The introduction of statutory regulation in any field of business usually spells bad news for smaller operators who tend to suffer more than their larger competitors. Large firms may constantly bemoan the amount of resources they have to direct towards meeting their regulatory requirements but few of them advocate the absolute rolling back of the frontiers of the state in business matters.
There is a very good reason for this. Large companies enjoy access to the corridors of legislative and regulatory power and effective lobbying often means any legislation, while annoying, is not too onerous for them. For their smaller business rivals regulation is often an entry barrier that makes it difficult to compete with larger entrenched rivals by raising costs in a way that favours big business.
The advent of regulation in the field of the mortgage industry and general insurance has seen this rule of thumb once again confirmed. Smaller businesses, like many mortgage and insurance brokers, have been attracted into networks in order to offset the costs associated with being regulated, that in many cases have threatened the very existence of some of these businesses.
Making its presence felt?
Since the FSA has assumed regulatory powers over these sectors it has been keen to make its presence felt. This is nowhere better illustrated than in the area of payment protection insurance (PPI) – in all its guises.
This can be traced back to September 2005 when the Citizen’s Advice Bureau made a ‘super complaint’ to the Office of Fair Trading (OFT) calling on it to launch an investigation into the PPI business. It complained that PPI is more about providing an additional source of profit for the financial services industry than protecting customers. Pulling no punches, it said: “Problems occur in nearly all sectors of the consumer credit market – from non-status mortgage lenders and hire purchase companies to major high-street banks and credit card companies.”
It is estimated there are approximately 20 million policies in force, producing annual revenue in excess of £5 billion. The OFT, which governs the Consumer Credit Act, is investigating claims of mis-selling and profiteering on the sale of this insurance where taking it out is estimated to add between a quarter and a third to the cost of a loan. There are also concerns that policies are sold to customers who cannot make a claim, such as some part-time and contract workers, and the self-employed.
FSA investigations
In the next few weeks the Competition Commission will report on its investigation into PPI sold with store cards. This area of protection insurance is viewed by providers as a big money-spinner and is giving the regulator most cause for concern. Mystery shopping conducted by the FSA also found widespread mis-selling and discovered the majority of shoppers taking personal loans were initially given a quote for a loan that included the costly insurance.
Firms that sell PPI and the insurers who provide the policies will be receiving feedback on the FSA’s findings and will need to address any problems raised. The regulator has promised the more serious cases will be referred for further investigation and possible enforcement action.
The FSA has already noted sales of regular premium PPI sold with prime mortgages are generally compliant. But it has concerns about poor compliance standards in single premium PPI business and has warned those firms where these problems exist must take urgent action to address them.
Provider failings
The FSA mystery shopping exercise revealed some non-conforming mortgage lenders were guilty of poor disclosure of product and price details. Failings highlighted by the exercise included:
*Inappropriate sales – around half of firms failed to take reasonable steps to ensure customers did not buy policies on which they could not claim or which provided only very limited cover;
*There were inadequate controls in place for non-advised sales – about half of the firms selling on a non-advised basis did not have adequate systems to stop their staff giving advice or were providing information that amounted to giving advice;
*Advice on PPI was often likely to be poor: most firms did not have systems in place to assess suitability adequately;
*The quality and timeliness of product and price disclosure by some firms selling single premium policies was poor;
*Training and competence of sales staff was not adequate in around half of the firms.
However, most mortgage payment protection policies are sold on the high street at the time the mortgage was taken out. But the choice of products from the banks, building societies, supermarkets and execution-only websites is limited. Selling ASU or MPPI is easy for big product providers – often as easy as ticking a box on a form – but the purchase rarely fulfils the needs of the customer. There is an added concern that consumers making non-advised buys are not informed in pre-sales literature or at point-of-sale that they lose the protection of the Financial Ombudsman Service if they buy an unsuitable product.
This has led to calls for some form of regulatory requirement to tell the consumer of the options available – how can they be treated fairly otherwise? We in the industry are aware protection sold through banks is expensive and independent providers offer much better value. But for brokers intending to sell better-value policies there are a number of hurdles to overcome – not least the deteriorating perception customers have of the protection market. However, in correcting this perception, brokers can demonstrate value and in that respect turn the tables on the big boys and make regulation work to their advantage.
Seek familiarity
The first step is to become familiar with the product and the providers operating in the market. Many brokers will have a good knowledge of the protection market but those that do not sell it in any volume may not be doing their best for the client, pointing them towards a product that could cost hundreds, if not thousands, of pounds unnecessarily during the policy and risk falling foul of the FSA’s ‘Treating Customers Fairly’ (TCF) principles.
The FSA expects networks to apply controls on their appointed representatives (ARs) so they maintain the same standards as directly authorised companies in their dealings with customers. That means understanding the products well enough to offer best advice. If networks fail to raise the standard of their ARs, and make sure they are aware of products available to them, then the regulator has warned it will take action.
Assess suitability
Whether you are a directly authorised firm or AR you should set your business up so you can assess whether the customer needs PPI, considering their circumstances and any existing insurance. You also need to assess whether the policy, including its cost where relevant, meets their needs. If the policy does not, perhaps because of one or more exclusions, you should clearly tell the customer which needs will not be met and take them into account when considering whether to recommend the policy. For example, a self-employed person may not entirely suit an ASU policy and should be shown a PA and Sickness and/or PHI policy.
Don’t assume single premium policies (where the customer pays the full premium up-front and pays interest on it if it is added to the loan), as opposed to regular premium policies, are always suitable. In many cases they are not and the market should be searched for a more suitable option. If you do decide on a single premium product, be aware your demands and needs statement for a particular customer has to show why you recommended a single premium policy and why it is suitable.
Brokers may complain that having gone through a drawn-out process to assess and apply for the appropriate mortgage for a client, going through a similar process to decide what protection cover is appropriate is an onerous and time-consuming task for both broker and client. There is also the added complication that those brokers working through networks with their own protection panels may not have access to the best products on the market. Too many of the large networks put the onus on override payments when it comes to putting their panels together, with too little attention paid to the product itself.
But brokers need to be aware that the MPPI market in particular has seen some innovative product developments. The introduction of an age-banded MPPI product in particular has been responsible for an increase in sales and indicates the product is meeting consumers’ needs. Intermediaries need to be aware of such product development and be ready to recommend them and by doing so embrace the opportunity for additional income for themselves.
Ted York is managing director of Berkeley Alexander Insurance Services
