While some sell MPPI as IP, Stephen Clowes argues that they are in fact two vastly different products that complement each other but should never substitute one another
Payment protection insurance (PPI) has been the subject of intense scrutiny over the last 12 months by everyone from the Financial Services Authority (FSA), the Office of Fair Trading (OFT), to the Citizens Advice Bureau (CAB).
In September 2005, the CAB submitted a super-complaint about PPI to the OFT which led to the OFT launching a study into this sector. In August this year, the OFT then published a report on its findings.
In the meantime, the FSA has undertaken a mystery shopping exercise into PPI, which showed both 'good and bad' practices in the sector. It has also issued a PPI fact sheet.
The main issues for the OFT are whether PPI offers value for money, how it is sold and what information customers have when buying it. It is also concerned with the lack of competitive pressures on PPI prices.
For the FSA, the main con-siderations include whether PPI is relevant to clients' needs and whether it is suitable. Further concerns include sales practices and whether the way the product is sold is treating customers fairly. In terms of product features, single premium accident, sickness and unemployment cover - which the FSA has not yet banned - is of particular worry to the regulator.
But while it has been more than a year since the OFT and the FSA's investigations began, the jury is still out on whether measures will be taken and, if so, when.
Most criticism has been levelled against banks and lenders' single premium PPI, linked with credit product and refunds practices, resulting in some providers altering their no refunds policy.
And while mortgage payment protection insurance (MPPI) came through the FSA review relatively unscathed, the standalone sales of this product are suffering too.
The industry reaction, as ever, is to attempt to change the nature of the product as well as making it cheaper by pricing it based on age, sex and occupation. These are all "knee-jerk" reactions to appease regulators - but it will not make any difference to fundamental issues, like training and competence.
Is there a substitute to MPPI? There is no doubt that many IFAs would be saying yes, income protection (IP) would be a better option. However, MPPI and IP are complementary not competing products.
MPPI should not be knocked because it is evidently offering good value and it also provides a solid foundation upon which an intermediary can build a stronger relationship with their customer and potentially offer wider financial planning in the future. For example it offers a natural lead-in to discuss a client's wider risks and provisions for longer-term IP, perhaps with a 52-week deferred period IP product to dovetail the MPPI cover.
The opportunities for IFAs to sell standalone MPPI have never been better, but it offers short-term payment protection, not income replacement. And it is only intended to cover the main financial household commitments. MPPI is not an IP policy, and it is concerning that some advisers do sell these products as IP. They are different and should not be confused with one another.
Going forward, we need to recognise that MPPI is different to all the other PPI variants. The MPPI baseline wording and a competitive independent MPPI market sets MPPI apart from other PPI products. Yet, as mortgage completions grow to an all-time high, MPPI sales are reducing due to fear of the unknown and reluctance to sell MPPI.
Here is a suggested 10-point plan to help combat these issues:
• Bring clarity on what the FSA really means with an 'advised/non-advised' sale for PPI.
• Adopt a 'benchmark level of competency' for all sales people involved with PPI.
• Wider access to PPI product-comparison services.
• Lenders should be required to quote cost with and without PPI with all loans and include a statement with quotes outlining that PPI is not part of the assessment criteria for obtaining any credit product.
• Make PPI jargon more consistent and leave less room for interpretation.
• APR rates to show with and without PPI.
• Positive Government action to align state provisions with MPPI - for example tax relief on MPPI premiums.
• Ban the practice of intermediaries being able to 'self price' PPI to cover higher commission demands.
• Publish a standard consumer guideline for PPI, endorsed by all of the regulatory bodies.
• Adopt a mandatory practice for intermediaries to always quote monthly PPI price if single premium products are offered.
Stephen Clowes is managing director of Millennium Insurance
