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Give us a break

The government is keen to see more mortgage borrowers with some form of payment or income protection insurance, and targets that equate to doubling the number of protection policies in force are often talked up.

No surprise there, given the minimal state safety net available but it is a strategy I agree with, as do many borrowers. This may come as a surprise to many.

But talking up targets is one thing and making them happen is another. Overall mortgage payment protection sales for 2006 seem to be pretty poor although up-to-date data is hard to find.

The trend since 2003 has been downwards – some 40% off in fact. This is hardly surprising bearing in mind the media onslaught on dubious sell-ing practices and overpriced products which has triggered a dramatic collapse in consumer confidence.

MPPI has a relatively clean bill of health compared with personal loans and credit cards, but there is such consumer confusion over the products that in their eyes it is all part of the same issue.

I believe MPPI is as clean as it is because of the presence of independent providers in the market – although this is not as significant as it should be – and the fact that lenders find it difficult to bundle loans and insurance together.

There is a product credibility crisis and consumers’ concerns are twofold – that they are being ripped off and that if they make a claim it won’t
be paid.

Consumer confidence has to be restored and it is no secret that the Council of Mortgage Lenders has a baseline committee reviewing this issue, although as long as lenders continue to look at MPPI as a profit centre to be exploited nothing much is likely to change.

And as to what the Financial Services Authority thinks, take a look at what it said in its August 2005 report entitled Advice and the best way of delivering it.

“According to FSA research, lack of trust in financial advisers may also be a factor. Anecdotal evidence suggests that some people assume a financial adviser will just try to flog them a product and are not aware that many independent financial advisers can provide generic financial advice.

“It should be added that research for IFA Promotion shows that once people have experienced independent financial advice, they are generally very satisfied.”

Of course competitive pricing is important but that is irrelevant unless it is backed by quality of cover and service, and this is critical in restoring credibility. As the saying goes, ‘You can put lipstick on your pig but it still won’t win the beauty contest’.

I was amused to read a recent survey by the Intermediary Mortgage Lenders Association which concluded that although lenders have embraced the FSA’s Treating Customers Fairly initiative, the same cannot be said for brokers.

Well, that may be how lenders see themselves but having worked on a number of recent BBC consumer investigative programmes I can assure them that is not how borrowers see it.

Looked at objectively, the most important cause of low MPPI penetration levels is the reluctance of intermediaries – who ironically introduce the bulk of mortgage sales – to promote it and this is illustrated by the fact that brokers only account for about 20% of sales.

No doubt this is partly because of poor product image – which can be addressed – but it is more because they have to jump through so many regulatory hoops and are vulnerable to the merest hint of mis-selling compared with banks and white label outlets which have an easier ride.

Asymmetrical regulatory categories – execution-only, information- only and best advice – put intermediaries at such a disadvantage in the sales process, at least for MPPI, that it’s a wonder they sell any at all.

Compared with pensions, investment products and even mortgages, protection cover should be seen as one of the less complicated financial services products available.

Unfortunately, over the years in-surance providers have competed fiercely not only on price but also on enhancing product features and benefits until previously basic policies such as critical illness insurance – once covering only heart attacks, cancer and strokes – can now cover up to 35 illnesses.

Even straightforward products such as MPPI now have many variants, what with flat prices or age-banded pricing, waiting periods, excess periods and deferred periods to name but a few. It has become a minefield for consumers and brokers.

Competition is good for consumers, often resulting in lower prices, more reasonable commission levels and fringe benefits such as premium-free periods on MPPI.

But with this fierce competition comes a drive for product differentiation and while this brings advantages to consumers it can also bring complexity and confusion.

Menu-driven products with a multitude of options offer consumers a huge array of choices but a dangerous banana skin lies in the path of choosing appropriate protection products – the difference between receiving infor-mation only and being advised. Or put more simply, advised versus non-advised sales.

Liberal Democrat MP Lorely Burt is concerned that financial products such as critical illness insurance are far too complex to be sold without the guidance of an adviser and that sales practices should be overhauled.

She has received cross-party support from more than 50 MPs and is sponsoring an early day motion calling on firms that sell products on a non-advised basis to act responsibly by putting a warning on product literature which would make clear to consumers the cover limitations they are buying into when compared with other options available if they were to receive advice.

But I fail to see what this would achieve. It would be about as effective as putting a sticking plaster on a broken leg.

There is one more notable and critical issue – those who receive information only and are not fully advised have no form of redress from the Financial Ombudsman Service if they find they have bought an unsuitable product.

The FSA is revisiting its rules for advised and non-advised sales as part of its review of general insurance regulation and within this, for the payment protection market excluding MPPI. It uncovered many examples where the line between advised and non-advised sales had become ex-tremely blurred.

The fundamental question to be addressed is whether MPPI is becoming unnecessarily complicated and top heavy.

There is a need to get back to basic concepts and keep it simple, transparent and cost-effective. Something which concerns me is the obsession with the marketing of cheap headline rates rather than fair value policy cover and service. Obviously competitive pricing is vital but you get what you pay for.

The controls a firm needs to put in place to ensure a person-to-person non-advised sale does not breach the rules need strict monitoring as commission-driven sales staff can all too easily stray into giving advice.

Products such as single premium MPPI lend themselves to breaches of the rules due to the high rewards on offer. Given the regulation-driven safeguards surrounding an advised sale when compared with a non-advised sale of the same product, it should not be unreasonable to expect higher premiums. In fact, as we know all too well, the reverse is true, often by a factor of hundreds of per cent.

I can understand why this is such a contentious question for advisers having the responsibility of giving best advice, jumping through hoops on product selection and justification and providing customers with detailed reasons why.

On the other hand they see many competitors including major financial institutions and some of the most respected retailers in the UK enjoying a huge advantage with information-only status and offering products on a buyer beware basis. No prizes for guessing which sector produces systemic mis-selling scandals.

Supermarkets, with their brand loyalty and often with a retail policy of ‘no quibble refunds’, are in a position of great influence when selling white labelled financial products.

Too many consumers are under the erroneous impression that with such purchases, if there is a problem they can simply take it back to the shop and it will be resolved.

Many mortgage lenders offer expensive, high-margin insurance products on a non-advised basis to customers who walk through their doors.

But if the same customers were to go to intermediaries, more competitive products would be available with the huge comfort blanket of redress through the Financial Ombudsman Service in the event of mis-selling allegations. Unfortunately, the significance of this difference is not understood by consumers.

Another problem is where intermediaries stand if they hold back and let borrowers take lenders’ mppi products when they have a better product available that does not sit comfortably with best advice and TCF.

This is a ridiculous and unacceptable situation and if intermediaries are to be brought fully onside and sales are to be energised, there must be a level playing field. Then the estimated 1.5 million borrowers who would take out cover if their confidence was restored could be reached.

Either intermediaries should be given information-only status – at least for MPPI sales – or those distribution outlets which are exempt from best advice requirements should have this revoked and be brought into line.

Given the regulatory commitment to consumer protection it is unrealistic to expect best advice directives to be relaxed but by the same rationale it is reasonable to expect those enjoying information-only status to be subject to a healthy measure of best advice requirements, particularly after high profile media expos豠of systemic mis-selling practices.

Do away with the information-only category? Now there’s a thought. As it stands it is an uneasy arrangement and an unnecessary one at that. There must be a fundamental realignment if a key distribution channel – intermediaries – is to play an effective role in restoring consumer confidence in MPPI.



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