The payment protection insurance (PPI) mis-selling scandal has been hitting headlines for several years now.
But with the major high street banks finally ending their opposition to regulators’ intervention, the issue is now approaching closure.
When combined with the incoming Competition Commission (CC) rules surrounding the sale of such products, it seems the market will face a more regimented structure in the future.
While this remedial action was largely necessary to correct the poor operation of the single premium loan and credit card PPI markets, it also captured a somewhat unwitting victim – mortgage PPI (MPPI).
The product has many fans and has been consistently noted by advisers as a good contract, providing valuable protection.
However, there are fears now that its reputation has been tarnished too much by its association with other PPI plans.
As Martin Sincup, protection product manager at LV=, explained, the Competition Commission targeted short-term PPI-style contracts, not long-term contracts such as traditional life, critical illness (CI) and income protection (IP).
And he warned the new rules – which will include a ban on the immediate sale of PPI to people when they apply for credit cards or loans and come in on 6 April next year – will significantly affect brokers dealing with these products.
“The biggest area that’s going to impact advisers will be the point-of-sale prohibition restricting when you can sell these PPI-style products,” he said.
“The CC wants it to be more separate, so you have to wait seven days after formally having a mortgage offer before discussing PPI, which means using things like a diary system.
“It’s going to have quite a big impact on brokers and I’m not sure how many advisers actually understand it. It is 54 pages of legislation, but how many understand it and have started looking at what they need to do?”
“Pretty much every adviser firm around the country is going to have to look at their current processes around how to sell the product and how to deal with it,” he added.
Understandably, with these incoming restrictions and the recent sales levels of MPPI mirroring the nosedive of other PPI products, many in the market are downbeat about its future prospects.
Sincup recognises this view and has concerns of his own.
“MPPI has dropped off already and I think the trend is not likely to reverse,” he continued.
“We’ll probably see the emergence of simpler IP-style products to be sold by comparison websites to take advantage of consumers being encouraged to shop around. And one of the interesting things is providers will have to publish claims statistics for PPI.
“There’s quite a lot for providers to get to grips with and we might see a few decide the market is not big enough to do it,” he added.
Stuck in the middle of this new regulatory burden are the advisers and mortgage brokers who will now have to take a long hard look at their sales’ process to ensure compliance.
However, despite this major overhaul, many are not put off by the new rule structure and suspect it will not affect their standing toward the product.
Andrew Frankish, managing director of Mortgage Talk, has been watching the drama unfold, but being an appointed representative has yet to take any action, preferring to wait for details to be passed on from Legal & General.
“We still see MPPI as an essential product, but there’s no question that we need to do more explaining to consumers of what it is,” he said.
“The mis-selling has had a knock-on effect with the consumer. But once we explain exactly what this product is for and how it can be used properly, it’s still actually quite a big priority.
“Addressing the changes is a matter of processes and we have quite a large admin team that support the advisers, so they could simply diary in to make sure the customers are fully informed of what’s happening,” he added.
Many of those caught in the periphery of the PPI debate have been seeking an end to the hostilities in the hope of rescuing what little remained of the market.
With sales levels about a third of their previous highs, Frankish is among those suggesting that the new regulations could be a big step in salvaging a decent product.
“You could argue it’s a good thing for the customer to think about what they’ve bought because what you don’t want is a customer to cancel six months in,” he said.
“Positioning it up front with the customer will be very important and keeping in touch and advising when you will be speaking again is also very important.
“In this business now, it’s all about customer service and fully explaining what you’ve done and them understanding what’s been done,” he added.
This is a view echoed by many advisers who have become accustomed to the rapid sea-changes taking effect periodically.
While the increased regulatory demands may be seen to penalise good advisers, some have suggested it does serve the purpose of ridding the industry of the less desirable element and should hopefully lead to a better informed client.
Dean Mason, principal of Masons Financial Planning, concurs with this and many of Frankish’s sentiments around the PPI debacle.
“Something needed to be put in place,” he said.
“There are a lot of myths around MPPI and a lot of things have got to be put behind us. We need to move on and we’ve already seen with IP’s unemployment add-ons that there are other options out there.”
Mason suspects many advisers will start branching out and looking at other more traditional protection products. He also applauded most of the incoming regulation and sales controls.
“The point-of-sale prohibition is a brilliant thing because it does cut the sharks out and means they can’t demand people to sign before they get the loans,” he continued.
“From my point of view, I think it will switch the emphasis. But any broker worth their salt has already been looking at IP as a credible alternative anyway.
The reality for most advisers is to get the loan approved first and then have a separate chat about insurance options.
“That suits clients because they’ve got what they want the loan and are able to focus on the next stage.
“So, I do like the almost pre-cooling off period,” he added.
However, it seems most likely that it is at the macro rather than micro scale that the fate of MPPI will be decided.
If legislation such as more open marketing materials encouraging a wider choice for consumers and publication of claims statistics does prove too onerous for providers, it could see some pull out.
Paul Broadhead, head of policy at the Building Societies Association, is currently overseeing research at the organisation about the need for people to protect their mortgages.
While recognising the current bad perception of PPI by the public, he had another suggestion for lower take-up rates of protection with mortgages.
“One reason is they expect to be bailed out by the government like the banks were, following the introduction of a raft of schemes from the previous government,” he said.
“But there is also the negative publicity surrounding PPI (particularly single-premium PPI) that tainted MPPI, so we felt now was the time to carry out some work that many people need protection.”
Repairing a tarnished image
This work involved conversations with insurers and seems to indicate that they are beginning to lean towards an income or lifestyle protection product operating similarly to IP, with a proportion of income being paid relating to redundancy rather than either paying the mortgage or loan payment.
Broadhead is pleased that action has been taken to address the PPI problem.
“It’s a good shift,” he said.
“The key thing is if someone gets into difficulty, they could lose their home and the lenders often make a loss when property goes to repossession.
“So, it has to be a good thing if penetration is higher as long as the product is right.
“It’s also a good thing for the government because at the moment where people are not taking out protection, all these schemes cost taxpayers money.”
Broadhead concluded by calling for more reliable and transparent products to be produced to satisfy consumer concerns.
“If the private sector can step up and plug that gap with a product that’s more respected by consumers and recognised as being worthwhile and cost effective, I think it’s a win-win for everybody.”
Given all the positive messages coming through about the Competition Commission and other regulators’ interjection in the PPI market, it seems a surprise it took so long to come.
Owain Thomas is reporter on Cover Magazine, Mortgage Solutions’ sister title
Or perhaps advisers are so used to marked regulatory shifts that they can take them all in their stride?