Sharpen up your act on MPPI sales

PPI is on the regulator\'s agenda as an ongoing area of interest and brokers who have not yet taken note of the FSA factsheet on the subject should do so now, says Bill Warren

As is well known, the vast majority of mortgage intermediaries sell mortgage payment protection insurance which is regulated as part of the general insurance regime. MPPI is part of the sector of general insurance labelled payment protection insurance. This also covers secured loans and consumer finance payments.

PPI is not a matter the Financial Services Authority intends to take lightly as has become apparent from its recent announcements. Everyone who has an interest in MPPI should know where the spotlight is falling when it comes to PPI regulation.

A few weeks ago I touched on the subject of PPI as a significant factor in the FSA and the Office of Fair Trading deciding to look again at the way they work together, to prevent potential duplication.

Along with the list of mortgage topics scheduled for FSA investigation in 2006/7, a list of general insurance projects was also published and PPI appears on that list as an ongoing area of interest. But in the world of mortgage brokers, the interest level when it comes to PPI does not appear to match that of the regulator.

The mortgage intermediary census published in March by the Association of Mortgage Intermediaries questioned 166 of its members and showed a healthy attitude to PPI along with good practice. Less than one-fifth of respondents currently offer single premium PPI contracts and 97% believe that intermediaries who offer single premium PPI contracts should also offer a monthly premium option. Four-fifths think there should be an industry standard baseline PPI product.

On the other hand, 42% had seen the FSA’s PPI factsheet and less than two-thirds had altered their processes as a result. The factsheet was a key document to emerge from the regulator’s original investigative work into the field and was published in December last year.

In brief, the factsheet is a summary of the letter that the FSA sent to chief executives at the conclusion of its original research and was published with a view to firms taking urgent action to review their sales practices.

The first important point made on the factsheet is that brokers must ensure their sales of PPI products meet customers’ needs, to fit in with three FSA Principles – number six which is about treating customers fairly, number seven which stipulates customer communications that are clear, fair and not misleading and number three which is about firms controlling their affairs responsibly and effectively with adequate risk management systems.

It is pointed out that one obvious way customers could be treated unfairly is to sell them policies they will be unable to claim benefits on or which provide only partial cover.

Suitability is another issue, and this is where single premium policies are singled out as an area where there is potential for customers to be sold unsuitable PPI. An example is given of a customer taking out a sub-prime mortgage with a view to remortgaging to a prime product whenever practicable. If this customer is sold a single premium PPI that has low rebates of premium on early cancellation, it is probably unsuitable.

The Statement of Demands and Needs is singled out for careful explanation. This document should cover three important areas, with reference back to the relevant business rules. First there needs to be proof that the adviser has gone through the applicant’s circumstances as they affect the policy. For example, does the applicant have employee benefits that make immediate PPI cover unnecessary? Next there must be an explanation of why the recommended product meets the customer’s needs, taking account of the cost of the premium and any contractual exclusions or limitations. Third, advisers are asked to consider including a record of all the areas where the proposed products may not entirely meet customers’ demands and needs.

Other areas highlighted in the factsheet are the structure of inducements and targets that might encourage employees to mis-sell PPI, clarity of product and price information, training and competence and compliance monitoring.

As PPI is still on the 2006/07 agenda, it would make a lot of sense if the 58% of brokers who apparently have not yet seen the factsheet become familiar with it, and then ensure they can show they have taken steps to implement its suggestions.