The Office of Fair Trading (OFT) announced last week that it has referred the UK payment protection insurance (PPI) market to the Competition Commission (CC) for further investigation.
PPI protects a borrower’s ability to maintain loan repayments should they be unable to keep up their repayments due to accident, sickness or unemployment.
These are the main risks covered by PPI; some unsecured, second charge mortgage, and credit card PPI policies also cover risk to life.
Policies are available to protect most forms of personal credit. The principal ones are first charge mortgage payment protection insurance (MPPI), second charge mortgage or secured loan PPI, unsecured loan PPI, credit card PPI and store card PPI.
During the OFT consultation over 20 responses were received from parties including businesses, consumer organisations and trade associations.
OFT chief executive, John Fingleton, says examination of the evidence presented during the investigation gave the OFT reasonable grounds to suspect that there are features of this market which restrict competition to the detriment of consumers.
“Despite some evidence of a degree of consumer satisfaction with aspects of the product, the evidence as a whole suggests consumers get a poor deal,” he says. “This referral will enable the Competition Commission to undertake a thorough investigation and, if necessary, ensure that appropriate remedies are put in place.”
A degree of disappointment
Although the decision to refer PPI to the CC was generally welcomed by the finance industry, there was a degree of surprise and disappointment that MPPI is to be included in the study.
Standalone PPI provider Paymentcare said the decision regarding PPI was a positive initiative, delivering a much-needed wake up call to high-street lenders, but that MPPI should not be included in the study.
“Banks and lenders have hijacked PPI as a cash cow to generate huge profits by charging consumers over-inflated premiums,” says Paymentcare managing director, Shane Craig. “Today’s announcement by the OFT underlines the fact that consumers get a poor deal, a situation exacerbated by the acknowledged lack of competition. But genuine low cost insurance is important for millions of people with borrowing commitments.”
Typically, PPI cover is purchased at the same time as the credit agreement, with both the credit agreement and insurance cover being arranged by credit institutions or lenders, the vast majority of which are high-street retail banks and building societies.
“It’s essential that consumers are made aware that there is an affordable alternative and that PPI doesn’t have to be bought along with a loan, store or credit card,” says Craig.
“People no longer believe they have to buy travel insurance along with the holiday, for example. They go online and find a great deal. PPI is just the same.”
However, Craig says he is disappointed that MPPI has been included in the study, saying the Financial Services Authority (FSA) findings showed there was a high level of compliance in the MPPI sector, compared to other sectors.
“MPPI was given a clean bill of health and was not found to be mis-sold. The study should relate more to loan PPI, where there are high pressure sales techniques and tactics. Also, MPPI is relatively cheap compared to other sectors, costing about £5 per £100 of benefit.”
Sales of MPPI are already down, with penetration currently at about 27 per cent; when in a climate of increasing interest rates and consumer debt, MPPI could be the right choice for a high number of people. It is undeniable that consumers should be encouraged to protect their home and that there is a strong possibility that this study will mean high-street lenders see massive falls in PPI sales, and that MPPI will be tarred with the same brush.
Denting confidence
The FSA’s and OFT’s criticisms of PPI have already dented consumer confidence in MPPI and the public is withdrawing from the market in droves.
Research from Bright Grey revealed mortgages lie third in a list of items the public believe is most important to protect. Protecting a mortgage is considered most important by 11 per cent of the public and only 23 per cent of those surveyed have insured mortgage payments. But 74 per cent have insured their house contents, which came second in the most important list, and 61 per cent insure their holiday.
However for those consumers who do want to protect their mortgage, research by the Association of Mortgage Intermediaries (AMI) shows that the vast majority of mortgage intermediaries offer MPPI policies from more than one provider.
Nearly three-quarters of respondents to the AMI survey said they offered policies from more than one provider with the breakdown as follows: 32 per cent – two to three providers; 14 per cent – four to five providers; 2 per cent – six to 10 providers; 5 per cent – more than 10 but still a limited panel; and 20 per cent – whole of market.
The research, conducted among AMI members, asked those who do not offer PPI policies why they chose not to. 36 per cent said they offered alternatives, such as income protection instead, while 26 per cent felt the product was ‘poor value’. 74 per cent of respondents offer permanent health insurance or income protection; 87 per cent offer critical illness cover; with 37 per cent offering private health insurance.
AMI and the Council of Mortgage Lenders (CML) both expressed disappointment that MPPI was to be included in the CC’s study.
AMI’s associate director, Rob Griffiths, says: “We are very disappointed that the OFT has not taken on board the strong case AMI made for excluding MPPI from referral .
“In its market study, the OFT itself called MPPI ‘something of a special case within the PPI sector’. Our belief is that the robust MPPI sales processes, which have been adopted by mortgage intermediaries separates MPPI from other PPI markets and we are disappointed that the OFT has failed to recognise this.”
As well as the OFT admitting that MPPI is a special case, the FSA actually gave most MPPI policies the thumbs up, saying it can offer good value and at a time of rising debt and unemployment, should be an important part of protection planning.
Not without its scandals
However, the sale of MPPI has not been without its scandals. Non-conforming lender Regency Mortgage Corporation was fined £56,000 by the FSA in September 2006, relating to failures during the MPPI sales process.
An investigation found the firm was failing to collect sufficient information during a PPI sale to ensure recommendations met customers’ needs. A number of customers were sold policies for which they already had cover, or under parts of which they were unable to claim.
CML director-general, Michael Coogan, says that MPPI is a vital safety net for many households, and the CC referral sends out entirely the wrong message to consumers. He says: “While we will co-operate as fully as possible with the CC to examine the issues, we are extremely disappointed that the special and unique position of MPPI has been ignored by the OFT in reaching this counter-productive decision.”
However the industry has to remember that the ongoing investigation is not an indictment of MPPI as a whole, it is an examination of poor practices, poor products and poor pricing. There is no denying the value of a policy that allows borrowers to meet their mortgage payments if they are unable to work. However, it must be appropriate and value for money.
“I can understand the disappointment expressed by some at the fact that the sale of MPPI has been referred to the CC – there are certainly other areas of the PPI market that need greater attention,” says James Cotton of broker London & Country. “However, it is clear the OFT and others want all PPI products looked at and do not feel comfortable exempting MPPI.”
He adds: “For those using MPPI, if you’re assessing a client’s needs and recommending a suitable product, then there should be little to worry about.”
Impact of the study
What impact the Competition Commission study will have on the mortgage industry and sales of MPPI remains to be seen. Investigation into other types of PPI is likely to result in claims against mis-selling and certain parts of the national press are already advising consumers as to how and why they could claim compensation for a mis-sold PPI policy.
The Daily Mail’s This Is Money website kicked off a campaign back in June 2006, saying around seven million PPI policies are taken out each year, but that many are vastly overpriced, impossible to claim on and sold to people who will never actually be able to use it.
Campaigns editor, Sascha Hutchinson, reckons readers are increasingly being harassed and scared by call centre staff into taking PPI, regardless of their personal situation. This Is Money is encouraging customers to challenge their bank or insurance provider if they think they have been mis-sold PPI.
“When people realise that they have been paying way over the odds for policies that may have been useless in the event of a claim, I believe we will see a stampede to claim compensation,” says Craig.
Common minimum eligibility requirements for PPI are that a consumer must be living and working in the UK, be aged 18 and under 65 years of age, and be actively employed for at least 16 hours per week and have been so for a specified period of time.
PPI entails terms and conditions relating to contract work and to self-employed borrowers, and there are also a number of conditions attached to the claims process itself, including specification of the period between purchase of the policy and when a claim can be made – the ‘initial exclusion period’ – and the period between the risk occurring and cover commencing –the ‘excess period’.
MPPI is often the icing on the cake for many mortgage brokers and lenders – for a relatively small amount of work it can deliver massive profits.
In light of the Competition Commission study, brokers will need to assess the sales processes they have in place and make sure they are offering the best insurance products in terms of cover and premiums, as well as eligibility. It is not enough to go along with the cover offered alongside a mortgage or through a tied agreement, so intermediaries need to spread their nets considerably wider.
Firms that fail to examine the suitability of the cover provided to clients or fail to seek out policies offering the best value will be left with the FSA to answer to.
In many cases a PPI policy might not be the best option for the customer; sometimes income protection will offer a better deal that is more suited to their needs.
Failing on many levels
Lifesearch’s head of protection strategy, Kevin Carr, says PPI and MPPI frequently fail consumers on many levels, not just being over-priced. “It is often an inferior and unsuitable product that is sold in a misleading manner to consumers who are unaware of the more suitable alternatives available, such as income protection,” he says. “It is concerning that sellers continue to promote PPI, without mentioning income protection, and yet still claim to treat their customers fairly.
“Protecting your income is one of the most important types of insurance a consumer can buy. This is because arguably it doesn’t matter what other insurance you have, because if you don’t have an income to pay for it you will end up canceling it because you can’t afford it.”
Carr’s view is backed up by brokers who recognise that there are often protection products that are more suitable for some customers than PPI. However until the Commission publishes its findings, it is difficult to say what impact the referral will have on MPPI and the way brokers sell it.
“The OFT clearly feels that there are questions that need answering, although it has said in the past that MPPI should be treated as a special case because the sales processes adopted by brokers is different from the way PPI is sold,” says Savills Private Finance associate director, Melanie Bien. “MPPI can be very expensive and there are often better protection products out there. But homeowners aren’t buying enough protection as it is so let’s hope this investigation won’t scare people off but encourage them to think about protection and the best type for their circumstances. Brokers have a crucial role to play in this educational role.”
