High cost of the high street
MONEY MARKETING - 12TH MAY 2005
The FSA is sweeping into the mortgage payment protection insurance market to look at lenders’ prices and practices.
I do wonder how staff at mortgage lenders can sleep at night when they are selling mortgage payment protection insurance policies designed to pay less than 10 per cent of all premiums in claims.
Hopefully, they will prove among the earliest casualties of the FSA’s Treating Customers Fairly initiative. I am in no doubt that IFAs stand to benefit now the mortgage payment protection insurance has graduated on to the FSA’s hit list.
I have been working with experts from the British Insurance Brokers’ Association to build suitable regulatory safeguards into my internet-based intermediary sales channel and brainstorming every detail of the new FSA regime. My message is clear – it is staff from the banks and building societies who should have been suffering from sleep deprivation since 15th January, not IFAs.
Having been geared to satisfying the FSA requirements for investment business, IFAs should be able to meet the new standards for general insurance standing on their heads if they invest the time in product knowledge or they can outsource the regulatory responsibility by dealing with a specialist wholesaler.
Mortgage payment protection insurance undoubtedly has valuable role to play when sold at a competitive price and with the right advice.
A survey by Burgesses found that four out of five UK homeowners regarded meeting mortgage payments as their biggest financial worry if they were to lose their jobs.
Some of these may find that their or their partner’s savings levels are enough to tide them over but research from the London School of Economics indicates that 55 per cent of mortgage borrowers need mortgage payment protection insurance.
The product pays out a monthly benefit for a maximum of one year or, in some cases – two years if policyholders become unable to work due to illness, injury or involuntary unemployment. It can cover all mortgage outgoings, including life insurance, endowment premiums and even household insurance. the so-called state safety net will not even cover the capital repayments on a mortgage, let alone insurance premiums. It will make full interest payments for mortgages of up to £100,000 but those who have taken out a mortgage since October 1995 do not get this for the first nine months. This skeletal assistance is only available for those eligible for income support so anyone with savings of more than £8,000 or a working partner will not qualify.
The main problem is that the bulk of mortgage payment protection insurance policies sold by high-street lenders is at rip-of prices. The average cost per £100 of monthly cover from the UK’s top 10 lenders is £5.78 a month but cover can be bought at less than £4 per £100 from a multitude of IFA and broker websites.
It is not only extortionate pricing that the banks and building societies are guilty of but the quality of cover peddled to unsuspecting customers is also often grossly inferior. Lenders’ policies tend not to pay out until after a 60-day excess period whereas specialist intermediaries usually offer back-to-day-one cover. Lenders normally stop those who develop pre-existing medical conditions from switching without further medical underwriting while those who buy through the specialist market can avoid this.
The lenders also normally only grant cover at the time of taking out a mortgage or remortgage whereas specialist intermediaries can offer it at any time during the mortgage term.
It is hardly surprising that the FSA has recently described these policies as posing a risk to consumers’ financial health and has raised concerns about aggressive sales techniques, lack of suitability and complex policy terms and conditions.
FSA consumer sector head Anna Bradley says: “We are looking into payment protection insurance as an urgent matter because we are conscious that it is a high-risk area. We want to make sure that firms are adhering to our rules although our main aim is to avoid a major problem rather than having to mop one up.”
I would suggest the IFA community makes it a priority to ensure the FSA’s mop stays securely locked in its broom cupboard but do not expect any co-operation from the mortgage lenders. It is quite simply a fact that mortgage payment protection insurance business, which is worth more than £2 billion a year in commission, is far too profitable to let slip.
IFAs should be looking to switch those who have fallen victim to more appropriate deals. They should also alert first-time buyers to the poor value they are likely to be offered in the high street and prove their worth by dovetailing mortgage payment protection insurance into existing insurance arrangements.
It never ceases to amaze me how many homeowners manage to get the impression that they are obliged to buy mortgage payment protection insurance from their lender. IFAs should be doing all they can to make them aware that looking elsewhere cannot jeopardise their mortgage deal.
