A stark warning

Over the next month we will learn what the Competition Commission’s ‘emerging thinking’ into the payment protection insurance (PPI) sector is. This follows a series of questionnaires and visits to main and third parties following the Office of Fair Trading (OFT) decision to call in the Commission as the investigating authority. I don’t think it will be difficult to second guess where it will be coming from. Once again we will hear horror stories about how clients were mis-sold or overcharged for this cover. Last year the Financial Services Authority (FSA) found that a third of firms it surveyed were mis-selling this type of insurance. That is unbelievable in a market that is supposed to function under the auspices of ‘Treating Customers Fairly’ (TCF). I believe that little will have changed.

Attracting bad press

Instead of trying to do the best for clients, and in so doing encourage more people to take out this increasingly relevant cover, some in the sector continue to rip them off, adding to the already considerable file of bad news stories about PPI.

While it is good that the various regulatory bodies are making a stand against unscrupulous brokers and lenders, it is a PR disaster for the industry and a calamity for the customer. As you might expect in the face of unrelenting bad news stories surrounding the selling of protection policies, numbers signing up to this cover have fallen away dramatically. Market analyst Datamonitor said the premium value of PPI policies collected by insurers fell by nearly 4 per cent last year to £5.4 billion. At the same time, lower lending levels were also affecting sales of PPI, particularly where the cover is sold alongside loans and mortgages.

Datamonitor said sales of the insurance alongside mortgages had increased only slightly. This can only be because mortgage brokers fear selling this insurance. In failing to recommend this cover they are missing a revenue generating opportunity – and may also be falling foul of the TCF directive if they fail to make clients aware that this cover exists. Because if they don’t take out this cover then they are risking their finances and are even jeopardising the roof over their head.

Preparing for the worst

With the average deposit for a first-time buyer property now costing £11,710, many novice buyers are using up all their savings at this stage of the buying process. It’s therefore understandable that some clients will refuse to take out cover, where asked. However, research conducted by Post Office Financial Services revealed that if they were to lose their regular salary, around 50 per cent of first-time buyers would only be able to meet their mortgage repayments for six months.

Despite this, 44 per cent of the respondents questioned in the Post Office survey said they felt PPI, which would cover them against accident, sickness or unemployment, was too expensive. But one in 20 of those questioned said they would have to sell their house if they lost their job. Now we are moving into an era where factors such as increasing interest rates for non-conforming borrowers will see them facing more expensive deals because of the US crisis. In these times people should be protecting their income against unforeseen circumstances, such as ill health or losing their job.

Industry guidance

The Council of Mortgage Lenders has produced a new consumer guide on PPI to encourage people to protect themselves. This explains how PPI works and advises customers on what they need to ask the seller to ensure the product is suitable for them. With the Royal Institute of Chartered Surveyors predicting that the number of repossessed homes is set to double to more than 45,000 next year as mortgages become more expensive, it is incumbent on brokers to get as many of their clients as possible signed up to this insurance.

However, with the FSA warning that other firms are being investigated for mis-selling and that they may be fined as well, the challenge is a tough one. That should not mean it should be ignored. Brokers will find that there has been a rush of new offerings over recent months from predominantly standalone providers operating web-based business models. They not only charge vastly reduced commission rates, but they have also driven different levels of value into their offering, providing consumers with choice and flexibility that allows them to tailor insurance cover to suit their individual needs and budgets.

If greater transparency is forced upon the market, traditional distributors could well see their market share eroded, unless they address the design of the products offered as well as the ultimate price to the consumer. But brokers should be investigating and recommending the best products to their clients right now. To not do so risks jeopardising your business. A retrospective case brought by a disgruntled client against an intermediary for not informing them about the existence of such cover cannot be far away. You have been warned.