For brokers who thought regulation was expensive, the thought of being hit by a regulatory fine will surely send them into a tailspin. Many in the mortgage market have referred to the sharper teeth and fiercer bite that the Financial Services Authority brings to regulation. Certainly, when compared with the Mortgage Code Compliance Board, the difference is stark.
The MCCB may have primed mortgage firms for the new rules and regimes they eventually would face, but nothing could have prepared them for dealing with the punishment meted out for non-compliance.
In recent weeks this issue has been brought to the forefront of the industry’s mind, as Regency Mortgage Corporation became the first firm to be sanctioned by the FSA for mis-selling mortgage payment protection insurance. The watchdog handed down a 56,000 fine. Not only will the fine come straight off the bottom line but it will also have wider implications in terms of reputation and will hike up mortgage brokers’ professional indemnity costs.
But the real worry for firms operating in the MPPI market is that the problems are not confined to one or two practitioners. In light of the Office of Fair Trading’s recent report, the whole protection market – including the MPPI sector – is failing clients, and has now been referred to the Competition Commission for further investigation.
As yet there is no timescale for this investigation but both providers and intermediaries should prepare themselves for wholesale changes.
In truth, these changes cannot come soon enough. It is disappointing that the market has been so slow to implement voluntary changes to the way PPI is sold.
Yes, there have been some changes to MPPI, but they have not gone far enough. Both the Association of British Insurers and the Council of Mortgage Lenders have done a lot of work on the issue, and the baseline standard that has been implemented is welcome. But the problems run deeper than the design of the products. What we are looking at is market failure.
Having investigated the whole PPI market, the OFT was detailed in its criticisms and clear in highlighting its reasons for referring MPPI, along with the rest of the PPI market, to the Competition Commission.
Even though standalone providers are seen to have a better foothold in MPPI, about 95% of policies are still sold alongside mortgages. This led the OFT to question the level of competition in the market and comment on the stranglehold providers retain over point-of-sale.
When this point-of-sale advantage is combined with customers’ unwillingness to shop around for insurance, plus the relatively low demand there is for the product, the OFT states that this means that too many customers fail to get the best products at the best prices.
But it is not only the providers that are stifling competition. The OFT was quick to point out that a number of problems also exist in the broker market.
Many intermediaries operate a single supplier arrangement when it comes to MPPI provision. So, despite the various needs their clients may have, all are being offered policies from the same provider.
As such, the OFT concluded that intermediaries were doing little to develop the market. Instead they were acting like mortgage providers themselves and simply selling products linked to credit rather than choosing from a panel or whole of market offering.
If long-lasting and effective changes are to be realised, then opening up competition is essential. Without genuine competition it is hard to motivate providers into offering the very best of breed to clients, no matter how much regulation is in place. The two are needed in tandem if the PPI market is to develop.
The OFT was also critical of the market’s claims ratios, and passed comment on the profits and commissions being made and the variation in price that existed between the cheapest and most expensive products available, despite the often small variation in cover.
Given these problems it becomes difficult to see how, as a market, MPPI is treating its customers fairly. It is also difficult to fathom how things can continue in the same vein in the future.
Unquestionably, the Competition Commission will look to ring the changes in the market and the FSA has already shown its intention to see that customers are treated fairly.
To avoid sanctions from the regulator and to position themselves well for the future, brokers should be looking across the market and asking themselves if their protection offering to clients stands up when compared with what is available elsewhere.
Mortgage providers also need to examine the insurance they are offering and see if they can justify it as anything other than a money-making exercise. In the face of stiffer competition, could products and pricing be improved while remaining profitable?
In many instances it will be difficult for brokers and mortgage providers to come to any other conclusion than the OFT. Behind closed doors, most already accept that change is long overdue and that it has been the clients themselves who have shouldered the cost. But as the FSA continues to put the boot in, these clients may not have to foot the bill for much longer.
Watchdogs take a bite out of PPI
Recent comments from the regulators about the market:
The Financial Services Authority’s managing director of retail markets Clive Briault said: “Despite some improvements in standards, major weaknesses remain that go to the heart of the culture surrounding PPI sales. The bottom line is that customers should come away from the sale having been given the best possible chance of understanding that PPI is optional, what the policy will and will not cover and how much it costs.
“On the strength of our findings, the industry has further to go to demonstrate that customers really are being treated fairly in this market.”
The Office of Fair Trading’s chief executive John Fingleton said: “Following the work we have undertaken, it is clear that many consumers are failed by PPI – insurance which gives them a poor deal and often less protection than they think. There is limited evidence the industry is taking steps to improve the situation, but we believe they will not make major improvements to competition in the market.
“Given our evidence and the scale of this market, our provisional view is that it would be appropriate for the Competition Commission to investigate further.”