In early February, the Office of Fair Trading (OFT) referred the payment protection insurance (PPI) market to the Competition Commission (CC). This news probably prompted a lot of questions in the minds of brokers that sell MPPI.
For example, ‘how will this referral to the CC affect the way that I can sell MPPI in future?’, ‘will there be additional things I have to do to remain compliant with my MPPI sales in future?’, and ‘do we have more than one regulator to answer to?'
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To answer these questions we need to look at three issues: first, the route via which the PPI market landed in the CC’s in-tray; second, the Financial Services Authority’s (FSA) increased activity in the PPI market; and third, what we need to do to keep on the right side of our regulator whenever we recommend and sell MPPI or any other general insurance (GI).
Improving markets
The CC is an independent body that carries out enquires and makes decisions in relation to investigations of mergers, markets and regulatory matters, acting only on referrals, mainly from the OFT. Its aims are to increase the level of competition in the UK economy, and thereby improve the UK’s economic performance and productivity within the global economy.
The CC’s objective is to make markets work better for consumers who can benefit from lower prices, wider choice, innovation, and higher quality products and services.
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The route through which PPI arrived on the CC’s agenda started with a ‘super complaint’ from Citizen’s Advice to the OFT in April 2006. The OFT was obliged to respond to this complaint by undertaking an in-depth market study of the PPI sector – even though the FSA was already conducting its own thematic work on PPI at the time.
The FSA and OFT already liaise with each other under four headings, working more closely together on areas of joint interest; policy collaboration; reducing the administrative burden of jointly regulated firms; and communicating with customers. The FSA was not part of the chain of command through which the PPI market was referred, but the objectives of consumer protection and fair markets are also key to the FSA’s own activity.
The reasons that support the OFT’s referral of PPI to the CC include the fact that there are elements in the market that may be distorting and restricting competition, thereby harming customers. Often PPI is bought and sold only when primary credit is being taken out, leaving sole providers of PPI out of the loop.
Sometimes borrowers are led down the path of believing that taking out the insurance is either compulsory or it will help them to obtain the credit. Consumers are also failing to shop around for the best deal, possibly because they don’t understand the products. There is also a low claims ratio compared with other insurances and commissions for the sale of PPI are also high in comparison.
Both the Council of Mortgage Lenders (CML) and Association of Mortgage Intermediaries (AMI) have expressed disappointment that MPPI has been included in the referral – but this has cut no ice with the OFT and it still believes that there are features of MPPI that need to be examined.
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In the meantime, the FSA continues to concentrate on PPI and it is one of the four priorities set out in the its Business Plan for 2007/8. In section two of the plan, it explained that personal protection products such as PPI and critical illness cover pose greater risks to consumers than, for example, household and motor policies.
While the FSA will consider the feasibility of de-regulating these lower risk insurance products in future, in 2007/8 it will ‘carry forward work to deliver a significant improvement in sales standards in the PPI market’. This work will include visits to 100 firms; targeting firms that sell PPI as the third element in a transaction; ensuring improved selling practices; enforcement action; and work with the competition authorities.
It is worth looking at some of the enforcement final notices that the FSA has issued in 2007 for PPI failures. In January, GE Capital Bank was fined £610,000 for failing to have adequate systems and controls for selling insurance, including PPI, and for failing to treat its customers fairly. Among other failures, training procedures were not adequately reviewed despite evidence that staff were not complying with procedures, and customers were not contacted to remedy the non-compliant sales.
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In February, Capital One Bank was fined £175,000 for failing to have adequate systems and controls for selling PPI and not treating customers fairly. This was followed by public censure being imposed on Cathedral Motor Company for failures relating to the sale of PPI in connection with vehicle finance agreements.
Keeping compliant
So where does this leave the broker that wants to sell MPPI compliantly and not run the risk of going against the FSA? There are some clues in the enforcement notices just cited – mainly systems and controls and ‘Treating Customers Fairly’ (TCF). In short, the compliance issue centres around managing and measuring TCF throughout the selling process.
Every compliant sales process starts with the factfind, and it’s no different for MPPI. Remember – MPPI is a product sale in its own right and not just an add-on to the mortgage sale. Key points to consider include:
- Is MPPI the best solution, or would another kind of income protection cover be more suitable?
- Is payment protection affordable on top of the mortgage loan?
- Which products, in addition to the MPPI offered by the provider of the loan, could be most suitable?
- What offers the best value and reduction of risk for the client – a single or monthly premium?
To treat customers fairly, if MPPI premium is added to the loan, the true cost should be demonstrated. It should be shown on the mortgage and GI Key Facts Illustration that the premium has been added, and what the new APR is. The broker should itemise how the loan is made up and point out that the single premium does not provide cover for the whole term of the loan – and yet the customer will be paying for it over the term, if it is added to the loan.
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In addition, brokers tend to be active in the non-conforming sector. Arguably these clients are more vulnerable and probably most need unemployment or sickness cover. But all the aspects of the cover must be made transparent so that the client can make a well-informed decision. Part of TCF is making sure that the customer understands that PPI can mitigate risks of circumstances changing in the future.
Systems and controls
Good systems and controls are essential to deliver compliance in the sales process. To ensure TCF on GI sales you must have the right process to put all the factfind information together – the client’s situation and affordability; what the product provides cover for; in what circumstances the customer will be eligible to claim; whether the premium is added to the loan and, if so, the total cost. If the client can’t afford it, or does not want it at the point-of-sale of the mortgage, the broker needs to go back later to see if they can afford it. Pulling all this together on the back of an envelope is an impossible task, so a sourcing, advice and sales system is as essential for PPI sales as it is for mortgages.
