Brokers under scrutiny on payment protection insurance sales
MORTGAGE STRATEGY - 12TH NOVEMBER 2007
Changes to the payment protection insurance selling rules mean that brokers will be under the FSA’s microscope and underwriters must help them meet their new responsibilities, says Simon Burgess.
The Financial Services Authority is reviewing its Insurance Conduct of Business rules and a number of changes are set to come into effect which will have ramifications for the payment protection insurance industry.
Whether offering advised or non-advised sales, brokers will come under closer scrutiny and in many instances, underwriters are not doing enough to help brokers meet their new obligations.
The rules are expected to come into force next month with a six-month transitional period thereafter. The thinking from the regulator has been to do away with prescriptive rules where possible but add extra ones where there are particular risks to consumers. In areas such as financial promotions and inducements, detailed rules are being removed and more weight is being placed on principles.
The rules around excessive charges are also set to be deleted on the basis that the FSA’s principles for business number six, which relates to Treating Customers Fairly, provides the protection consumers need.
While many firms will welcome this relaxation of the rules, they must not assume that it equates to a relaxation of requirements in terms of the way they do business.
Instead it means that compliance is moving from being a tick-box exercise to one in which firms are evaluated on outcomes for consumers. And in some situations, achieving the best outcomes will be difficult for brokers.
In terms of payment protection insurance, the FSA is introducing a rule requiring that information on all main policy characteristics should be delivered orally if part of the information non the policy is provided orally.
This includes sales where insurance is discussed over the telephone or face-to-face but is not concluded until later. In essence, this means it will no longer be possible for firms to rely on the documentation they send out after a loan has been all but completed in an interview. It also means brokers will have to have access to all the information they need from underwriters.
A new rule for both advised and non-advised payment protection insurance sales will also require firms to take reasonable steps to ensure that customers are only sold policies under which they are eligible to claim benefits. If certain parts of the cover do not apply, clients must be informed so they can decide whether or not to make a purchase.
The problem for many payment protection insurance sellers is that underwriters are making little effort to change the filters they use when designing policies. They have been more concerned with rating customers so eligibility has not been a priority.
That focus is now changing to ensure that only eligible clients can take out insurance. If a broker concentrates on the benefits a policy delivers without taking account of whether it is appropriate, they will be held to account.
So it is not suitable for brokers to rely on the rating questions that underwriters might have used. They must delve more deeply into consumers’ individual circumstances.
An underwriter may only be concerned with the gross income of a potential client, but in terms of eligibility it is important that brokers understand how that income is made up. For example, if a client is self-employed, how much of their gross income is made up from dividend payments and are these payments included in calculating the benefits due under the wording of the policy?
Some policies only require that a client has been in work for six months but insurers work out he payable monthly benefits by taking an average of their income over the past 12 months. If a claim is made before the client has worked a full year, averaging what they have earned over 12 months may not do justice to what they are earning and leave a shortfall in their benefit.
For advised sales, the pressure is on brokers to ensure their questioning is detailed enough to guarantee that only those who are eligible for polices take them out. At the moment it’s possible for clients to answer all the questions put forward by some firms and still be ineligible.
Indeed, even though the FSA is putting the emphasis on clients buying policies via non-advised sales to ensure they are eligible, how can they be expected to do this if they interview they have with the seller does not make them aware of the intricacies of their policy?
Non-advised sellers will not be able to use this as a get out clause if they have failed to interview clients properly.
As with any new set of rules, it will take time for the ramifications of the changes to feed through but it’s distressing to not that so few brokers seem to be doing much about changing the wording they use to interview clients.
Nor have underwriters been active in highlighting areas where they will need greater clarification to ensure clients are eligible, although they may have gleaned enough data to rate them.
Because the responsibility for sales lies with brokers, underwriters seem happy to farm out this regulatory liability out without making the changes necessary to help brokers deliver what is best for clients.
Hopefully, the fact that cancellation period on payment protection insurance policies is being increased to 30 days will help those who have fallen through the net and been inappropriately sold policies. But the truth is that once a policy is in place, it’s often not until claims are made that consumers realise the problem.
This means the broker and underwriting sectors must work more closely together and put the interest of their clients ahead of their volume of sales.
To date, this has not been a sacrifice made by many but as the FSA continues to intensify its focus on payment protection insurance, it is surely a change that will be driven through, even if some firms have to be dragged kicking and screaming into the new trading environment.
