Following the announcement that the FSA is to review payment protection insurance (PPI), Chris Cummings considers the type of regulator the industry needs
Who do we want reviewing sales of PPI – elephants or goldfish? They say that elephants never forget. I’m not sure who has asked them what they are so keen to recall or even how anyone knows this is the case.
I’ve never seen an elephant with a knot in its trunk (did you ever do that with a handkerchief? Me neither. Another great urban myth quashed). On the other hand, they say goldfish have a memory of about 30 seconds.
I’m tempted to ask the same questions again (or did I just say that?).
The reason for my sudden interest in the brainpower of all creatures great and small is the news that the FSA is reviewing sales of PPI.
Unlike government inquiries, which tend to find that no one was to blame, regulatory ones usually result in some action being taken – otherwise they risk looking like a waste of money.
Covering all sectors
PPI is one of those products that divide the industry but we risk being as myopic as the proverbial bat if we think only in mortgage terms. The FSA’s review crosses all sectors including unsecured lending, credit cards, store cards and other products which have a creditor aspect to them.
The first job of AMI is to start with a proper market definition and to improve the understanding of those who are conducting the review. After all the last thing we need is a regulatory fix for one part of the financial services industry which turns into an ‘unfix’ in the mortgage business.
Before going on I would like to flag a salient point. Beware the law of unintended consequences. This law states that no matter what the target of the action is, other things get hit along the way. In my experience this means the intermediary sector.
Putting it in context
It is not that long ago that the government and CML were pushing a 50 per cent penetration rate for MPPI policies. It seemed a mortgage intermediary could be hung, drawn and quartered if they didn’t talk about MPPI.
However, with the onset of statutory regulation, we have a regulator that may not be fully aware of the background to the issues and the external pressure put on those in the market before it arrived.
This would be less of an issue if the regulator was going to take a ‘goldfish’ view of the industry and simply forget everything that happened before it arrived. But I am worried this may not be the case.
So should we be pressing for an ‘elephantine’ approach where we ask for all past circumstances to be considered? Well, that approach is not without its difficulties either. Could anyone tell me why single premium MPPI lasts five years (as opposed to three or eight or any other number)?
Who said five years was the magic number or was it simply that mortgage deals tend to last five years at most?
FSA looking back in interest
My discussions with the FSA suggest it is very interested in our past history. It is particularly concerned to hear about any practice where those in the non-conforming market were targeted with single premium MPPI and even told they couldn’t get the mortgage without the insurance.
I am a great believer in the saying: ‘if you don’t know where you’ve come from, how do you know where you are going?’ It speaks volumes for me about our industry.
There is more to protecting a mortgage than simply discussing MPPI. Here are just some of the other factors to consider:
Any employer’s scheme the borrower is a member of that could provide cover for a period of absence through illness or injury. This is especially important for those in the public sector.
The relevance of critical illness cover to the borrower.
Is income protection meeting a need (if they are worried about replacing income over a longer period)?
Do they have sufficient resources from their own or their family’s assets and so do not need cover?
What is the borrower’s attitude to risk? Perhaps the biggest question and the one an adviser needs to be especially mindful of.
Think carefully
I have heard some intermediaries saying they will pull out of the market or simply become introducers of protection business.
Firstly let me say I believe protection is the other half of the mortgage coin and I worry that happy clients can become Ombudsman complainants very quickly if their protection needs haven’t been properly addressed – so think carefully about ceasing to offer protection advice. Secondly, I also strongly believe protection offers a good source of earnings.
To answer my original question, the industry doesn’t need elephants or goldfish – it needs a regulator that is a wise old bird. Capable of taking an aerial view so it can see the context in which the industry operated but sufficiently sharp-eyed to spot the miscreants.
Chris Cummings is director of The Association of Mortgage Intermediaries (AMI)
