According to media reports the UK financial services industry has less than a month to get its house in order over the sale of payment protection insurance (PPI), or it could face the imposition of much tougher controls by the FSA. The alleged deadline follows a damning report into PPI by the regulator, based on supervisory visits and mystery shopping, which revealed that poor sales practices and a lack of compliance control were widespread.
Although the majority of prime mortgage intermediaries were given a clean bill of health in the investigation, the FSA drew particular attention to the sale of PPI by mortgage brokers and secured loan providers in the sub-prime sector. Once again the controversial subject of single premium policies was raised, with the regulator questioning the sale of these products to vulnerable sub-prime borrowers.
Market failure
But as well as poor compliance amongst individual intermediaries, the FSA also highlighted what it calls a ‘market failure’ – major issues with the entire PPI sector that impact not only brokers but product providers as well. Robin Gordon-Walker, spokesperson for the FSA, told Mortgage Introducer: “In addition to the instances of firms not following regulations on the sale of PPI, we also identified a market failure whereby even if firms are 100 per cent compliant with ICOB, there are still issues that could impact on the consumer.”
Following the publication of the report in November, the FSA called a meeting of the various trade bodies involved, including AMI, the CML and ABI (Association of British Insurers), setting a deadline of 17 March for the industry to put together proposals to address the issues that currently beset the sale of PPI. With the Office of Fair Trade (OFT) also looking into PPI, it could be a tough time ahead for the product.
Of the 45 firms investigated by the FSA, 15 were mortgage intermediaries specialising in prime business. Announcing the report, Clive Briault, FSA managing director for retail markets, said the regulator’s findings in the prime market showed that PPI could be sold well, and to the benefit of the consumer.
He said: “When properly structured, explained and sold, PPI can provide worthwhile cover for consumers against unexpected changes in their personal circumstances. We were therefore pleased to see that sales of regular premium PPI sold with prime mortgages are generally compliant.”
Major problems
However, major problems were found amongst the remaining 30 intermediaries selling PPI, which ranged from banks and building societies to car dealers and store card providers. Most worrying for the mortgage industry, 13 of the 30 firms singled-out were intermediaries selling mortgages and secured loans to sub-prime and non-conforming customers.
Briault continued: “Compliance standards in other areas of the market, notably single premium business, are generally weak. Those firms were these problems exist must take urgent action to address them.”
In particular the FSA says it is concerned that poor disclosure of product specifications and price details could mean consumers could end up buying PPI that is unsuitable or would not pay out if they made a claim.
According to the FSA, major areas for concern amongst the 30 firms include:
c Inappropriate sales: around half of intermediaries did not take reasonable steps to ensure consumers did not buy policies with limited cover or that they could not claim on.
Inadequate controls for non-advised sales: half of firms selling on a non-advised basis did not have adequate systems to prevent staff giving information that amounted to advice.
Poor advice: most firms did not assess the customer’s suitability adequately enough.
Over-reliance on documentation: many firms did not provide adequate explanations of products.
Poor sales practices for single premium policies: there were major concerns over price and product disclosure.
The danger of mis-selling: there was a possibility that mis-selling could be encouraged by inducements such as commission and sales targets set by firms.
Poor compliance monitoring: at best variable and in some cases non-existent.
The FSA has not said what measures it would take if the industry cannot provide its own solutions, but one possible remedy could be the de-linking or de-bundling of the insurance policy from the main financial product being sold. This would mean that mortgage brokers, for example, would not be able to offer PPI to borrowers until after the home loan had been completed.
Support
Vanessa Moore, policy officer at the Association of Mortgage Intermediaries (AMI), says the trade body supports such measures. She explains: “We support the de-linking of PPI from loans, or the de-bundling to break down the different elements of the products to make it clearer for the consumer.”
Moore says that AMI intends to take a leadership role in the development of an industry solution to the issues facing payment protection, so it has put together a PPI working group, including other bodies, insurance providers and interested parties. The group will be responding to the FSA before its March deadline.
Moore stresses that the FSA’s findings amongst the majority of mortgage intermediaries were encouraging. However, she says more work and analysis would have to be done to find out exactly why issues remained in the sub-prime sector. She continues: “We need to focus on ways of making the sale of PPI better and to ensure compliance across the entire intermediary sector. We have to make the correct regulatory information available and intermediaries must ensure they comply by the rules.”
Baseline specifications
The CML, along with the ABI, is currently reviewing baseline specifications for PPI policies specifically for mortgages. Bernard Clarke, spokesman for the CML, said the new baseline specifications should help address issues with the design of PPI products as well as the sales process. The organisation will also be going back to the FSA before 17 March with its thoughts and suggestions.
“There are a number of issues with PPI,” Clarke says, “and clearly sales practices are an important part of the process. We will have to see what progress is made by the various trade bodies by March, and see what the FSA’s view is of what everybody comes up with.”
Some commentators believe product providers should take more responsibility for the way products are offered, particularly when it comes to the small print and clauses. Simon Chalk, of specialist brokers Mortgage Portfolio Services, says one of his self-employed clients fell foul of a PPI policy that reduced its cover because the client’s income had fallen.
He explains: “My client was a horsewoman who had a nasty fall and broke her leg. We had put PPI in place, but when we made the claim she only got two-thirds of the cover she was expecting. Tucked away in the small print of the policy was a clause that said if her net profits fell, her cover would be reduced.”
Chalk continues: “The finger needs pointing at the providers. The insurer in this case should have written to my client asking for up-to-date annual profits and advising her they needed to adjust cover accordingly.”
Single premium
Beyond the design of products, a major concern to the FSA is the sale of single premium insurance policies, in particular when they are sold to sub-prime customers. The premiums for such policies are usually lumped in with the mortgage, with the insurance element also attracting interest, adding considerably to the cost of a loan that is normally a lot higher than a prime product. Yet when borrowers seek to cancel their single premium cover, they often receive little or no refund.
The FSA has already written to several insurers offering PPI products with ‘no refund’ small print asking them to explain ‘how such clauses were compatible with the Unfair Terms in Consumer Contracts Regulations.’
The British Insurance Brokers Association (BIBA) has joined the chorus of commentators calling for the practice of single premium sales to be either stopped or seriously curtailed. Branding the products ‘bad value’, BIBA chief executive, Eric Galbraith, said: “PPI can be a valuable cover for many people. Outlawing single premium policies would be a valuable first step to improving the reputation of the product.”
Ray Boulger, senior technical manager at brokerage John Charcol, also questions the rationale behind single premium policies. However, he stops short at calling for an all-out ban on the product, suggesting instead other measures that would show up the price differential of single premium compared with monthly premium cover.
Boulger says: “It is very difficult to find any justification for single premium PPI, other than it generates a large amount of commission. I don’t think it should be banned but there is every reason to expect that the FSA should do something to ensure inappropriate sales are stopped.”
Added in
Critics of single premium PPI say that all too often the policy is added to the mortgage quote without the request of the borrower – a problem that was revealed in the FSA’s mystery shopper research. The consumer remains unaware of the actual cost because it is rolled into the overall sum borrowed.
One of Boulger’s suggestions is that if brokers automatically add the single premium on to the loan amount, this must then be reflected in the annual percentage rate (APR). Boulger points out that although in most cases the APR does not give a clear indication of the cost of a mortgage for the purposes of comparison, in the case of single premium PPI the APR would be higher than mortgages without the single premium added in, so it would set alarm bells ringing in potential borrowers.
As for intermediaries that sell PPI policies that are unsuitable for the needs of the consumer, he believes they should be forced to pay back all premiums when the problem comes to light. The FSA’s investigations showed that policies were sometimes sold incorrectly to consumers that were in temporary work or that had pre-existing medical conditions not covered by the insurance.
Boulger explains: “The FSA should insist that sellers must return all the premiums to the consumer. It is not good enough for the broker to be told to stop selling inappropriate policies – sellers should repay all the premiums incorrectly collected.”
Vulnerable clients
Boulger agrees the biggest problem with PPI in the mortgage industry, an issue that goes hand-in-hand with the controversy over single premium products, is that it is often the most vulnerable and least well off that suffer. Often they are so desperate to get a mortgage they believe PPI is either compulsory or required for them to qualify for the loan. According to the FSA’s research this perception is usually due to a lack of advice or explanation from intermediaries.
According to independent broker Danny Lovey of The Mortgage Practioner, this is an all-too-often occurrence, and a selling practice that is not always down to ignorance on the part of the adviser.
He explains: “It is a practice that I am very uncomfortable about as the rates are excessive compared with monthly premiums, and if the borrower comes out early and tries to get their cash back they will fail. It is all money in someone else’s pocket.
“If you ask mortgage brokers why they sell single premiums, they will usually say it is to protect borrowers from themselves. There is a feeling that some borrowers, particularly in sub-prime, will stop paying monthly PPI premiums and leave themselves unprotected. But in my experience the clients usually don’t get the choice. The single premium cover is sold as being contingent on the borrower getting the mortgage.”
Lovey, along with BIBA and a good many other critics, points out that it is often the high-street lenders that are most guilty of lack of clarity in the sale of PPI, largely because they are selling both the finance product and their own insurance policy. According to the FSA, this falls way outside the spirit of ‘Treating Customer Fairly’.
PPI could be the first test of the FSA’s appetite to flex its muscles since the mortgage market was regulated. But the regulator will also have to tread a fine line, because as its own investigations show, payment insurance is valuable and in a large number of cases being well sold to the majority of mortgage customers.
It’s important for the mortgage industry to come up with ideas to address the problems and distance itself from bad practices elsewhere in the financial services market. Because if the industry can’t get its house in order, the FSA will step in with its own solutions. And the last thing brokers want right now is more rules.
Paul Beadle is a freelance journalist
