YOUR INDUSTRY

Your Industry

Current Issues

Payment Protection Insurance (PPI)

The payment protection insurance (PPI) sector has come under heavy scrutiny from not just one regulator but two. Both the FSA and the Office of Fair Trading (OFT) have placed the UK PPI sector firmly under the microscope. FSA has concentrated on the standards of advice and selling of PPI whilst OFT has conducted a market study of the entire market looking at the competition issue.

As this is a sector that both regulators have a high interest in, FSA and OFT have been working together on their respective research projects and findings. Indeed, in October this year both released their findings on the same day.

FSA thematic work

FSA have conducted two rounds of thematic work into the PPI sector. In November 2005 it conducted its first review into the sale of PPI products. This first round of research (which included mystery shopping) found a number of firms failing in the following areas:

There was a risk of inappropriate sales: around half of the firms failed to take reasonable steps to ensure that 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.
There was an over-reliance on product documentation given to the customer at the expense of explaining the policy to the customer orally: most firms selling by telephone did not give sufficient information on exclusions.
The quality and timeliness of product and price disclosure by some firms selling single premium policies was poor.
The level and structure of inducements and targets for sales staff could encourage mis-selling in some firms.
Training and competence of sales staff was not adequate in around half of firms.
Compliance monitoring was variable and in some cases very poor.

The industry was effectively placed 'on notice' to get its house in order and raise standards.

The following press release outlines the FSA's message to firms to take 'urgent action':

The mystery shopping results of the November 2005 work is available here.

The full report of the November 2005 thematic work is available here.

AMI raising standards

AMI took on the challenge to raise standards amongst our members. We set up a PPI Working Group made up of practitioners and product providers tasked with delivering a programme of initiatives to boost standards of PPI sales. The Working Group also fed into AMI policy on PPI. In early 2006 we published a PPI checklist factsheet which tackled the FSA's main concerns from its November 2005 work and was designed to assist member in considering these issues when reviewing their sales procedures for PPI. The factsheet is available to members here.

AMI is a member of the FSA's Trade Association forum on PPI. Early in 2006 AMI issued an Action Plan to FSA outlining the steps we would take to increase the standards of advice and sales amongst members. Some of ours, and other trade association proposals, are available here.

PPI undertakings and statements - firms often tell FSA of their undertakings to review and change PPI policies. A number of these undertakings are published here.

FSA follow-up work - October 2006

Following its November 2005 work, FSA promised to follow-up with further research into the advice and sale of PPI policies. This was to gauge whether there had been any improvements since its November 2005. The findings of this second review were published in October 2006. FSA said a number of firms had shown improved sales standards but others were still not treating their customers fairly.

The key findings were as follows:

Many firms are still not giving customers clear information during the sales conversation. It is not being made clear that PPI is optional and customers are not getting full information about how much the insurance will cost.
Customers are still not being made fully aware that there may be parts of the policy under which they cannot claim. Furthermore, some firms are still failing to establish that the PPI policies they recommend are suitable because they are not collecting sufficient information from the customer - for example, about any existing cover they possess.
Where customers are sold single premium policies, this is not always done with the best interests of the customer in mind - for example, where a choice between a regular or single premium is available, the sales conversation may be biased towards the single premium policy when the customer's circumstances suggest this is not the most suitable option.

FSA also issued a statement about ongoing work into PPI sales. This includes:

The FSA will follow-up urgent remedial programmes with a number of firms to improve their sales standards and will continue to pursue formal disciplinary action against firms who fall well below the required standards. The FSA will conduct further work in 2007 to ensure that senior management are addressing the areas of concern and embedding the behaviours and standards expected.
The FSA is considering, as part of the existing wider review of the effectiveness of the regulatory regime for general insurance products, whether new rules are required in the area of PPI sales. It plans to publish a report on this wider review in Q1 2007 with any resulting changes coming into effect in Q4 2007. The ICOB effectiveness review is considering whether the rules provided sufficient consumer protection for protection products, including PPI, and whether there is a case for deregulation in the case of 'simpler general insurance products such as household and motor insurance'.

The full October 2006 PPI press release can be viewed here.

The full report of the October 2006 thematic work is available here.

Following the October 2006 findings FSA has fined a number of firms for failings with regard to their sales of PPI policies and for failing to treat their customers fairly. The following PPI Good Practice note outlines what FSA has done since October 2006 and the fines it has issued because of those firms' failings:

Member firms are advised to take note of the final notices issued with the fines. They give a clear breakdown on the areas where firms are failing.

AMI (Payment + Income Protection Briefing) Factsheet

Following the FSA's October 2006 PPI results being published, AMI has continued to deliver on its Action Plan. Part of that commitment has been a published factsheet called 'Payment & Income Protection Briefing'.

The factsheet has been designed to provide an overview of both mortgage payment protection insurance (MPPI) and permanent health insurance (PHI), also known as Income Protection. It is available to members here.

OFT market study

In April 2006, the Office of Fair Trading (OFT) launched a market study in the UK's PPI market. The launch of the study followed a 'super complaint' from Citizens Advice (CitA) to the OFT in September 2005.

CitA had published a report called, 'Protection racket: CAB evidence on the cost and effectiveness of payment protection insurance'. CitA stated 'that the evidence presented in its report suggested that the features of the PPI market seriously harmed the interests of consumers'. It highlighted a number of areas of concern:

Consumers pay excessive prices for PPI.
The protection consumers buy is partial, with evidence of high pressure and unfair sales tactics.
The administration of PPI claims can be slow and unfair, and can leave consumers facing additional charges or serious debt enforcement action.

The OFT's press release announcing its market study is available here.

'Emerging Issues' paper

In August 2006 OFT published its paper on the emerging issues which had arisen during the course of its PPI market study. The main focus of the market study was 'on how well the market delivers good value for consumers'. The possible outcomes of the market study were:

To give the market a clean bill of health.
To publish information to help consumers.
To encourage firms to take voluntarily action.
To encourage a consumer code of practice.
To make recommendations to the Government or sector regulators.
To investigate and use enforcement action against consumers suspected of breaching consumer law or competition law.
To make a reference to the Competition Commission.

The main points highlighted by OFT in the paper were:

The UK PPI sector can be split between wholesale (upstream) and retail (downstream) markets. Upstream market: underwriters compete to provide PPI policies to lenders. Downstream market: OFT identified five retail market sectors - credit card PPI, unsecured loan PPI, secured loan PPI, first charge mortgages PPI, store card PPI.
Value for customers. Claims ratios across PPI are low compared with other insurance products; there are high commission rates paid by insurers to downstream intermediaries; prices for PPI differ greatly which cannot be accounted for by differences in quality; anecdotally, OFT had heard that some unsecured personal loan providers, and possibly some credit card providers, were offsetting low margins on their credit offerings with profits generated from the sales of PPI.
How customers buy PPI/information issues. PPI is a product which is sold not bought, i.e., consumers rarely set out to buy this product on their own; consumers do not tend to shop around for PPI and, even if they wished to, the wide variety of products and prices makes comparison difficult; there is a lack of switching by consumers; headline APR - it is common practice for distributors to make use of a headline APR to draw people into a credit deal but not include the cost of the PPI in the APR; there is poor information on PPI prices; PPI is being automatically included in quotes; there is poor information on product details; there is a lack of marketing/promotion of PPI; some consumers believe that taking out the PPI policy helps the application for credit.
Competitive pressure on prices. Distributor profitability appears to be sizeable; alternative products do not appear to provide competitive pressure; there is a point-of-sale (POS) advantage to sell PPI; the POS advantage strengthens with the sale of single premium PPI; stand-alone suppliers face difficulties in accessing the consumer at POS; stand-alone suppliers face greater start-up costs and direct marketing costs in order to try to attract sufficient volume of customers to trade successfully over the long term; the internet does not appear to have opened up the sector as an effective sales channel; stand-alone suppliers are not acting as a competitive pressure within the PPI sector; neither initial purchase decision nor cancellation is acting as a pressure on prices.

AMI's OFT response

AMI submitted a formal response to the OFT's paper. It is available to read here.

It highlighted our belief that the issues raised in the paper were not as severe in the MPPI sector as in other sectors and stressed the need for greater transparency and information across the board. AMI has long called for delinking of the PPI policy from the associated product, unbundling of the individual elements of ASU and greater portability of MPPI policies. We also believe other PPI sectors would also benefit from similar moves. AMI also stressed the role of the intermediary in the MPPI market as being vital to the greater degree of competition in this sector.

AMI also attended a feedback meeting with OFT in August where the industry was given the opportunity to respond to the emerging issues paper. Other trade associations, product providers and the consumer lobby also attended.

Market study report and proposed decision to make a market investigation reference

OFT's final market study report was published in October. It outlined its intention to refer the UK's PPI market to the Competition Commission (CC).

OFT's study looked at competition in the PPI sector and analysed whether this delivered 'choice and value to consumers'. In announcing its decision, OFT said the following:

'Many consumers are failed by PPI - insurance which gives them a poor deal and less protection than they think'.
'There is limited evidence the industry is taking steps to improve the situation'.
Evidence suggests that 'how consumers purchase their PPI, their understanding of the product and the quality of information available to them hinders competition'.

In its report OFT outlined five distinct PPI sectors - first-charge mortgage payment protection insurance (MPPI); second-charge mortgage or secured loan PPI; unsecured loan PPI; credit card PPI; store card PPI. Of those five sectors, OFT is only minded to exclude store card PPI from the referral to the Commission on the grounds that it has recently been looked at by the CC in the context of the store card market investigation reference.

The full report can be viewed here.

AMI's Future comments

AMI responded to the market study setting out why we believe the Mortgage Payment Protection Insurance (MPPI) market should be excluded from the proposed market investigation referral to the Competition Commission (CC).

AMI shared some of OFT's concerns about how consumers buy PPI, their understanding of the product and the quality of information available to them. We are also keen to see that the PPI market works for consumers and delivers good value products which are supported by good quality product literature.

However, we believe the MPPI sector is a unique sector and should be viewed differently to the other PPI markets the OFT identify. In the report, OFT itself calls MPPI 'something of a special case within the PPI sector' and AMI's belief is that its special nature, especially the robust MPPI sales processes that have been adopted by mortgage intermediaries, mark the sector out as distinct."

AMI's response focuses particular on MPPI and also offers some general comments about the OFT's report and the PPI market in general. These included:

AMI's concern at the use of 'anecdotal evidence' within the report and a concern that OFT have not used the FSA's more up-to-date Product Sales Data. AMI feel this would have given OFT a more rounded, accurate view of the current market situation to base its decision on.
A call for greater publication of data on PPI, especially from the FSA in terms of the regulatory reporting data requirements, such as sales and complaints data for PPI.
AMI's view on what good looks like in relation to PPI products. Consumers must be clear on what they are/are not covered for and this could be achieved by better up-front plain English information.
AMI's support for delinking of the PPI policy from the credit product and unbundling of the individual elements of PPI.
AMI's disappointment that no distinction is made in the report between the different types of intermediary firm and that there is no differentiation between advised and non-advised sales, particularly as most MPPI sales are conducted on an advised basis.

The response questioned the need for the MPPI sector's inclusion in any referral to the CC and highlighted the reasons why we believe its inclusion is not justified. We pointed out that most mortgage intermediaries adopt a two-stage sales strategy for the client's mortgage and protection needs. There is therefore less of a point-of-sale advantage for lenders and distributors in the MPPI sector.

We pointed out how the role of the mortgage intermediary in 'shopping around' for his/her client is crucial in the MPPI market. We also disagreed that mortgage intermediaries would automatically include MPPI in quotes for the mortgage. MPPI is not sold as a 'must have' for the consumer and both products are clearly delinked.

Our response acknowledged there is work to be done in the PPI market in terms of clearer information for customers, provision of claims data and commission transparency. AMI also outlined the continued work of the mortgage industry in tackling these issues and highlighted the work it is committed to do as part of its Action Plan submitted to the FSA. This includes:

Issuing good practice notes to firms on PPI.
Issuing good practice notes on record-keeping.
Issuing good practice briefing on how MPPI fits in with other insurance products.
Launch of good practice training and competence guide for members on PPI.

As at January 2007, OFT has yet to announce its decision on it proposed referral to the Competition Commission.

AMI members can view the full response here.

MEMBERS LOGIN

Password reminder

Not a member? JOIN AMI

AMI has three prestigious meeting rooms available to hire.

A White Paper prepared by the Association of Mortgage Intermediaries