Good riddance

It hasn\'t had the best reputation and in many ways made itself an easy target but the banning of single premium payment protection insurance, while not surprising, is important for the industry.

The move by the Competition Commission to prohibit single premium PPI and the selling of PPI at point-of-sale will be significant for the protection sector, but will it have positive or negative effects?

On January 29 it was announced that single premium PPI would be no more. This revelation from the CC came just days after the Financial Services Authority stated that Alliance & Leicester, Barclays, Lloyds Banking Group, the Royal Bank of Scotland and the Co-operative Bank would no longer sell the product.

Following a 16-month investigation into the sector the CC issued its final report confirming the ban. But it also stated that firms must wait seven days after a sale before they are allowed to contact customers to sell PPI cover. It was originally thought this would be 14 days but the CC chose to reduce the cooling-off period.

Its report stated that if consumers want to buy PPI they can contact providers 24 hours after the sale but they will not be able to buy single premium cover.

As part of the new regime, distributors and brokers will have to provide a PPI quote stating the cost of the PPI policy, both standalone and when added to the loan product.

This quote can be given at the point-of-sale if requested, but the policy cannot be purchased that day. It can only be taken out seven days after the quote is given or seven days after the credit sale, whichever is longer.

The moves come after horror stories emerged surrounding the sale of single premium PPI, including the CC’s finding that con-sumers were being overcharged by £1.4bn due to lack of competition.

The ban has been welcomed by much of the industry, with many claiming single premium PPI was the black sheep of the sector and that its removal will result in greater trust among consumers.

“For too long, lenders have been able to get away with selling this cover by stealth,” says Simon Burgess, managing director of British Insurance. “They sneak the cost onto the final amount owed and then expect customers to pay interest on the premium as well as the loan itself. It’s outrageous.

“We know this cover has been mis-sold and overpriced. You only need to look at the increasing number of FSA fines and the spiralling complaints to the Financial Ombudsman Service. The ban will stop lenders ripping off consumers and put an end to them relying on this type of cover to compensate for losses they are making elsewhere in their businesses.”

Insurance provider Paymentshield also welcomes the ban. Sandy MacPherson, head of marketing at Paymentshield, says single premium policies offer the same level of protection as regular policies but cost significantly more. According to Defaqto, a single premium PPI loan costs on average £18 per £100 whereas a regular premium policy costs around £5 per £100.

“FSA mystery shopping exercises continue to highlight poor sales practices in relation to single premium PPI, with many customers not being aware of the true cost of the cover or the fact that this cost is added to their loan with interest being charged on it,” says MacPherson.

“Cancellation and refund terms for single premium policies are not transparent and the FSA has raised concerns about the fairness of refund terms.”

MacPherson adds that the fact the big banks stopped selling the product even before the CC made its move confirms the market’s view that the ban represents a positive result for consumers.

But not everyone is in favour of the move. John Prust, director and founder of the now-defunct Southern Pacific Mortgage Limited, is in the process of setting up a secured loans company and is also non-executive director of MMS. He believes the ban is a step too far.

“I do not agree with the ban,” says Prust. “Although there were cases of single premium mortgage PPI mis-selling, a blanket ban reduces customer choice. In my experience, many customers who choose the monthly premium option soon decide to cancel their direct debit but not the likes of their Sky TV subscription or their spending on celebrity magazines.

“At a time when the economic outlook is bleak and there is increasing unemployment, such consumers will be in danger of losing everything. This ban means more consumers will not get the benefits and peace of mind this cover can provide.”

Prust says he accepts that some long-term insurance products did not reflect customer needs as many only kept their loans for a couple of years before refinancing and often getting less than fair rebates.

“I would like the industry to still have the option of selling short-term cover for a maximum of, say, two years with the single premium not incurring any interest, as lenders were considering,” he adds. “Such a facility would improve lenders’ risk management profiles and the small cost of the lost interest could be absorbed within overall lending costs. Industry-wide standards for a fair pro rata refund policy should also be implemented.”

There is some concern that the ban could signal the beginning of the end for the PPI sector. With the single premium product being banned, negative press could lump all protection products together and the financial services industry knows all too well the effect negative and inaccurate media reports can have.

But as Prust points out, the need for payment protection is greater than ever and while the national media may speculate, the industry is convinced this is by no means the end of the sector.

“In my 25-year involvement in the mortgage industry there has never been a more appropriate time for the public to protect themselves against possible job loss and repossession,” he says. “PPI gives consumers a 12-month cushion to get their lives back on track.

“Equally, mortgage professionals cannot rely on a buoyant housing market for their income. Progressive brokers who intend to weather the storm and take advantage of the upturn when it comes should be looking to improve their sales of general insurance products.”

MacPherson agrees. He says PPI provides valuable cover and while the past decade has been fairly benign, as we enter the recession consumers will come to understand and appreciate the benefits PPI provides.

“Since early 2005 the PPI market has been under scrutiny, with the CC investigation starting in February 2007,” he says. “This means the industry has been in a state of limbo while waiting for the CC’s proposals to be published. There will now be a period during which MPPI underwriters and providers respond or object to the report but the investigation being completed means PPI underwriters and providers can take action to modify their sales practices and products.”

Indeed, it seems the ban is a positive thing for the protection sector.

“This heralds a more level playing field for consumers,” says Burgess. “The ban will instill confidence in consumers that they will no longer have premiums added to their loans that result in extra interest payments and higher overall costs. It’s a shame we had to wait for the CC to impose this ban – lenders should have acted more ethically in the fist place.”

But Burgess concedes that some lenders may pull out of the sector, unable to make the profits they did with single premiums.

“This is a good thing,” he says. “Some companies have already announced that they are moving to monthly cover and in time they will have to give more information about the products available from other providers. This will empower customers to make independent decisions about which firms they purchase cover from and open up the market for all, which is what the CC wanted.

“But a few firms will be unable to treat their customers fairly because it would severely affect their profit margins. This move will separate the wheat from the chaff and should be applauded.”

While the move may not signal the death knell for the sector it will undoubtedly bring changes. Brokers will have to alter the way they sell the cover. Being unable to sell PPI to customers on the day of the credit sale, they will have to work on their follow-up skills. If customers don’t come to brokers after the cooling-off period, brokers will have to remember to contact them.

But as always, with change comes opportunity.

“All markets go through changes over time and the PPI market is no exception,” says Prust. “Such changes present opportunities for customers and providers. The key to success is to start with the customers’ needs, which is what the FSA’s Treating Customers Fairly initiative is all about.”

The ban is certainly good news for consumers. Horror stories surrounding the selling of single premium PPI are all too common. Last year, the Financial Ombudsman Service complained about poor sales practices in the PPI sector, claiming its staff dealt with some 25,000 complaints in 2008.

The FSA has also been quick to act, fining various companies for misconduct. It is hoped that banning the product will ensure customers always get the best deals.

“Hopefully, only those who need PPI will now get it,” says Danny Lovey, proprietor of The Mortgage Practitioner. “Companies that have mis-sold it will find their businesses badly affected. Many clients who did not need the cover were sold it – for example, they may only have needed unemployment cover but were sold accident and sickness too.”

One fear is that the negative publicity could deter mortgage borrowers from taking out MPPI, which is a different product. In the short term it is likely that the negative focus on the protection sector will lead to MPPI being unfairly affected.

“Despite the CC and the FSA recognising the competitive dy-namics of the MPPI market and its robust sales process, it is likely to be tarred with the same brush as loan and credit card PPI,” says MacPherson.

“MPPI providers will try to educate the media and consumers about the difference between it and other PPI products.”

In the current economic climate it is easy to see interference from regulatory bodies as unwelcome and adding to the strain businesses are under, but at a time when PPI is needed more than ever it is vital that consumers have faith in the product.

Burgess claims that as consumers have better buying experi-ences and fewer policies are mis-sold, trust in the sector will return. For the sake of consumers and the protection sector, it’s fingers crossed that that is the case.

Clients have been ripped off

We welcome the report published by the Competition Commission which confirms what we said in our super-complaint that triggered the original investigation – that payment protection insurance is expensive and often unsuitable, and that lenders are ripping off customers.

In September 2005 we made a complaint to the Office of Fair Trading, calling on it to launch an investigation into the PPI business which at that time had an estimated 20 million policies in force producing annual revenue in excess of £5bn.

While borrowers are trying to be responsible and achieve peace of mind by taking out PPI policies, many are pushed into debt by the extra cost. We call on the industry to address issues of cost and quality as a matter of urgency to ensure that PPI protects consumers in an appropriate manner.

Here are some examples of mis-selling:

  • A couple took out a secured loan which included PPI. We obtained a transcript of the phone call when the loan was taken out and at no point did the person selling the loan mention that it was variable and the cost of the PPI would be £21,000 on top of the loan.

    The couple were sent documents stating that the loan was for £85,000 which they signed, and four days later the loan money was deposited into their account.

    They then received a loan agreement which stated that the insurance would be on top of the loan, making the loan plus insurance £106,207.50 in total. When one of the clients had to stop work because of ill health and tried to claim on the PPI she was told she could not claim for sickness as only her partner was covered.

    The loan firm has refused to refund the PPI, the client has had to take a lower paid job because of her illness and now she and her partner may lose their home and still owe money when it is repossessed. The worry has added to the client’s health problems.

  • A married man of 47 – a home owner who is employed – recently took out a secured consolidation loan for £60,000 with an additional loan for £15,000 for PPI in case he lost his job or suffered poor health. He didn’t realise the PPI was only for six years despite the term of the secured loan being 20 years.

    Our adviser says the PPI cover seems inappropriate and excessive, and does not appear to meet the client’s needs. Also, some of the terms appear to be unfair as he will not be covered for 14 years after his PPI expires.

    The client cannot arrange other cover or cancel the PPI as he will only receive 25% of the premium back if it is cancelled within 12 months of his taking out the loan.

    The addition of the PPI premium has increased his indebtedness by £15,000 for little discernible benefit.

    Teresa Perchard

    Director of Policy

    Citizens Advice

    An edited extract from the Competition Commission report

    The CC has concluded that businesses that offer PPI alongside credit face little or no competition when selling PPI to their credit customers. To address the lack of competition, the CC will be introducing a package of measures to introduce competition in the market.

    The vast majority of the UK’s more than 12 million PPI policies are sold at the same time as a consumer takes out a loan, credit card or other type of credit. The CC found that many consumers are unaware that they can buy PPI from other providers, rarely shop around to compare prices and terms and conditions of PPI policies, and rarely switch PPI providers.

    The resulting point-of-sale advantage makes it difficult for other PPI providers to reach credit providers’ customers and in the absence of such competitive pressure, consumers are charged high prices.

    We are introducing a range of measures to get competition working in this market, giving consumers the time and ability to make a considered and informed choice, and other providers the chance to compete far more effectively with the initial credit provider. Competition will provide consumers with lower prices and better choice.

    We are tackling the single biggest barrier to competition in this market, the credit providers’ point-of-sale advantage, by stopping distributors of credit products from completing sales of PPI until seven days after the sale of the underlying credit product.

    Along with this we will be ensuring that consumers are fully equipped with the information they need to take advantage of this opportunity to search the market. Parties must provide binding personal quotes, provide certain information in marketing materials and provide information for use in price comparison websites.

    In addition, we will also make it easier for consumers to switch their PPI policy at a later point if a better deal becomes available. This is why we are banning single premium policies, which lock in customers to their current provider to a significant extent.

    Annual statements will also help remind consumers how much their policy is costing and of their ability to switch, while other elements of our remedies package will help them to find whether there are better-value policies available to them.

    In the current economic climate there may well be a greater need for consumers to obtain the cover that PPI – and other protection products – can provide. The increased economic uncertainty makes it even more important that consumers have choices, that they have the opportunity to make the right choice and they can get value for money.

    We recognise that prohibiting firms from completing PPI sales during this time interval and prohibiting single premium policies are significant interventions in this market. However, these actions are necessary to enable consumers to benefit from lower prices and better choice.

    Since publishing its provisional findings reports and notices of possible remedies last year, the CC has been collecting evidence regarding the possible remedies from PPI providers, consumer groups, the Financial Services Authority, the Office of Fair Trading and other interested parties.

    Following a series of hearings and a considerable amount of analysis, and the publication of its proposed remedies in November 2008, the CC has finalised a package of measures which it considers will be effective in increasing competition in the market to the benefit of consumers. The proposed package of remedies comprises:

  • A prohibition on the sale of PPI by a distributor or intermediary to a customer within seven days of selling credit to that customer. This will address the point-of-sale advantage and give the customer more opportunity to compare products and providers, in turn encouraging greater competition between providers. Whilst the distributor or intermediary cannot re-contact the customer for seven days, customers will be able to contact the distributor or intermediary and purchase a PPI policy on their own initiative from 24 hours after the credit sale.

  • Distributors and intermediaries will be required to provide a ‘personal PPI quote’, which will clearly state the cost of the PPI policy individually and when added to the credit product. If this is not given at the point-of-sale, the credit provider must provide it if they subsequently contact the customer to offer PPI. The seven-day prohibition period starts from the later of the conclusion of the credit sale or the date on which the personal PPI quote is provided to the customer.

  • A prohibition on the selling of single premium PPI policies, whose rebate terms act as a barrier to consumers switching while the prices of these policies are unduly difficult to compare with other PPI policies. Premiums can be charged monthly or annually – if an annual premium is charged and the customer decides to terminate the policy, then a pro rata rebate must be reimbursed. No separate charges can be levied on a customer for administration or other costs arising from the set-up or early termination of a PPI policy.

  • A requirement on all PPI providers to provide certain information and messages in PPI marketing material including the price of their PPI, expressed in a common format of monthly cost per £100 of monthly benefit, and that PPI is optional and available from other providers.

  • A requirement on all PPI providers to provide certain information on PPI policies to the FSA and a recommendation to the FSA that it uses this information for its PPI price comparison tables. Providers will also be required to supply information to the OFT for the purpose of monitoring the remedies package and to provide information about their claims ratios to any person on request.

  • A requirement on all PPI providers to provide an annual statement for PPI customers, including information similar to that provided in the personal quote, to encourage customers to review their policy annually and make it easier for customers to decide whether to switch.


    Trade bodies are worried that consumers could be left unprotected

    The announcement that the sale of single premium payment protection insurance is to be banned is disappointing but not surprising. The Competition Commission has consistently failed to recognise the benefits of this product, which is designed for a particular segment of consumers. Some problems around pricing have been recognised by the CC but its remedies fail to address this issue.

    We regret that the CC has not recognised the differences in the products and sales processes surrounding broker-led secured loan PPI advice and sales.

    The introduction of seven-day waiting periods and 24-hour consumer deferments will add cost and complexity to an already lengthy process.

    Many consumers benefit from this protection and we hope the changes demanded by the CC do not increase the number who will be wholly reliant on state benefits. We will monitor developments and inform our members about the steps they need to take.

    Robert Sinclair

    Director

    Association of Finance Brokers


    We support any measures that help consumers make informed choices, such as the Competition Commission’s remedies regarding clearer, more timely information about the cost of payment protection insurance and product features. But the point-of-sale ban carries significant risks for borrowers by leaving them unprotected at a time when unemployment cover has never been more necessary.

    Our figures show that in November 2008 there were 19,105 new unemployment claims on PPI policies – a rise of 118% compared with November the previous year. This massive leap shows PPI is helping many consumers through difficult financial times.

    We welcome the reduction from 14 days to seven for the cooling-off period. This shows that the CC has acknowledged some of our fears but we are concerned that fundamental risks remain. We will now work with our members and the regulators to minimise these. The devil will be in the detail.

    Nick Starling

    Director of General Insurance and Health

    Association of British Insurers