The Financial Services Authority (FSA) seems to be losing patience with firms selling payment protection insurance (PPI) after mystery shopping and a series of visits to advisers again uncovered examples of poor practice last year. The regulator has now announced a new phase of investigation into the sale of PPI saying that it is determined to improve sales practices and advice.
In the new phase, described by the FSA as ‘one of largest programmes of thematic work’ it has undertaken, the regulator will be re-visiting firms it has previously found problems with, as well as targeting other advisers. Significantly the FSA has said: “A particular focus will be on firms for whom the sale of PPI is a minor activity relative to their main business.” This obviously includes mortgage brokers, although it also reflects concerns about the sale of PPI with other credit agreements, such as by motor traders and retailers.
Perhaps more worryingly, in announcing this latest phase the FSA also hinted at the possibility of rule changes or even the introduction of new regulations for the sale of PPI. The regulator said: “The FSA is not convinced that its current rules relating to PPI are delivering the protections that customers deserve and intends to see if there is a case for changes to some of the existing rules or the introduction of new rules.”
Adding to the burden
The Association of Mortgage Intermediaries (AMI) warns that the FSA has to be careful not to add to the already high regulatory burden brokers face by implementing new rules for PPI as this might cause intermediaries to stop selling the product. Rob Griffiths, associate director at AMI, explains: “In its last round of thematic work into PPI, the regulator stated it was considering increasing the rules around the sales of PPI policies, which would be considered under the ICOB effectiveness review which is currently taking place. This would obviously be a big move for FSA and shows the strength of feeling at FSA around PPI and its need to improve firms’ sales practices.
“The FSA is attempting to move towards a more principles-based regulatory regime and yet this action on PPI would mean further prescribed rules. The FSA has to tread a fine line here between the need to improve PPI sales practices and not making the rules so completely onerous that there is a danger that large numbers of intermediaries simply walk away from selling a product which, in many circumstances, is suitable for their client’s protection needs. That said, we are expecting further specific PPI sales rules to be recommended when the ICOB effectiveness review team report back later in the year.”
AMI feels that the current rules surrounding PPI are stringent enough, as shown by the majority of mortgage brokers who act with the best interests of their customers at heart. However, Griffiths warns that introducers that are not so diligent will fall foul of the FSA. He says: “We believe that the rules surrounding sales of general insurance (GI) products are robust and that those firms who work with them and take into account ‘Treating Customers Fairly’ (TCF) should have nothing to fear.
“The FSA has embarked on its Phase Three PPI work targeting those firms it has already visited to see if there has been improvement, and also new firms which it has never visited before. Therefore, firms involved in the sale of PPI policies can be in no doubt of the FSA’s intentions in this area and the level of fines already made against firms for poor PPI sales practices should be heeded.”
No sympathy
Danny Lovey, who operates as The Mortgage Practitioner, does not have any sympathy with mortgage brokers who get caught out by the FSA for poor selling practices, although he feels that there are not many that perform badly, believing that most of the bad practice happens during the sale of other credit agreements.
He does worry that the FSA’s focus could impact badly on those selling PPI properly. Lovey says: “Mortgage payment protection insurance (MPPI) is something brokers should be talking to their clients about, along with life insurance. I always put this in my ‘reasons why’ letter.
“But PPI is not contingent with the mortgage. Intermediaries should take an holistic approach and advise their clients based on the client’s needs, not just as a way of selling them another product.”
Thomas Reeh, chief executive officer of broker blackandwhite.co.uk, believes the FSA is also in danger of killing off PPI because it is painting the product in such a bad light. He told Mortgage Introducer: “The regulator needs to share best practice with the broker community. There is just too much cloak and dagger that goes on. Surely in its visits it must have seen some practices that were good.
Why not share them? Every PPI headline you read has a negative connotation, and yet it’s a vitally important product. Individual Voluntary Arrangements and repossessions sky rocketed last year and are set to grow even further, yet the industry is debating whether PPI should be sold or not?”
Reeh says that in particular the debate over single premium policies is being misrepresented and that the product does have its uses. He continues: “The FSA needs desperately to build some confidence in the industry. This is even more the case with lump sum policies – where huge leaps forward have been made by product providers, but have gone largely un-noticed.”
Reeh claims that many non-conforming customers have cancelled monthly PPI and accident, sickness and unemployment (ASU) policies in the past, leaving the most vulnerable customers without protection. He says: “Some major insurers have even withdrawn the product from sale because the persistency levels among non-conforming customers are so low. It’s the same reason they cancel their life policies and any IFA or mortgage broker of note will tell you that life claw backs from cancelled policies are a fact of writing life business. That doesn’t mean we should stop writing life business because we would be leaving customers and their families exposed.
“There’s a fundamental issue here – why sell a client a monthly policy when they have a demonstrated history of not being able to meet their monthly commitments? And guess what? They will cancel their monthly ASU policy at the time when they need it the most.”
Catch 22
Reeh says that often brokers face a ‘Catch22’ if they don’t offer a single premium PPI option. Reeh explains: “The potential ramifications for the broker are dire should they be unable to demonstrate that they offered their client the option of either monthly or single premium ASU and it has subsequently gone pear shaped for their client.
“We detail the costs and benefits of ASU in the suitability letter and document in that letter if the client has chosen not to take it up. We go even further. For clients who cancel their policies downstream, we send a disclaimer ensuring they know what they are cancelling and detail the ramifications of having no cover. It’s cheaper to do that than risk the potential of attracting legal action or drawing bad press to our business and brand.”
Rob Clifford, managing director of Mortgageforce, believes that the government is sending mixed messages and that its own desires are not necessarily being supported by the FSA’s stance. He explains: “The government has historically set publicly-stated targets for increasing the sale of MPPI, driven by the desire to reduce reliance on state benefits and to reduce the incidence of properties being taken into possession by mortgage lenders.
“My understanding is that, despite political pressure being placed on lenders, consumer take up of MPPI remains disappointingly low – somewhere between 25 per cent and 45 per cent of mortgages. This all rather suggests that there is no ‘mis-selling scandal’ in terms of MPPI and that, on the contrary, more should be done to persuade consumers to buy more of it.”
Clifford says that this gives credence to the widely held view that mortgage brokers could fall foul of tougher rules relating to the sale of PPI, yet much of the poor selling goes on in other areas of credit supply.
He continues: “There is a high incidence of loans being sold with PPI as a result of PPI being quoted as an integral part of the loan – in other words, sales staff automatically opting-in their clients, as opposed to clients specifically seeking the cover. I hear that the large banks are guiltier of this process than intermediaries.
“Unlike some areas of the regulated regime whereby lack of education appears to be at the heart of an industry shortcoming, I believe that selling practices can be blamed largely for the linked approach, not a lack of technical understanding on the part of the seller. The regulator therefore needs to look at product design and transparency – ensuring that loan manufacturers have a responsibility to offer loans with and without PPI – with overtly higher interest rates and APRs.”
Clifford adds: “Lenders might argue that they currently have both options available, which means that the regulator additionally needs to bring about a sales process which requires consumers to ‘opt-in’ rather than ‘opt-out’ of PPI. De-linking of some kind, but clearly making the consumer aware of what critical cover they are bypassing by opting out. After all, it is easy to focus on mass-selling of PPI and how that might not be in the consumer’s best interest, but the extreme alternative could be that consumers are left far too exposed – as is the case with MPPI, where thousands more borrowers should have MPPI, but do not currently have it.”
Consumer understanding
The FSA says that ensuring customers understand that PPI is optional will be key in its next phase of thematic work. Clive Briault, FSA managing director of retail markets, said: “Improving sales standards in the PPI market remains a key priority for us and we see it as an indicator of whether firms are treating their customers fairly. Customers should come away from the sale having been given the best possible chance of understanding that PPI is almost always optional, what the policy will and will not cover, and how much it costs. The next phase of our programme will tell us what progress has been made and what further action is necessary.”
The new work is in response to the disappointing findings of the previous two phases in 2005 and 2006. After Phase One, the FSA said it was ‘pleased to see that sales of regular premium PPI sold with prime mortgages are generally compliant’. However it called for urgent action by advisers to address issues that included poor advice on the sales of PPI and consequently the danger of inappropriate sales, inadequate controls of the sale of non-advised PPI and an over-reliance on complicated literature, identifying concerns about brokers and secured loan providers in the non-conforming sector.
After Phase One, the financial services industry was effectively one last chance to get its house in order, with the FSA convening an industry wide meeting including AMI, the Council of Mortgage Lenders and the Association of British Insurers to discuss what it called ‘market failures’ in the sale of PPI.
Unfortunately when Phase Two was completed in October last year, although the picture was better, the FSA said it was still not good enough. In particular, the regulator said that again sales conversations did not always make it clear that PPI was optional in most cases; firms selling PPI were not collecting enough information about policies the customer may already have in place; and the sale of single premium policies were not always been sold with the best interests of the consumer in mind.
Commenting on the findings, the FSA’s Clive Briault noted ‘major weaknesses remain which go to the heart of the culture surrounding PPI sales’. The regulator backed this up with hefty fines against a number of firms. Capital Mortgage Connections was fined £17,500 after the FSA found that 85 per cent of the firm’s business was generated by cold-calling, and a staggering 97 per cent of its ASU policies were sold on a single premium basis.
The Regency Mortgage
Corporation was fined £56,000 for failures relating to the sale of PPI to primarily non-conforming mortgage customers, including not taking enough information to ensure that the policies sold met clients’ requirements. In addition, second charge loan specialist Loans.co.uk was hit for £455,000 for a catalogue of failings.
The results of Phase Three of the FSA’s thematic work on PPI are due in the Summer, at which point we are likely to hear more about regulatory changes. At the same time the Office of Fair Trading has referred PPI to the Competition Commission, with single premium policies particular under the microscope.
It looks like it will be a bumpy road for PPI in the next year or so, but we can only hope that the actions of the government brings clarity to the issue and does not scare brokers off from selling this valuable protection.
