While the spotlight placed on PPI by the FSA and OFT will unfortunately make intermediaries more apprehensive about advising on and selling MPPI, they still have a duty of care to advise clients on its value.
The market now has to concentrate on making sure that advisers are continuing their important work in ensuring customers have sufficient protection in place. We do not want criticism of PPI result in few intermediaries being willing to advise on MPPI as it remains a valuable product for clients.
In the current environment of rising unemployment, interest rates and repossessions it is vital for mortgage borrowers to have protection in place.
The latest figures from the Office of National Statistics (ONS) revealed UK unemployment climbed by 27,000 to 1.71 million in the three months to September – the highest level in seven years.
The jobless rate rose to 5.6 per cent and the number of people seeking Jobseekers’ Allowance rose by 1,200 in October to 961,300. While some clients may think they will never be in this situation, there is rarely any guarantee and the state now has very strict criteria on which it will assist with mortgage repayments if they are of work.
Repossessions are also on the up – although they are still at a relatively low level compared to the early 1990s for example.
The Council of Mortgage Lenders found that 8,140 homes were repossessed in the first six months of this year – the highest since 2001 – so there is clear evidence that many people cannot afford to repay their mortgage and require protection.
According to new research by Bright Grey, the UK already has a £2.4 trillion protection gap and we don’t want this to get any bigger by people being reluctant to take out MPPI..
Another factor adding to the importance of MPPI is the expectation of a further increase in the Bank of England base rate. The two changes already this year have brought the base rate up to 5 per cent and further hikes are expected next year.
This, of course, affects monthly repayments and people may struggle even more to pay their mortgage in a higher interest rate environment.
Another sad reality is that more people are getting separated or divorced and this also gives MPPI a large role to play.
In the run up to Christmas, Britain’s large debt burden will increase and if someone loses their job it is not just their mortgage they will be left with, but numerous other outgoings from credit cards to secured and unsecured loans.
Rather than avoid advising on MPPI, intermediaries should realise they are ideally placed to explain the benefits of the product to clients.
Unlike banks, intermediaries can choose from the whole of the market and through companies like Paymentshield they can access the best rates and also get assistance with their compliance. An intermediary can shop around on behalf of the client to save them time and money in the long run.
Rather than complain about the FSA and the OFT’s investigations, intermediaries should be working hard to re-assure clients and dispel the myth that MPPI is an inherently bad product.
We should all do what we can to enhance the reputation of MPPI and educate consumers on what it can do for them. Hopefully, the Competition Commission will recognise that MPPI differs from the rest of the market and give it the praise it deserves.
The last thing anyone wants is for intermediaries to be accused of mis-selling by not pointing out the value of MPPI to their clients.
