View more on these topics

Build up your MPPI defences now

Firms must sharpen up their sales processes when it comes to MPPI policies or they will face the regulatory music when complaints start rolling in, says Simon Burgess

Mortgage payment protection insurance is the icing on the cake for many mortgage brokers and lenders – the mortgage has been arranged, the application is winging through the systems and with one or two extra questions insurance can be arranged, delivering staggering profits.

There is no doubt about the high levels of profit involved for many high street providers while brokers have also been quick to cash in. One simply needs to look at the claims figures to see the share of consumers’ premiums going into the swollen profit pot being split by underwriters and distributors.

According to a recent report on the PPI market that was sponsored by the Post Office, there were almost 118,000 MPPI claims made in 2002. Three years later this figure had tumbled to 87,000, representing only 4.3% of all policies in force. The report says that claims accounted for no more than 30% of annual premiums in the market, and this was something broadly supported by the Office of Fair Trading which found the claims ratio in the MPPI market stood at 35% in 2005.

It is astounding that despite such low levels of claims, premiums are rising. The Council of Mortgage Lenders estimates that the typical premium rate was 4.95% of the monthly benefit at the end of 2003. But by the end of 2005 this proportion had risen to 5.15%. The truth of the matter is that asMPPI sales have fallen, providers and distributors have sought to cash in further and bolster their profits by inflating margins.

However, large-scale changes are hurtling towards the MPPI market and the number of enforcement actions against firms in this sector over recent months should be more warning than anyone could need that companies should get their houses in order.

The Financial Services Authority has already stated that a number of actions are in the pipeline, while a programme of further investigation is underway. Depending on how this turns out, there is the possibility of revised regulations being introduced towards the end of this year.

If lenders and brokers are to operate effectively and profitably in the MPPI market in the year to come, a number of significant changes need to be made now. In light of the FSA’s Treating Customers Fairly initiative there is no room for misleading information in the selling of these products.

The exact level of cover on offer must be made clear to consumers if we are to reduce and eventually eradicate the problems of people who take out policies that don’t provide for them when they make claims. Consumers must also be aware of the impact that insurance will have on their monthly premiums and not simply have it added onto the final figure without due comparisons being made.

Brokers offering single premium policies also need to assess how they work to the benefit of their clients and unless they can detail and provide evidence, they should give them a wide berth. The fact that both the Association of Mortgage Intermediaries and the British Insurance Brokers’ Association have called for the abolition of single premium policies should be an indication of the kind of value these products represent for clients.

Brokers 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. 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.

Certainly, 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 without a leg to stand on in the face of FSA investigations.

Moreover, firms need to have robust training and compliance procedures in place for staff so their clients can be reassured about the level of service and advice they are getting, and intermediaries can be reassured they are not building up a bank of future complaints.

That said, it is increasingly likely that a large number of claims have already been made against MPPI providers and distributors. Firms should therefore ensure they highlight these to staff. This should help avoid similar mishaps occurring in the future.

How firms do this will depend on their client base and the sales techniques they have used in the past.

Decisions will also need to be taken regarding how best to ap-proach customers who may have been mis-sold in-surance policies and how best to resolve problems where they occur. Unless firms begin to take these decisions themselves, the regulator will take them on their behalf.

To see the magnitude of the threat that lies ahead, brokers need only look at the residential banking market where charges on personal accounts are being held up to question. The tide of customers seeking the return of these fees is building fast.

If at some stage in the future MPPI clients question the policies they have bought, claiming they were sold a certain type of cover while other policies were available offering the same protection but at a fraction of the price, there is every chance that intermediaries will be forced to defend the advice they have given or be held liable for the losses incurred by clients.

The MPPI market is simmering away and threatens to boil over. Providers and distributors that refuse to offer advice or products that deliver best value for consumers will be held to account. Those making changes now will reap the benefits as the sector moves towards a lower margin, higher volume model. These intermediaries will be able to protect themselves against future complaints while those refusing to do so will be left to face the music when the regulator comes to call.


Recommended

Goldman Sachs takes 17% stake in Kensington

Goldman Sachs has snapped up a 17% stake in Kensington Group on behalf of one or more of its clients.The London Stock Exchange made a notification of major interest in shares on January 23, which showed that Goldman Sachs purchased 17% of ordinary shares worth 10p each. However, John Maltby, chief executive officer of Kensington […]

Money for nothing, your HIPs for free

Cost has always been a key issue with Home Information Packs. I have no doubt that if HIPs were free the attitude towards them would be dramatically different to the hostile reception they have received to date.

Prestige Finance joins AFB

Prestige Finance has joined the the Association of Finance Brokers as an associate member.Simon Stern, director of Prestige, says: “We are delighted to have joined the AFB as an associate member and look forward to working closely with the AFB in the future. “As the market becomes more regulated it is vital that lenders and […]

Equity release growth “promising”, says Pru

Prudential says the 19% increase in equity release business is a promising start to 2007.Ali Crossley, director for lifetime mortgages at Prudential, says: It is great to see that the level of new business in the equity release market has continued to grow over the last year. A 19% increase compared to the same time […]

China: growth defence or another debt-fuelled boom?

By Douglas Turnbull, Head of Chinese Equities at Neptune Following recent stimulus efforts from Beijing, Neptune’s Douglas Turnbull examines how the government’s long-term reform agenda can be balanced with supporting growth and addressing structural challenges, and the investment opportunities arising from this.Click here to read more Important information: Investment Risks Neptune funds may have a […]

Newsletter

News and expert analysis straight to your inbox

Sign up