Give clients a fair deal on protection

The mortgage industry cannot stand aside from the debate as regulators have their say on the question of fairness in the payment protection market, says Bill Warren

Since I last wrote about payment protection insurance back in September 2005 the issue has moved on, sparked off by the Office of Fair Trading publishing the report on its PPI market study and proposed decision to “make a market investigation reference”, in other words, refer the matter on to the Competition Commission for a market investigation.

This is because the OFT believes there is evidence to show that the market for PPI “prevents, restricts or distorts competition”. The CC is the fourth major organisation to become involved in PPI issues. First, Citizen’s Advice made a super-complaint to the OFT while the FSA was doing parallel thematic work on the subject. Now, the CC will conduct an inquiry into the market and make recommendations for improving the market.

Most of the responses to the OFT move from representative bodies in the mortgage sector sought to distance mortgage payment protection insurance from the general PPI faults cited by the OFT which included low uptake of claims, poor quality of information for consumers, poor consumer understanding of the product, disproportionately high commissions paid to sales people and lack of competition and choice at the point of sale.

The Council of Mortgage lenders quickly expressed its surprise that MPPI – and especially prime MPPI – had been included given that few compliance failures had been found in the sale of this product. The Association of Mortgage Intermediaries voiced similar sentiments, with both the lender and intermediary trade bodies being concerned that consumers might be put off from buying a product that could be of great benefit to them should their earnings be reduced by sickness or unemployment.

It was surely not a coincidence that the FSA published the results of its follow-up thematic work on PPI on the same day as the OFT’s referral.

The headline results of this follow-up report echo the OFT’s views. Many firms are not giving customers clear enough information during the sales conversation – it is not being made clear that PPI is optional. Customers are not getting full information on how much the insurance will cost. And customers are not always aware that there are parts of the policy under which they can claim. Firms are not getting sufficient information from customers so that they can make a suitable recommendation.

Assuming that mortgage firms are the most likely to sell MPPI, rather than PPI on consumer credit, are we as a sector justified in adopting a ‘not my problem’ attitude to the momentum building towards action to make the PPI market work better for consumers?

Before considering the answer to this question it’s interesting to look at an enforcement action where the final notice was published just a week after the OFT and FSA announcements were made. This enforcement action included a fine of £455,000 for failures of systems and controls to minimise the risk of unsuitable sales of PPI. The firm involved was Loans.co.uk and the credit that was being insured was second charge loans secured on property – which is about as close to first charge mortgage lending as you can get.

MPPI does not stand completely outside this debate and all mortgage brokers – whether for first or second charge loans – must take care to treat their (M)PPI customers fairly. If readers want to refresh their knowledge on all the key issues surrounding the recommendation and sale of PPI, AMI members have access to an excellent checklist included in factsheet 29.

Those without such access should remember certain key points. Customers should not believe that PPI is compulsory, they should be given full product information and they should understand all the terms and conditions. A thorough demands and needs conversation needs to take place making sure that the customer is able to claim under the policy and is not already covered elsewhere for the same benefits. All this must then be properly set out in the prescribed statement which should be kept on file for a long time.

Staff should not be unfairly incentivised to sell PPI, there should be an adequate training and competence system to include PPI, and performance should be continuously monitored by an adequate compliance system. This is another key deliverable in the Treating Customers Fairly toolbox.