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Payment protection insurance

Repossessions are on the rise and the Government is rethinking the amount of help it can offer homeowners, so now is the time to take another look at payment protection

The payment protection market has come under the microscope recently, with the Office of Fair Trading set to follow up a 'super-complaint' by the consumer pressure group Citizens Advice into the pricing and cover offered by loan protection. Citizens Advice is suggesting that the big lenders – banks and building societies – are potentially engaged in selling unsuitable policies to customers using some questionable practices. Is there any merit in this argument? The major lenders have been accused of selling overpriced policies, that can offer poor cover to home-buyers, for years. Sometimes the customer is unsure as to what exactly they are buying in terms of cover and it is possible that they can be led to believe that they must buy these policies in order to qualify for the loan.

Parallel attitudes

So are there significant parallels with the lenders' alleged attitudes to selling loan payment protection insurance and the way that they go about selling mortgage payment protection insurance (MPPI) policies?

It is believed so, and for this reason it will not be long before the pressure groups train their sights on the MPPI sector – also referred to as accident, sickness and unemployment (ASU) benefit – and in particular the role of lenders in selling MPPI products. If the practice is true that mortgage lenders take up to 80% of clients' premium in commission and over-rider payments – meaning that their cut commonly runs into hundreds, if not thousands, of pounds – this income contributes massively to shareholder profits and makes their product more expensive than customers could buy if they visited a broker who would compare the market.

Over the past year, especially with the introduction of regulation to the mortgage and general insurance sectors, brokers have finally started to believe they can offer borrowers a better service than the lenders – both in terms of price, cover and levels of service – when it comes to sorting out ASU protection. This realisation has come at an opportune time for future home-buyers – especially since we have entered into a period that has seen the number of home repossessions rise for the first time in years. According to the Department for Constitutional Affairs, the number of mortgage repossession orders applied for rose to 28,476 in the second quarter of 2005, compared to 18,675 a year ago. And the number of repossessions is set to increase further in the short term, despite historically low interest rates. The Financial Services Authority (FSA) requires brokers to demonstrate that they are treating their customers fairly and, given this unstable national financial backdrop they should, and increasingly are, talking seriously to them about protecting their home should they find themselves unable to work and earn through accident, sickness or unemployment. The time to speak to the client about this vital protection is either during the mortgage sourcing process or immediately after the mortgage has been completed and the life assurance has been sorted out.

MPPI is another add-on brokers should consider selling to clients – the Government has urged that more people take out this cover as it does not want to be responsible for bailing out homeowners who cannot make repayments through the benefit system. For this reason the Government has shifted the goal posts over a number of years to the point where it is now very difficult to get state cash to meet interest repayments.

This is something that brokers should make very clear to borrowers. In fact, should they fail to, it is not beyond the bounds of possibility a client will turn up on their doorstep at some time in the future claiming that since they had not pointed out the benefits of MPPI cover they are guilty of negligence. Should the clients still refuse to take out MPPI cover after having the benefits of doing so explained, it might be pertinent to get them to sign a statement to that effect. That would have the twin effect of covering brokers' backs should an issue crop up further down the line, as well as getting clients to think very seriously about what is being offered to them. And what brokers are offering is usually going to be a much better product in terms of cost and cover compared to many lenders. For example, in the South East the average mortgage payment is around £890 per month, with a typical ASU policy costing around £45.50 a month for a 30-year-old. However, Berkeley Alexander, for example, can quote the same person £32.48 a month for better cover, making for quite considerable savings for the policyholder over a typical seven-year period, which is the average lifetime of most mortgages. Needless to say the broker would also do rather well, picking up useful additional income in the form of trail commission over the same period.

As well as offering cheaper cover, product providers in the MPPI market have also been very innovative and offer a much more tailored service. One example of this is the introduction of age-banded products into the market. Traditional MPPI products offered by lenders are flat-rated for premiums. But the introduction of age banding means reduced premiums for younger borrowers – the people who need the cover most and who often find paying the premiums a struggle. This is revolutionary and the big players will soon be forced to respond. Until then, brokers have an opportunity to tap into this lucrative market by offering products superior to those of the lenders.

And, by doing so, advisers can also be sure they are following best practice as the best ASU policies also include comprehensive 'back to work' packages as well as a range of options such as 30-day back to day one, 60-day back to day one or 30-day or 60-day excess periods.

Of course, the new regulations mean that anyone selling or advising on general insurance products must be authorised. If the intermediary is not directly authorised, they should be authorised through a network and that in turn permits them to sell or advise with the network's permission. And brokers who are not authorised at all can always introduce the business. This means that even if brokers do not want to deal in payment protection directly they can outsource the entire fulfilment process and regulatory responsibility to an external specialist wholesaler and still earn useful residual commission.
While such an arrangement will inevitably involve dealing online in order to be cost-effective, some of the technology available is user-friendly enough to be accessible to most. All intermediaries should think about signing up to an online quotation system that provides details of products from a wide range of companies. The intermediaries that are offering ASU products to clients may be called to account at a later date by the regulator as to why that particular product was selected ahead of others. By using a quotation system they can demonstrate that, at the time of purchase, that particular product was the most suitable and so deflect any criticism and possible compensation claim. Why, therefore, go through a single insurer? It is best for intermediaries, and for clients, to offer a whole-of-market service.

Fair treatment

It is important, given the current environment surrounding payment protection insurance, and the recent announcement by the FSA that it is to review the regulations surrounding general insurance, that brokers transparently show they are treating their customers fairly. A review by the FSA may cause some discomfort to those operating within the industry, but the outlook for the majority of house-buyers looks much more rosy. Thanks to the introduction of age-banded premiums, younger borrowers especially will get a much better deal when they sign up to an ASU policy.

This kind of cover will become more and more crucial as the Government is forced to rein back on public spending and targets a reduction in unemployment benefits. One obvious consequence of this is that a claimant could have a consideration made on any equity on their property before the Government would pay out any benefit. A possible change to benefits should be explained clearly to borrowers, linking with the importance of taking out ASU cover. However, it is crucial for an intermediary who arranges cover that the product selected is best for the client in terms of price and cover. If it is not, then they will run the risk of falling foul of the regulator's rules on treating customers fairly and, given these increasingly litigious times, that could prove very costly indeed

Source: Mortgage Solutions Magazine

 

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