Back in the day, when I was editor of a certain mortgage trade magazine – I can’t for the life of me recall which one – I would often be confronted with, what I like to call ‘the headline/picture dilemma’. This mainly revolved around the rather tiresome task of trying to get a headline and picture to match a feature. Sometimes I would be inspired, but most of the time I would struggle and my default would often have to be, ‘Under the microscope’. There is no topic in mortgages which will not suit that headline and it’s also a very easy – i.e. lazy – image to get away with.
Serious scrutiny
It’s fair to say that, in the past year, no sector has been ‘under the microscope’ as much as payment protection insurance (PPI). And if you were in any doubt about the seriousness of this scrutiny, you should look at both the Financial Services Authority’s (FSA) and Office of Fair Trading’s (OFT) recent publications which have, once again, placed the spotlight firmly on PPI. A suggestion for a headline might be, ‘An eye on PPI’.
The big headline of course comes from the OFT’s report on its market study of the PPI sector and its proposal to refer it to the Competition Commission. Its study looked at competition in the PPI sector and analysed whether this delivered ‘choice and value to consumers’. In announcing its decision, the OFT said the following:
‘Many consumers are failed by PPI – insurance which gives them a poor deal and less protection than they think’.
‘There is limited evidence the industry is taking steps to improve the situation’.
Evidence suggests that ‘how consumers purchase their PPI, their understanding of the product and the quality of information available to them hinders competition’.
The OFT has outlined five PPI sectors in the UK: first-charge mortgage payment protection insurance (PPI), second-charge PPI, unsecured loan PPI, credit card PPI and store card PPI. The OFT has said it is minded to exclude store card PPI from the proposal to refer to the Commission, because it has already recently been looked at. The OFT says there are ‘arguments that it would not be reasonable to include store card PPI within the scope of the proposed reference’, although it is aware there are arguments to the contrary.
That said, if its proposal is accepted the other four sectors will be included in the referral. The Association of Mortgage Intermediaries (AMI) has already expressed its disappointment that MPPI has been included in this referral. Our response to the OFT’s ‘Emerging Issues’ PPI paper, published this Summer, outlined how we believe MPPI is a distinct product with a different sales process to the other sectors. We also stressed the vitally important role intermediaries play in the MPPI sector which makes it a more competitive and transparent market.
Noting the differences
In its most recent report, OFT itself notes the differences between first-charge mortgage PPI and the other sectors. It references the ‘existence of stand-alone products’ and the ‘greater role for financial intermediaries’ which ‘might result in less of a point-of-sale advantage for the distributors of the credit’. But the report reads: ‘At least one insurance firm noted that many intermediaries act in a similar way to lenders – i.e. they do not offer consumers a choice of PPI products’; and ‘anecdotal evidence from other stakeholder meetings corroborates this viewpoint’.
AMI feels that the nature of the MPPI sector, with de-linked products and intermediaries working on behalf of their clients in order to find the most suitable product, marks the MPPI market as different and it therefore should have been treated as such. It is disappointing to see ‘anecdotal evidence’ cited as a justification not to treat MPPI differently, especially given that the FSA chose not to include firms that sold regular premium PPI in the prime sector in its Phase Two work. AMI will be formulating a response on behalf of our members which will include our thoughts on this matter.
The FSA’s results of its Phase Two work into firms’ PPI sales practices revealed some improvements since Phase One but the picture as a whole was ‘mixed’ and it gave three key areas of ‘widespread concern’. These are:
A lack of clear information being provided to consumers during the sales conversation.
Customers not being made aware that they many not be able to claim under parts of the policy.
In the sale of single premium policies, ‘this is not always done with the best interests of the customer in mind’ – for example, where there is a choice of regular or single premium the firm may be biased towards the single premium, even if the client’s circumstances are not suitable for this product.
Following this second review, the FSA is now exploring the case for further regulation of PPI sales which could mean further rules related to the sale of PPI. This move will be considered as part of its ICOB effectiveness review – a report on the wider review will be published in quarter one of 2007 with any resulting changes coming into effect in quarter four of 2007. The FSA findings also reveal examples of good and bad practice it has seen during firm visits and I recommend any firm selling PPI to look at this document which is available from the FSA website.
AMI continues to work with the regulator to improve standards and firmly believes that MPPI is a product which can meet many consumers’ needs. We have published a ‘PPI Checklist’ factsheet which outlines the key areas and issues to be aware of in the sale of these products and have drawn up a PPI action plan. This sector is not likely to leave the spotlight for many months to come and broker firms must satisfy themselves they are acting compliantly in the sale of these products. The regulators’ eyes are most definitely on you.
